Nike and Adidas

Nike and Adidas are two brands that compete, according to Keefe (2011). Both of these businesses compete in sports equipment, apparel, and other accessories. Adidas was founded and developed in 1948, whereas Nike was founded and established in 1964. Adidas is a German corporation. While Nike is a sportswear company based in the United States. According to Young (2015), Nike's emblem is the swoosh, while Adidas' logo is three stripes. Nike and Adidas are clearly two of the most contemporary sports equipment firms in the world. In both situations, their popularity has grown to the point that they have become household names (Rajanayagam, 2016). In fact, they pretty much focus on the same target of the people who love sport.

Unlike Adidas, Nike outsources most of its products from both Korea and Taiwan. All its developments are made at its headquarters in Beaverton (Rajanayagam, 2016). As noted earlier, Germany currently manages the development of Adidas. Although both of these companies may be filled under the sports and sportswear category of equipment firm, they have a lot of differences from each other (Young, 2015). For instance, they have separate locations and market developments and so on. Most importantly, Adidas acts as the first leading company in the manufacturing of sportswear in Europe. Globally, it is the second top after Nike company (Rajanayagam, 2016). Besides making of the sportswear, Adidas company also manufactures bags, eyewear, shirts and other products. In the same way, Nike is the first leading sports and sportswear items manufacturer globally. According to Rajanayagam (2016), many of the athletes and the market actors sponsor Nike.

Nike

In the generation of today, Nike is very well known because of their limitless sponsorship of celebrity, but of course, their notoriety does not end at this point. According to Rajanayagam (2016), the people into both the basket and running are their primary target markets. For this reason, their products majorly focus on such two endeavors. In the past, their market used to be primarily the United States (domestic), but in the recent years, the Nike company have expanded globally. They have a prevalent sponsorship on athletes.

Adidas

Undoubtedly, the primary market of the Adidas company are those people in both the tennis and soccer sports (Young, 2015). In the past, they used to have their sole focus on Europe regarding the market, but globally, they are also well known. One of their secrets of becoming very popular is because they label their soccer connection as the sport of the world (Rajanayagam, 2016). Additionally, they have their athletes’ sponsorships share made over the years.

Debt Ratios and Current Ratios

The current ratio is helpful for measuring the ability of a company for paying the debts that are short term and other obligations of finance that do not exceed one year or current liabilities. In brief, it compares the current assets to current liabilities. Such ration mainly helps in illustrating the ability of a company to remain solvent (Keefe, 2011). In general, a current ratio of one simply means that the book value of the current assets is similar to the company’s current liabilities book value. In fact, the investors mainly look for a company having a current ratio of 2:1. In simple terms, a company having its current assets two times larger than its current liabilities (Rajanayagam, 2016). Remember that any current ratio, not that is less than one, clearly indicates that such a company might not be very effective in the use of financial facilities or the current assets in the short run.

The definition of the current ratio involves taking the assets of the firm and driving them by the liabilities of the firm. According to Rajanayagam (2016), the current ratio of Nike is 2.72. In fact, it is almost twice the current ratio of Adidas. Young (2015), clearly illustrates that Nike company sells more quickly than the Adidas company. Current ratio = current assets/ current liabilities.

Figure 1: The Historical Debt to Equity Ratio of Adidas. (Source: Rajanayagam, 2016).

Figure 2: Debt to Equity Ratio of Nike Company. (Source: Rajanayagam, 2016).

Nike is well known around the world for its products and performance and success within the industry (Young, 2015). Apparently, enhancing Nike and its brand around the world makes many professionals organizations to use it for their likings. Again, Nike contributes a lot to the globe with the stunning advancement of the sport. In the same way, Adidas also has various branches such as Reebok, etc. Although these companies fall within the same industry, they have different debt and current ratios. Adidas mainly concentrates on archery, baseball, football, gymnastics and so on (Keefe, 2011). In short, both of these companies are successful in the industry of sports. For this reason, they are fit to be called rivals.

