Section 1 - Introduction

Adidas AG is a German multinational corporation that designs shoes, clothing and accessories. It’s the secondest largest sportswear manualfacturer in the world. Adidas is listed in fifth place among the global 100 most sustainable business and is recognized as the industry leader, on 2016 it was the third consecutive year that adidas included in the top ten of the global 100 index.

The aim of this document is to provide a finalcial analysis into the organazation’s financial performance using financial models and concepts.

The following analysis is complied from previous financial statements from Adidas annual reports(2007-2016) together with data from Morningstar database. Adidas’ financial observation are in euro million dollars unless specified otherwise, its financial state would be evaluated using accounting ratios along with examinations, some of the ratios are meaningful in themselves but their value mainly lies in their comparision with the equivalent ratio from last year, or a target ratio of a competitor’s.

Section 2 - Financial statement analysis

Revenue analysis

Adidas revenue summary from year 2007 to 2016 (Fiscal year ends in December. EUR in millions)

##    Min. 1st Qu.  Median    Mean 3rd Qu.    Max. 
##   10299   11097   13762   13662   14796   19291

Nike revenue summary from year 2008 to 2017 (Fiscal year ends in May. USD in millions)

##    Min. 1st Qu.  Median    Mean 3rd Qu.    Max. 
##   18627   19176   23331   24039   27799   32376

We see the revenue follows significant uprising after golbal economic ression on 2008, note that the revenue for Nike is quoted in USD whereas for Adidas it is quoted in EUR, the EUR/USD exhange ratio is roughly 1:1.15, it’s obvious that Adidas group firmly emerged as a true competitor for the market leader NIKE in the last few years, but one thing undeniable is that the revenue gap between Adidas and Nike were enlarged, the trend can be visually seen on the graph, in fact there is great parity between Nike and Adidas outside of US market, but in United States Nike has built up a share of almost 55% percent where in comparison Adidas only accounts for 5%.

ROA

Adidas ROA ratio summary from year 2007 to 2016 (Fiscal year ends in December.)

##    Min. 1st Qu.  Median    Mean 3rd Qu.    Max. 
##   2.660   4.657   5.960   5.584   6.728   7.190

Nike ROA ratio summary from year 2008 to 2017 (Fiscal year ends in May)

##    Min. 1st Qu.  Median    Mean 3rd Qu.    Max. 
##   11.57   14.50   14.89   14.94   16.28   17.49

ROC

Adidas ROC ratio summary from year 2007 to 2016 (Fiscal year ends in December.)

##    Min. 1st Qu.  Median    Mean 3rd Qu.    Max. 
##   6.050   8.363  10.960  10.164  11.963  13.480

Nike ROC ratio summary from year 2008 to 2017 (Fiscal year ends in May)

##    Min. 1st Qu.  Median    Mean 3rd Qu.    Max. 
##   16.56   20.50   21.32   21.60   22.55   26.59

Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.

Return on capital (ROC) is calculated by dividing the after-tax operating income (NOPAT) by the book value of both debt and equity capital less cash/equivalents.

Both of these two indicators give an idea as to how efficient management is at using its assets to generate earnings, the highest the indicators, the better the company’s ability to generate profit.

As we can see from the diagram, over the last few years Adidas consistently sticks ROA/ROC to an average of 6%/11% respectively, the number itself isn’t bad but after comparing with NIKE the data reveals Adidas struggled to catch up with Nike’s influence on sportswear market, Nike is maintaining the pace of rapid growth as investors came to expect, in order to catch up Adidas needs to improve its position in the fast growing aera like China and Latin America, also refine distribution by improving retail relationship in US market.

Current ratio

Adidas current ratio summary from year 2007 to 2016 (Fiscal year ends in December.)

##    Min. 1st Qu.  Median    Mean 3rd Qu.    Max. 
##   1.310   1.413   1.500   1.504   1.577   1.700

Nike current ratio summary from year 2008 to 2017 (Fiscal year ends in May)

##    Min. 1st Qu.  Median    Mean 3rd Qu.    Max. 
##   2.520   2.720   2.850   2.914   2.980   3.470

Quick ratio

Adidas quick ratio summary from year 2007 to 2016 (Fiscal year ends in December.)

##    Min. 1st Qu.  Median    Mean 3rd Qu.    Max. 
##  0.5500  0.7225  0.7900  0.7760  0.8575  0.9200

Nike quick ratio summary from year 2008 to 2017 (Fiscal year ends in May)

##    Min. 1st Qu.  Median    Mean 3rd Qu.    Max. 
##   1.470   1.680   1.820   1.866   1.940   2.320

Current ratio is a liquidity ratio that measures a company’s ability to pay back liabilities with its assets, current ratio can be taken to used to measure a company’s financial health.

Quick ratio is a measure of how well a company can meet its short-term financial liabilities.

During the last ten years, Adidas has lower current/quick ratio then Nike, it exposed the issue that the liquidity position of Adidas to pay its debit is weaker than Nike, Adidas should treat this situation with caution. The remidiation can be achived by various actions such as better cost management, marketing, distribution, cheaper production, etc.

