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Fundamental Financial Analysis: A Case of Adidas

Abstract

Adidas is a multinational corporation operating in the Global Sportswear Industry. The company has recorded remarkable success in the sportswear and sporting apparel business. It is driven by the mission of being the leader in manufacturing and marketing sports shoes, accessories, and equipment. In 2015, Adidas developed an initiative called “Creating the New” to expand its market size and increase revenue returns. The significant activities promoting Adidas operation are fitness exercises for good health, soccer games, and Olympic sports all over the world. The global economy influences retailing activities following the fluctuations realized in the micro-and macroeconomic environments. Thus, it is appropriate for Adidas to establish strong financial strategies for overcoming the shifts of commercial activities experienced in the competitive economic world. The fundamental financial analysis of Adida’s status as per the year 2019 focuses on short-term liquidity, operational efficiency, capital structure, and profitability in the global market. The ratios unveil that Adidas is not risking to incur losses but faces liquidity problems when obligations are met by using the quick assets only. The operation efficiency of the Corporation is relatively high since credit sales management functions on time. The capital structure analysis shows that Adidas has more assets than debts; however, the elevated credit ratio puts the company in a risky state that only relies on liabilities for capital. Generally, the profitability of the company in the global market is relatively low. The implication is that Adidas Corporation should focus on mitigating the weak points in its financial plan to gain higher revenue returns and market expansion.

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Introduction

Adidas is a multinational company operating in the Sportswear Industry, having major brands of Adidas, Taylor Made, and Reebok. The corporation has its headquarters in Herzogenaurach city in Germany. Adidas was created by the Dassler brothers, Adi and Rudolf, but developed by Adi after a conflict. Rudolf Dassler came up with Puma after that. The company grew to the extent of holding a share in the DAX30 stock exchange in which highly mentioned 30 companies are recorded (Ind, 2015). Currently, Adidas Corporation is quoted more than 12 stock indices, and over 60,000 personnel are working for the company in 160 countries all over the world. The mission of Adidas is to “strive to be the global leader in the sporting goods industry with brands built upon a passion for sports and a sporting lifestyle.” Thus, by 2015, the “Creating the New” initiative was implemented to escalate growth in production and marketing. The products generating revenue for the corporation are classified as footwear, apparel, and hardware (Laluyan et al., 2017). This paper discusses the economy of Adidas Corporation and analyzes the financial flow of the company. The objective is to carry out a fundamental financial analysis and relate it with the development strategies and opportunities of Adidas.

The Industry

The Global Sportswear Industry deals with goods utilized for sporting activities. Adidas Corporation holds the second position among the most significant contributors to the Global Sporting Goods Industry (previously identified as the Global Sportswear Industry). The industry comprises manufacturing and retailing companies that trade equipment for fitness exercises, uniforms for athletic activities, soccer boots, Olympic shoes, and different accessories (Santos, 2017). The estimation in 2018 predicted a CGAR of 10.4 percent between 2019 and 2025, and at that time, the Global Sportswear Industry market size was USD 239.78 billion. The basis of forecasted growth in marking sporting costumes and apparel was the popularization of health benefits and a good lifestyle obtained from fitness activities (Santos, 2017). Thus, progression in the growth of the Global Sportswear Industry relies not only on athletics but aerobics; swimming and yoga also contribute to an increase in production and marketing in the industry.

The Global Sportswear Industry has obtained strong support from athleisure and increased participation in international sports. In 2016, the Deutsche Bank unveiled from different research that global health awareness pointing to physical exercise raised the revenue returns from retailing sporting apparel and costumes (Laluyan et al., 2017). Moreover, the industry profited from Brazil’s 2016 Olympic sports and the European Union soccer games hosted in France in the same year. The time range from 2015-202 was also indicated to be a period marked by growth in the Global Sporting Goods Industry with a CAGR of 3.4 percent. Apart from health awareness and sporting activities, the standards of living and consumer attraction to Adidas products comprised the drivers of industrial development (Santos, 2017). In addition, the online marketing platforms propagated Global Sporting Goods Industry growth since retailers would reach customers efficiently all over the world.