Table 1: Liquidity and Solvency Ratios

Liquidity ratios or short term solvency

Adidas

Nike

The Company’s Cash Ratio

0.30 times

1.07 times

The Company’s Quick Ratio

1.10 times

1.71 times

Current Ratio

1.68 times

2.72 times

Interval Measure

3030.24 days

1358.43 days

NWC to Total Assets

0.24

0.466

Solvency ratios of long-term

Debt/ equity

1.21 times

0.72 times

Total debt ratios

55 %

42 %

Times interest earned

13.47 times

93.18 times

Long-term debt ratio

21.97 %

10 %

Cash coverage

19.63 times

N/A

Turnover ratios or asset management

Sales of the day in inventory

123 days

93 days

Sales of the day in receivable

51 days

45 days

Inventory turnover

2.95 times

3.89 times

Receivable turnover

7.13 times

8. 10 times

Fixed asset turnover

2.87 times

9.81 times

NWC turnover

4.90 times

3.21 times

Total asset turnover

1.17 times

1.50 times

In general, short-term solvency is divided into a quick ratio and current ratio. Such ratios are helpful for the companies in the determination of their financial health. Although the quick ratio works like the current ratio, in addition, their inventories are subtracted from the current assets. In this case, it is clear Adidas has a larger product overstock that is not selling as quick as the Nike company. By definition, long-term solvency simply means the company's long-term benefits (Young, 2015). Firms have to invest their markets hoping that they will gain a high rate of return and therefore increase the profitability and the value of the stock. Such ratios include debt versus equity, total debt ratio, times interest earned, debt ratios, and the cash coverage. After the determination of these ratios, it becomes clear to define the company with more potential gain leadership within the industry and market.

The total debt ratio helps in explaining how much the total assets against the total liabilities a company has in the industry. For example, Nike is evidently more likely to pay off all the debts of the company since the total ratio of the debts equals to only 42 %. The failure of Adidas company results from its total debt ratio that stands at 55%. Clearly speaking, the company has about 1.209 times it terms of its total liabilities in comparison to its total assets. The Nike’s earned interest ration time stands at 93.18, indicating the company is well equipped with enough income for paying off all the interests about 6.92 times, in comparison to the Adidas company. In this case, it is mainly assumed that the cash coverage for Nike is much higher than that of Adidas.

Note that a few things must be made clear when it comes to the determination of the turnover ratios within any company. These things include the receivable turnover, the inventory turnover, the NCW net sales, the sales of the day in receivable, the sales in the day in inventory, the net sales of the fixed assets, and the turnover of the total assets. In simple terms, the inventory turnover measures the sales against the inventory. In this case, the inventory ratio of Nike is about 3.89 times. For this reason, the company can sell all of their inventory in just 93 days. Adidas requires at least 30 more days for doing the same process. Moreover, the Nike company is evident to be having a receivable turnover of about 8.1 times, while at the same time, its rival, Adidas only has about 7.13 (Young, 2015). Such ratios are essential in defining how many accounts receivable that a company collects every year. According to Keefe (2011), the determination of how many days it takes for receiving the payments makes the all the ratios to add up. As shown in the table, the day’s sales in receivable of Nike are 45 days versus the competition with 51 days. Equally important is the determination of the NWC turnover of the companies.

The definition of the NWC turnover of a company involves subtracting the liabilities that each of the companies has from their current assets. In other words, it is known as the working capital. Subsequently, the sales of the company are divided by the working capital once that is measured. The process should ideally provide the value of the working capital turnover. As a result, what is left is the 4.90 times for Adidas and 3.21 times for Nike. Further, the definition of the fixed asset turnover becomes possible when net sales of each competitor are taken and divided by their assets such as equipment and property. Higher numbers give better working conditions because the business has to pay off both the property and equipment and also generate only the profit (Young, 2015). According to Rajanayagam (2016), the turnover of Nike is 9.81 time as mentioned earlier while that of Adidas is just 2.87 times. Lastly, the determination of the total asset turnover involves the powerful sales by the total assets. Adidas has a turnover ratio of 1.17 times while Nike has the turnover ratio of 1.5 times (Keefe, 2011). In short, Nike company is doing much better than the Adidas company because they can pay off their debts without any financial difficulties.

Operating Performance Ratios and Profitability

Both the operating performance ratios and profitability are the best ways for seeing how the company is doing so far. In fact, taking the net income/ net sales (profit margin) helps in determining how good a company is doing. In effect, one can decide if the investment will be both valuable and hold a high return. In this case, Adidas company generates 3.29 percent while Nike company has a margin of 9.69 percent (Keefe, 2011). According to Young (2015), the market value measures are then calculated. Note that the measures are broken down into different ways of calculations like PE ratio. Markedly, taking the market value per share then dividing it by the earning per share helps in defining the price-earnings ratio. As can be seen, Nike and Adidas companies are quite close to competition as competition goes. Adidas was having a ratio of 24.78 while Nike has a ratio of 25.81.

Table 2: Profit Ratios and the Computation of the Market Value Measures

Profitability Ratios

Adidas

Nike

ROA (return on assets)

5.85 %

14.48 %

Profit margin

3.29 %

9.69 %

ROE (return on equity)

11.02 %

24.88 %

Computing market value measures

The value of the enterprise

14.67 billion

80.24 billion

PE ratio

24.78

25.81

EBITDA ratio

8.45 times

17.42 times

Market – to – book ratio

3.69 times

8.139 times

In conclusion, Nike company has been making more profit than the Adidas company over the past three years. For this reason, Nike is doing better than Adidas company. As can be seen in the table above, Nike has higher ROA, profit margin, and ROE than the Adidas company. Regarding the computing market value measures, it is evident Nike still performs better than the Adidas company hence making it be performing better.

