Investment Analysis and Recommendation Paper

DuPont

DuPont is a performance measurement method, by dividing Returns on Equity into three parts. The splitting of returns on equity helps the company to understand the changes that have taken place in the returns on equity. By calculating the returns on equity, it can be analyzed that ROE is affected by operating efficiency, asset use efficiency, and financial leverage.

The profit margin of a company measures its operating efficiency and the total asset turnover measures efficiency of usage of the asset. Moreover, equity multiplier helps in measuring financial leverage. The formula to measure ROE through DuPont is.
ROE= (profit/ sales) x (sales/ assets) x (assets/ equity)

Here, (profit/ sales) is the Profit Margin, (sales/ assets) is Total Asset Turnover, and (assets/ equity) is Equity Multiplier.

The DuPont value of Nike for three years is

Year ROE
2014 0.245041
2013 0.228805
2012 0.219838

The DuPont value of Adidas for three years is

Year ROE
2014 0.088177
2013 0.145822
2012 0.098947

From the calculated DuPont, it is observed that over the past three years Nike has been successful in increasing its DuPont ratio. A higher ratio is better for an organization as it indicated that the company is using the funds of the shareholders in an effective manner. On the other hand, the ratio of DuPont of Adidas increased in 2013 but decreased in the year 2014. On comparing the DuPont of both the companies, it can be said that Nike is far ahead of DuPont, and its performance has not been affected in the past three years, unlike Adidas. From the analysis, it can be said that the Nike is more effectively using the funds of its shareholders (Guerard & Schwartz, 2007; Moles, Parrino, & Kidwell, 2011).

Difference in Trend

The difference is the trend is observed while calculating DuPont as the values of the ROE ratio of Nike is increasing whereas, the fluctuation is observed in the values of ROE ratio of Adidas. The ROE ratio value increased in 2013, but it decreased in 2014. It indicates that the company (Adidas) did not utilize the funds of the shareholders effectively which affected the overall performance of the firm (Böhm, 2008; Ducat, 2012).

Summary

From the findings, it is noted that the Nike has a higher ratio of ROE as compared to its competitor Adidas which means that the company is allocating its resources/ funds effectively. The company is observing an increase in the overall growth of the company is significant. Moreover, fluctuation has been observed in the performance of Adidas. On analyzing the financial statement of the company, it could be indicated that the company has performed well in the year 2013, which is also reflected by the findings of the DuPont value but in 2014 the net income of the company was affected which affected the DuPont value of the company (Nike, Inc., 2014; Adidas Group, 2015).

Formula

ROE= “(Net Income/ Sales) x (Sales/ Assets) x (Assets/ Equity)” (Böhm, 2008)

Nike Adidas
2014 2013 2012 2014 2013 2012
Net Income 2693 2464 2223 490 787 526
Sales 27799 25313 24128 14534 14492 14883
Total Assets 18594 17584 15465 12417 11599 11651
Average Shareholder Equity 10990 10769 10112 5557 5397 5316
ROE 0.245 0.2288 0.2198 0.0882 0.1458 0.0989

DuPont=Profit Margin x Total Asset Turnover x Equity Multiplier

 2014 2013 2012 2014 2013 2012
Profit Margin 0.09687 0.09734 0.09213 0.03371 0.05431 0.03534
Total Asset Turnover 1.49505 1.43955 1.56017 1.17049 1.24942 1.2774
Equity Multiplier 1.6919 1.63283 1.52937 2.23448 2.14916 2.19169
DuPont 0.24504 0.2288 0.21984 0.08818 0.14582 0.09895

The table above provides all the values that are used in calculating the DuPont for three years of both the companies. The trend of Nike shows that the performance of the company is good over the past three years as Net Income and Sales of the company has increased. On the other hand, the value of Net Income of Adidas increased in 2013 but decreased in 2014. The sales of the company have increased from 2013 to 2014.

References

  • Adidas Group. (2015). Adidas Group Annual Report 2014. Herzogenaurach: Adidas Group.
  • Böhm, A. (2008). Interpretation of key figures in financial analysis. München: GRIN Verlag.
  • Ducat, C. (2012). Constitutional Interpretation. Mason: Cengage Learning.
  • Guerard, J. B., & Schwartz, E. (2007). Quantitative Corporate Finance. Berlin: Springer Science & Business Media.
  • Nike, Inc. (2014). Form 10-K. Oregon: Nike, Inc.
  • Moles, P., Parrino, R., & Kidwell, D. S. (2011). Corporate Finance. Hoboken: John Wiley & Sons.

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