Global Economy Outlook

The third quarter of 2019 was marked by elevated equity returns. Irrespective of the low output of 2018 returns to the global economy, increasing product value to enhance marketing returns instead of wage-earning boosted the revenues. Generally, when there are favorable monetary conditions, equity prices increase, and economic growth is realized. However, in 2019, a case occurred in the United States, where the interest rates were cut three times, and lowered by 0.25 in October. In developed nations like the United States, the United Kingdom, and Japan, monetary easing would flatten the economy (Salvatore, 2020). Conversely, attaining the expected revenue returns from investments to meet the saving demands became hectic. Thus, economic growth relies on the high value of products to enhance the marketing of manufactured goods (Santos, 2017). It implies that the growth of Adidas Corporation has to follow a strong financial background and understanding of diversities in the market to overcome the competition challenge.

Future Prospects

The clarity of methods applicable to Equity valuations remains unsettled in the world of economics and business growth. Specifically, companies and marketing organizations hold a critical aspect of growth in a diverse and economically competitive world. Multiple valuations is a strategy employed by investment and financial institutions that follows the simplicity of its structure and dividends obtained in return. However, for a company to succeed, the approach as applied in banking institutions will be questionable on eligibility for the targeted customers (Santos, 2017). Well-defined strategies should be utilized in the fine-tuning equity valuation of Adidas Corporation. It is based on the fact that each model and method of assessment depends on openly available information about the targeted market and production in the company. Different factors affect the equity valuation in a company, such as a history and short-term changes in the micro-and macroeconomic environment (Santos, 2017). Thus, Adidas should consider looking into improving its economic output through a well-designed approach in equity valuation.

Short-Term Liquidity Analysis

The liquidity ratio shows the ability of the firm to meet its short-term liabilities.

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  • Current Ratio = Current asset/ Current Liability

10.64 Billion/ 8.75 Billion = 1.22

Since the current ratio of Adidas Company is greater than one, it implies that the company’s current asset is greater than the current liability. The organization will be in a position to meet its short-term obligation using the excess current asset (Yan & Zheng, 2017). Hence, the Adidas firm is not in a risky state or a financial crisis since its current ratio is more than one.

  • Quick/ Acid Ratio = (Current Asset – Closing Stock)/ Current Liability

(10.64 Billion – 4.09 Billion)/8.75 Billion

6.55 Billion/ 8.75 Billion = 0.75

The quick ratio shows the firm’s ability to meet its short-term obligation using the total current asset without the inventory. The firm’s quick ratio is 0.75, which is less than one, indicating that the firm faces challenges in meeting its short-term liability without using its inventory (Yan & Zheng, 2017). The Adidas firm faces a liquidity problem when it uses its quick asset only to meet its obligation.

Analysis of the Operating Efficiency

The ratio shows the efficiency of the firm in using its assets to generate sales.

  • Total Asset turnover = Sales/Total asset

23.6 Billion/ 20.68 Billion = 1.14

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Total asset turnover shows the efficiency of the firm in using the assets to generate sales. A higher ratio implies that the firm is efficient in using its assets to generate sales resulting in a good performance (Yan & Zheng, 2017). The Adidas firm generates 1.14 sales from every dollar of its total assets.

  • Inventory turnover = Cost of goods sold/ Inventory

11.32 Billion/4.09 Billion = 2.77

Inventory turnover shows the efficiency of the firm in using its inventory to generate sales. It demonstrates the number of times a firm sells its stock in a year, which is 2.77 times in a year (Yan & Zheng, 2017). A higher inventory turnover of the Adidas Company shows its good performance in terms of using its inventory to generate sales.

  • Day sales inventory = 365/Inventory turnover

365/2.77 = 132 days

Day’s inventory turnover shows the number of days that a firm takes to convert its inventory to sales. The lesser days are taken to sell the inventory, the more efficient is the firm. Adidas firm takes 131 days, which translates to four months before selling its inventory.

  • Account receivable turnover = Sales/ Account receivable

23.64 Billion/3.24 Billion

= 7.3

Account receivable turnover shows the proportion of sales generated from the account receivable. Adidas generates 7.3 times sales from its account receivable during the year (Yan & Zheng, 2017). The implication is that Adidas Company receives payment from debtors 7.3 times in a year.