Investment Valuation Ratios and Cash Flow Indicators

These two companies, Adidas and Nike deal with sporting equipment globally. They also lead in the sales of both footwear of athletic and sports in the entire world. Adidas ranks second in terms of manufacturing sporting products or goods. For this reason, Nike is the more likely to satisfy stakeholders than Adidas. Furthermore, Nike is more attractive compared to Adidas because of its different sponsorships of celebrity (Rajanayagam, 2016). In fact, the product prices of Adidas are dependent on both color and looks. For example, a black pair of shoes can sometimes be cheaper than the white one. Nike uses both the pricing leadership strategies and the value based pricing techniques.

Figure 3: Net Margin of Nike and Adidas Companies. (Source: Young, 2015).

Figure 4: Return on Equity. (Source: Young, 2015).

The indicators of profitability show that Nike performs better than Adidas company. In addition, both the return and the net profit margin on equity of Nike are higher than that of Adidas.

Figure 5: ESP (recurring). (Source: Young, 2015).

By 2014, the earnings per share for both companies reach 3 dollars. However, in 2012 and 2013, Nike had some higher earnings per share than Adidas company (Young, 2015).

Figure 6: Liquidity – Current Ratio. (Source: Young, 2015).

Moreover, Nike as has a better liquidity as compared to the Adidas. In fact, the current ratios of Nike almost double that of Adidas.

Figure 7: Total Debt/ Total Assets. (Source: Young, 2015).

In this figure, it is clear Adidas has higher financial leverage as compared to Nike. In other words, Adidas depends more on debts than Nike. Nike depends more on the internal funding than the external funding.

Figure 8: The Market Capitalization of Nike and Adidas Companies. (Source: Rajanayagam, 2016).

The Choice of the Company for Investment

As an investor, Nike is the best company for investment. With the information that is present for both the companies, it is evident many strengths and weaknesses pertain to the two organizations. Looking at Nike, it is clear it has many strengths compared to the Adidas company. According to the chart, Nike still exceeds Adidas drastically. In short, it can cover their current liabilities about 2.72 times. In simple terms, their assets are greater than their liabilities. Additionally, Nike company can liquidate their inventory for paying off and also have enough cash for paying off their liabilities which is vital for the company. In light of the financial leverage ratios, Nike also has a more strengthened advantage in comparison to Adidas.

Again, having a lower debt equity and debt ratio (0.72 times and 42% respectively), shows that Nike does not use most of their assets for financing their debts in the long run. According to such scenario, it means there is still the best company for investment. Nike can use the majority of their assets for further enhancing the company as an entirety and will be left with enough money for paying back their creditors. Keefe (2011) notes that the strength in the speed of Nike allows them to sell more of their inventory within a short period and in effect generate a lot of profit. Looking at the data, one can easily confirm that Adidas company primarily is weaker in all of the regions that include dealing with turnover, market value, and profitability of the companies. According to Rajanayagam (2016), this weakness makes Adidas not to be the company of choice for making any investment when compared to Nike. Essentially, Nike has several strengths in all of their ratios as compared to the Adidas company. In a nutshell, Nike is outdoing Adidas in light of the debt payments, generating profits for the company, and paying back their stockholders. Although Adidas also has the interest of investors regarding their future growth, Nike still exceeds in all spectrums.

Conclusion

The choice of these two investment options also involves taking into consideration some of the non-financial criteria. For both the sustainability and success of any organization, the use of strategy becomes very fundamental. In fact, it is helpful for the organizations to mitigate risks identify and address weaknesses, understand core capabilities, and the trends that go to impact on their business and industry. Again, the use of strategy acts as a non-fundamental criterion for streamlining the business. For this reason, the strategies that an organization follows depend on either its failure or success. For the survival of the competitive business environment of today, the business has to plan both the differentiation and innovative strategies. In the same way, both the strategies of Adidas and Nike help them sustain their positions and survive in the market. When one takes into consideration all the non-financial criteria, Nike company is still better than Adidas company. This company mainly focuses on the marketing and design innovation. In summary, Adidas is not very far behind regard competition because it does have a promising future of growth. Nevertheless, Nike evidently has the upper hand in the industry.

References

Keefe, M. (2011). The impact of athletic apparel company funding on grassroots basketball (2003-2008) (1st ed.).

Rajanayagam, L. (2016). Adidas' three stripes strip away the competition. Journal of Intellectual Property Law & Practice, 11(6), 401-403.

Young, Y. (2015). Binding, loosening, or adjusting her sandal? On Nike from the parapet of the athena Nike temple. Source: Notes in The History of Art, 34(4), 2-9. http://dx.doi.org/10.1086/686280