FIN 534 Assignment 1 Part 2

Running Head: FINANCIAL RESEARCH REPORT 1

FINANCIAL RESEARCH REPORT 7

Financial Research Report

Chet L. Walker

Strayer University

Dr. Inez Black

FIN 534 – Financial Management

24 May 2020

Financial Research Report

As the child of a recent retiree on a fixed income, I understand how much my mother worked for money. With that in mind, she would not be willing to work so hard for so long to frivolously squander it away in her twilight years casing risky investments. At the same time, due to her health needs, I know that I would want to make sure her money worked for her on a level to ensure she can get the care she needs without wondering how she will pay for medication or deductibles. With that in mind, I would want to find the optimum stock for her to invest in.

Since she does not have the disposable income or time to recover from a huge loss, I would suggest she invest in intermediate-cap or large-cap company, and attempt to avert little-caps names altogether. The reason startups give such high returns is because they are indeed risky investments. She has a great of a chance of bottoming out as she would striking it big. Even though some small firms would suit the older individual’s investing framework, most of her picks should follow this advice (Bunker, Cagle & Harris, 2019). Moreover, if you are participating in "best of breed" firms and unique brands which conform to the rules of Graham and Buffet investing thoughts should not be a challenge.

The next criteria I would use to help her pick a stock would be to find a stock that is a robust past performer. It may not give double-digit returns every year, and it can even be subject to an occasional lousy quarter. The overall thought process is the long-term plan has to be persuasive. I would want her to invest in a business that has made shareholders rich while avoiding a stock that has ruined stockholder value in the long run. She should invest in stocks that meet the metrics as mentioned earlier, and that has done well over a considerable duration.

Once we weed out the type of stocks to focus on, it’s now time to zero in on a particular company. I would advise her to invest in a stock that offers a simple, reasonably direct company business model. These companies usually provide a good or service that is easily understood and extremely recognizable. Since she is not an industry expert, she should avoid companies that other investors might find complicated. That company should also be considered "best in the breed."

These companies are among the best in their industry. The general rule of thumb is it is best to stick with excellent, permeating, and highly-admired brands. Additionally, if you look at the best stocks in past, have a great brand as an everyday thing. If one is looking for rapidly-emerging brands, it should not be difficult to trace one that has an antiquity of better performance. Most firms that suit this outline have a tremendous continuing trajectory record of creating stockholder value.

Based on the rationale for picking a stock that meets all of these requirements, I would suggest that she invest in Nike, Inc. Nike designs, grows, markets, and retails athletic footwear, attire, equipment, and fittings global. Through its parent company and several subsidiaries- Jumpman, Converse, Chuck Taylor, All-Star, One Star, Star Chevron, Jack Purcell and Hurley trademark - they offer brands in multiple groupings, comprising running, football, training, basketball, and casual wear. It markets brands for all genders and age groups across numerous professional and recreational athletic uses. They also sell clothing with approved college and qualified team and league logos and retails sports clothing and accessories.

Analysis of Financial Ratios

Nike has been one of the most consistent performers over the past three years. Based on the analysis of financial statements over the past three years, Nike has remained one of the top performers in its field. I would use two sets of ratios to determine the financial health of Nike. I would first look at a set of liquidity ratios, primarily the current ratio, quick ratio, and cash ratio. Liquidity ratios are essential classes of fiscal metrics used to conclude a debtor's capability to pay off contemporary debt obligations without the requirement to raise external capital (Bunker, Cagle & Harris, 2019). Liquidity ratios estimate the potential of a firm to pay debt debts and its margin of safety.

Liquidity Ratios

Liquidity Ratios	2019	2018	2017
Current Ratio	210%	251%	293%
Quick Ratio	139%	163%	201%
Cash Ratio	51%	87%	113%

The first ratio I analyze is the current ratio. The working capital ratio estimates the potential of the company to settle short-term obligations or those in arrears within one year. Nike has maintained a current ratio over 2 for the last three years (Ee, Agarwal, Goyal, Panigrahy & Pushkar, 2019). The latter means they have almost three times the capital needed on hand to meet its short term obligations.

The quick ratio, on the other hand, is also called the acid-test ratio. Quick ratio estimates the potential of a firm to meet its interim obligations with its most liquid investments. This ratio ignores stocks from its contemporary assets. Nike has consistently maintained a quick ratio of over 1. The latter points to adequate liquidity even after eliminating stocks, with over $1 in assets that can be converted promptly to cash for every dollar of contemporary liabilities.

I would finally have analyzed the cash ratio. Cash ratio is more conformist compared to the other ratios because it only contemplates a firm’s most liquid resources. It informs creditors and experts the assessment of contemporary assets that could easily be converted into cash, and what proportion of the firm’s present liabilities these cash and near-cash investments may cover. It is considered a gauge of a company’s worth under the worst-case scenario, such as if the firm were about to go out of the industry. Nike had a cash ratio of over 1 in 2017, almost .9 in 2018, and over .5 in 2019 (Ranjan, 2016). Even though Nike does not maintain $1 in cash for each dollar of liabilities, taken into account with the other ratios, the company remains exceptionally liquid to cover any short term liabilities without the need to raise capital (Ranjan, 2016).