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  • Debtor days ratio = 365/Account receivable turnover

365/7.3 = 50 Days

Debtor day’s ratio shows the time taken by the debtors before paying the credit sales. It indicates the efficiency of the firm in administering its credit sales. The debtors of Adidas take 50 days before paying their debt to the firm (Yan & Zheng, 2017). Since the days are less, the company is efficient in its sales credit administration.

  • Account payable turnover = Credit purchases/Account Payable

Credit purchases = Cost of goods sold (COGS) – Opening inventory + Closing inventory

11.32 Billion – 3.45 Billion + 4.09 Billion

= 11.96 Billion

  • Account Payable turnover = 11.96 Billion/2.7 Billion

= 4.43 times.

Account payable turnover shows the number of times credit purchases (creditors) are paid during the year (Yan & Zheng, 2017). Adidas Company pays its creditors 4.43 times in a year, making it a good firm in management of its credit purchases payment.

  • Creditor’s Conversion period = 365/Account payable turnover

365/4.43

= 82 days.

The creditor’s conversion period shows the time that the firm takes before paying its creditors. The Adidas Company takes 82 days before paying its creditors (Yan & Zheng, 2017). The organization receives payment from its debtors after a short period (50 days) and pays its creditors after a long period (82 days). Thus, Adidas Corporation has good management for its credit sales and purchases.

Capital Structure of Adidas

The capital structure shows the extent to which the firm depends on the non-owner’s funds to operate the firm.

  • Total Debt Ratio = Total debt/ Total asset

(0.043 Billion + 3.99 Billion)/20.68 Billion = 0.2 OR 20%

The total debt ratio demonstrates the extent to which the company uses debt to finance its asset. A higher value of debt ratio that is greater than one shows that the organization highly depends on debt, making it riskier (Syifaudin et al., 2020). Since Adidas’ total debt ratio is less than one, it indicates that it has more assets than debt, making it less risky.

  • Debt equity ratio = Total debt/total equity

(0.043 Billion + 3.99 billion)/7.06 = 0.57 OR 57%

The debt-equity ratio indicates the proportion of funds contributed by the non-owners of the firm to that of the owners. It evaluates the leverage of the firm. A company with a debt-equity ratio greater than 100 percent shows that it is highly geared, making it riskier (Syifaudin et al., 2020). Since the debt-equity ratio of Adidas is 57 percent, which is less than 100%, it is not risky.

  • Times Interest earned = Earnings before interest Tax (EBIT)/ interest expense

3.75 Billion/0.161Billion = 23.29

Times interest earned indicates the number of times a firm can cover its current payment (interest expense). A higher ratio indicates a low gearing position of the firm, making it have a low financial risk (Syifaudin et al., 2020). Since the time’s interest earned for Adidas is higher (23.29), it has a low financial risk.

Analysis of Adidas Corporation Profitability

Profitability ratios show the success of management in generating profits from a firm’s product sales.

  • Gross profit margin = gross profit/ Sales

11.16 Billion/ 23.64 Billion = 0.47 OR 47%

The gross profit margin indicates the gross income that a firm obtains from its revenue. The lower the gross income, the lower the firm’s efficiency in generating profit from its sale (Syifaudin et al., 2020). Adidas generates 47 percent gross profit from its sales, which is roughly a high value.

  • Net profit margin = Net profit/Sales

1.92 Billion/23.64 Billion = 0.08 OR 8%

Net profit margin refers to the percentage of the net profit that a firm generates from its sale. A higher net profit margin implies a good efficiency of the firms operating (Syifaudin et al., 2020). Adidas has a net profit margin of 8 percent, which is a lower value indicating its low performance in generating net profit from its sales.

  • Return on asset = Net income/Total Asset

1.92 Billion/20.68 Billion = 0.09 OR 9%

Return on asset (ROA) indicates how efficient a company is in generating its net income. A higher return on assets indicates the firm’s efficiency in generating a net income from its asset. The Adidas Company has a 9 percent return on assets, indicating that the net income realized from the total asset is 9 percent (Syifaudin et al., 2020). The percentage is quite small, making it low in performance on generating income from the total asset.