Inventory turnover

Adidas inventory turnover summary from year 2007 to 2016 (Fiscal year ends in December.)

##    Min. 1st Qu.  Median    Mean 3rd Qu.    Max. 
##   2.870   2.973   3.080   3.113   3.235   3.490

Nike inventory turnover summary from year 2008 to 2017 (Fiscal year ends in May)

##    Min. 1st Qu.  Median    Mean 3rd Qu.    Max. 
##   3.790   4.160   4.410   4.329   4.500   4.770

Asset turnover

Adidas asset turnover summary from year 2007 to 2016 (Fiscal year ends in December.)

##    Min. 1st Qu.  Median    Mean 3rd Qu.    Max. 
##   1.130   1.210   1.230   1.242   1.280   1.350

Nike asset turnover summary from year 2008 to 2017 (Fiscal year ends in May)

##    Min. 1st Qu.  Median    Mean 3rd Qu.    Max. 
##   1.370   1.490   1.520   1.508   1.540   1.610

Days sales outstanding

Adidas days sales outstanding summary from year 2007 to 2016 (Fiscal year ends in December.)

##    Min. 1st Qu.  Median    Mean 3rd Qu.    Max. 
##   40.20   43.34   46.63   46.61   49.98   53.67

Nike days sales outstanding summary from year 2008 to 2017 (Fiscal year ends in May)

##    Min. 1st Qu.  Median    Mean 3rd Qu.    Max. 
##   37.20   43.01   48.54   47.22   51.83   54.05

Inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year, it equals the cost of goods sold divided by the average inventory.

Asset turnover is a financial ratio that measures the efficiency of a company’s use of its assets in generating sales revenue or sales income to the company.

Days sales outstanding is a financial ratio that illustrates how well a company’s accounts receivables are being managed, it is an index of the relationship between outstanding receivables and credit account sales achieved over a given period.

In the last ten years, Adidas has lowers inventory turnover ratio and lower asset turnover ratio than Nike and the gap between them was increased gradually, it implies poorer sales and inventory managment as well as ineffectiveness for Adidas to use its investment to generate revenue. Adidas must control their cost, reduce inventories by doing sales promotion on legacy products, also improve forecasting and material management. These could helo to reduce the time it takes to sell its stock, seen though the gradual decrease in time taken over period.

Days sales outstanding shows both Adidas and Nike are trying to reduce their time to collect money. Over the years this number decreased significantly.

Finalcial leverage ratio

Adidas finalcial leverage summary from year 2007 to 2016 (Fiscal year ends in December.)

##    Min. 1st Qu.  Median    Mean 3rd Qu.    Max. 
##   2.110   2.203   2.320   2.357   2.350   2.820

Nike finalcial leverage summary from year 2008 to 2017 (Fiscal year ends in May)

##    Min. 1st Qu.  Median    Mean 3rd Qu.    Max. 
##   1.480   1.520   1.580   1.594   1.700   1.750

Debt equity ratio

Adidas Debt equity ratio summary from year 2007 to 2016 (Fiscal year ends in December.)

##    Min. 1st Qu.  Median    Mean 3rd Qu.    Max. 
##  0.1100  0.1925  0.2700  0.3150  0.3875  0.7100

Nike Debt equity ratio summary from year 2008 to 2017 (Fiscal year ends in May)

##    Min. 1st Qu.  Median    Mean 3rd Qu.    Max. 
## 0.02000 0.05000 0.06000 0.07444 0.11000 0.16000

Financial leverage is the amount of debt that an company uses to buy assets. An excessive amount of financial leverage increases the risk of bankruptcy, since it becomes more difficult to repay debt.

Debt/Equity Ratio is a debt ratio used to measure a company’s financial leverage, calculated by dividing a company’s total liabilities by its stockholders’ equity, the higher the index the riskier the business.

As we can see from the graph Adidas in general exposed higher leverage ratio, this is not necessarily a bad thing because in many countries interest expense is tax deductible, borrowing money could reduce its net cost to the borrower. Both Adidas and Nike are better off than industry average, Adidas’ debt/equity ratio was decreased drastically over the last few years as can be visually seen from the graph, however, Adidas still needs to find its optimal financial structure and in the meantime boosts excellent result to its stakeholders to increase their confidence on the debt.

Section 3 - Conclusion

Adidas is an ambitious company aims to be market leader, it continues to engage in sportswear market competition.

Adidas has an established market in Europe and Asia countries, however, in the biggest market United states Adidas is overwhelmed by Nike’s influence which ultimately results the revenue gap. Adidas would need to diversify its portfolio to emerging markets like China or Latin America, also Adidas needs to improve supply chain and inventory control by applying lean operational management to focus on efficiency and time value, increase operating effectiveness by tightly managing overhead expenses.

Adidas is striving to further improve their operating profit though retail repositioning and market distribution, Adidas needs to associate itself with major sports retain chains, professional sports teams and famous celebrity worldwide. There is still room for Adidas to improve forecasting and material management, find its optimal financial structure and refine credibility in the world of fashion and sport.