The next set of ratios I would use to determine the financial health of Nike are profitability ratios. Profitability ratios comprise of a group of metrics show how great companies use their existing assets to make profit and value for shareholders over time. (Bunker, Cagle & Harris, 2019). The profitability ratios I will concentrate on are operating margin, profit margin, and return on equity. Higher ratio outcomes are usually more promising, but the ratios offer a lot of data related to findings from the other, comparable firms, the firm's past enactment, or the industry mean.

The table below shows Nike's profitability ratios.

Profitability Ratios	2019	2018	2017
Operating margin	12%	12%	14%
Profit Margin	10%	5%	12%
After-Tax ROE	45%	20%	34%

The operating margin estimates the profit a firm makes per each dollar of sales, after paying for adjustable costs of production (Bunker, Cagle& Harris, 2019). Nike has maintained an operating margin of over 10% for the last three years. This margin is most beneficial when used to compare to other companies in the same industry to determine how efficient the company is operating.

The net profit margin measures the potential of the firm to generate revenue after taxes. The profit margin shows how many cents of income has been made per each dollar of sale. It is used by creditors, financiers, and companies themselves as indicators of a firm's financial vigor, management's skill, and development potential. Nike averaged about 9% profit margin over the last three years (Prigge & Tegtmeier, 2019). The latter would also need to be compared to other companies in the industry but shows that the company has made money every year.

The final ratio, ROE, is a ratio that is most important to company shareholders because it estimates their potential to earn a profit on their equity assets. ROE can rise with no equity addition if it can profit from a sophisticated return that is aided by a more extensive asset base. Since Nike is such a large company, it can upsurge its asset extent (Fang, 2018). This, in turn, generates more profit with higher margins. Nike has averaged a 33% ROE, which means stockholders can maintain much of the yield growth when surplus assets are the consequence of efficient debt use (Prigge & Tegtmeier, 2019).

Risk Level of the Stocks

Since Nike has maintained profits over the last three years and has more than enough assets to cover its obligations, I believe the company is positioned itself to remain viable for years. Since the company enjoys licensing deals with multiple professional leagues, numerous academic, athletic institutions, and provides good that are essential for large amounts of the general public, the company is relatively low risk to buy.

To manage the risks that could come with purchasing any stock, an investor could look to diversify by purchasing shares in other industry leaders such as Reebok, Adidas, or Under Armour. But as long as sports remain viable in public institutions, and professional leagues remain viable as a source of industry throughout the world, Nike is positioned to reap the benefits of these activities.

Recommendations

Nike currently has a market cap of over $139 Billion, yet is trading for under $100 a share. That means that it is a very large company, but there is no large barrier to entry for new investors. And since the company has been around for almost 40 years, it has a long proven track record for how it has performed for investors.

Since Nike is a large-cap company that offers an easy-to-understand, fairly straightforward company business model, it is an easy investment choice. This company has a tremendously established brand that is also "best in the breed." It has shown that it has been a strong past performer, with more than enough cash and assets to facilitate growth or survive a downturn. Nike also currently pays out dividends. It is currently paying out a 1.11% dividend quarterly to investors. It is in a viable field, serves multiple swaths of the country, and has numerous subsidiaries to provide a viable product to large numbers of the population. It would be foolish not to buy this stock.

References

Bunker, R. B., Cagle, C., & Harris, D. (2019). A Liquidity Ratio Analysis of Lean vs Not-Lean Operations. Management Accounting Quarterly, 20(2), 10.

Ee, B., Agarwal, H., Goyal, S., Panigrahy, A., & Pushkar, A. (2019). Institutional Research 101: Analyst Reports. Finding Alphas: A Quantitative Approach to Building Trading Strategies, 179-193.

Fang, J. (2018). Study of Relationship Between Liquidity Risk (Quick Ratio) and Internal and External Factors in Nike Company.pdf.

Prigge, S., & Tegtmeier, L. (2019). Market valuation and risk profile of listed European football clubs. Sport, Business and Management: An International Journal.

Ranjan, W. (2016). The Financial Performance Analysis of Nike Inc: with Special Reference Year 2015 Annual Report.

Appendix

Table showing Nike’s Liquidity Ratios

Liquidity Ratios	2019	2018	2017
Current Ratio	210%	251%	293%
Quick Ratio	139%	163%	201%
Cash Ratio	51%	87%	113%

The table shows Nike's profitability ratios.

Profitability Ratios	2019	2018	2017
Operating margin	12%	12%	14%
Profit Margin	10%	5%	12%
After-Tax ROE	45%	20%	34%