  • Return on equity = Net income/ Total equity

1.92 Billion/ 7.06 Billion = 0.27 OR 27%

Return on equity shows the amount of net income the firm generates from its shareholders. The lower the return on equity, the lower the performance of the firm. The Adidas Company generates 27 percent net income from its equity, indicating a low performance (Syifaudin et al., 2020). The reason is that the company can only generate 27 percent net income from its shareholders, which represents a lesser value.

Conclusion and Recommendations

The fundamental financial analysis of Adidas Corporation indicates that the company is stable and operates with limited liabilities to generate income. However, it is appropriate for it to make inputs towards gaining economic stability even when running on quick assets only. The liquidity problem may cease. Generally, the company is efficient in making credit sales. However, the payment of debts three times a year is likely to drag the business into a competitive global sportswear market. Thus, strategies should focus on how to transform credits sales efficiency to a rapid revenue return system. The capital structure of Adidas is well established. Efforts should focus on how to rely on the total assets for maximum income generation. Briefly, the value of Adidas Corporation is high, and mitigating identified points of weakness in its financial plan would yield maximum economic output in the global market.

References

Ind, N. (2015). Adidas: Rediscovering the source of its success. Web.

Laluyan, W. N., Pangemanan, S. S., & Worang, F. G. (2017). The effect of advertising, perceived quality and brand awareness on consumer purchase intention (Case study: Adidas sport shoes). Jurnal EMBA: Jurnal Riset Ekonomi, Manajemen, Bisnis dan Akuntansi, 5(2), 267-278.

Salvatore, D. (2020). Growth and trade in the United States and the world economy: Overview. Journal of Policy Modeling, 3(1), 1-10.

Santos, D. F. (2017). Adidas group: Equity valuation thesis [Unpublished Master’s thesis]. Universidade Católica Portuguesa.

Syifaudin, A., Yusuf, Y., Mulyatno, R., & Dhevyanto, B. (2020). Fundamental financial information as a signal of company value. 1st International Conference on Accounting, Management and Entrepreneurship (ICAMER 2019). 123, pp. 22-24. Atlantis Press.

Yan, X., & Zheng, L. (2017). Fundamental analysis and the cross-section of stock returns: A data-mining approach. The Review of Financial Studies, 30(4), 1382-1423.

Appendices

Appendix I: Adidas Income Statement for 2015-2019 Period

Fiscal year is January-December
(EURO millions)
2019
Sales/Revenue 23.64B
Cost of Goods Sold 11.32B
Depreciation 1.08B
Amortization of Intangibles 78M
Gross Income 11.16B
Total Expense 8.58B
Interest Expense 161M
Pretax Income 2.56B
Income Tax 640M
Net Income 1.92B
Extra ordinaries & Discontinued Operations 59M
Net Income After Extra ordinaries 1.98B
EPS (Basic) 10.00
Basic Shares Outstanding 197.61M
EBITDA 3.75B

Appendix II: Adidas Balance Sheet for 2015-2019 Period

Fiscal year is January-December
(EURO millions)
2019
Cash & Short Term Investments 2.51B
Accounts Receivables, Net 2.63B
Other Receivables 619M
Inventories 4.09B
Other Current Assets 803M
Total Current Assets 10.64B
Net Property, Plant & Equipment 5.31B
Total Investments and Advances 523M
Long-Term Note Receivable 804M
Intangible 2.42B
Other Assets 983M
Total Assets 20.68B
Liabilities & Shareholders’ Equity 2019
Short-Term Debt & Current Portion Long-Term Debt 776M
Accounts Payable 2.7B
Income Tax Payable 618M
Other Current Liabilities 4.66B
Total Current Liabilities 8.75B
Long-Term Debt 3.99B
Provision for Risks & Charges 489M
Deferred Taxes 813M
Other Liabilities 106M
Other Liabilities (excl. Deferred Income) 102M
Deferred Income 4M
Total Liabilities 13.62B
Retained Earnings 6.56B
Total Shareholders’ Equity 6.8B
Accumulated Minority Interest 261M
Total Equity 7.06B
Liabilities & Shareholders’ Equity 20.68B

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