Finance The Appraisal of Financial Performance of Adi

Masaryk University

Faculty of Economics and Administration

Field of study: Finance

The Appraisal of Financial Performance of Adidas Group

Master’s Thesis

Supervisor: Author:

Ing. Bc. Jana HVOZDENSKÁ Chhengkeang CHENG

Brno, 2019

Name and surname of the author: Chhengkeang Cheng

Master’s thesis title: The Appraisal of Financial Performance of Adidas Group

Department: Finance

Master’s thesis supervisor: Ing. Bc. Jana Hvozdenská

Master’s thesis date: 2019

Annotation

The goal of the submitted thesis: The appraisal of financial performance of Adidas group” is to

perform financial analysis of Adidas group from 2013 to 2018 and beyond 2019. The first part

is focused on describing the characteristics of Adidas group. The second part is focused on

financial analysis of financial statements of Adidas group from 2013 to 2018 and revenue

forecast and pro-forma financial statements for 2019. And the final part is focused on providing

general view of financial performance of Adidas group and recommendations for inefficiencies

areas.

Keywords

Appraisal, financial performance, Adidas group, financial statements, revenue forecast,

pro-forma financial statements, general view of financial performance, and recommendations.

Declaration

“I hereby would like to certify that I have written the Master’s Thesis “The appraisal of financial

performance of Adidas group” by myself under the supervision of Ing. Bc. Jana Hvozdenská

and I have listed all the literary and other specialist sources in accordance with legal regulations,

Masaryk University internal regulations, and the internal procedural deeds of Masaryk

University and the Faculty of Economics and Administration.”

Brno,

______________________________

Author’s signature

Acknowledgement

I would like to thank my supervisor Ing. Bc. Jana Hvozdenská. Without her, I would have been

able to complete this diploma thesis. Her advices and recommendations have mainly

contributed to the completion of my thesis.

……………………………

Chhengkeang CHENG

CONTENTS

INTRODUCTION…..…………………………………………………….…………………. 13

I FUNDEMENTAL OF FINANCIAL ANALYSIS………………………………………… 17

1.1 Characteristic of financial statement analysis …………..…………………….... 17

1.2 Financial statements ……………………………………………………………. 17

1.3 Comparative analysis……………………………………………………………. 18

1.4 Uses of financial statements…………………………………………………….. 18

1.5 Limitations of financial analysis………………………………………………… 19

2 TOOLS OF FINANCIAL ANALYSIS………………………………………………….. 23

2.1 Fundamental Vs. Technical analysis…………………………………………….. 23

2.2 Analysis of absolute indicators…………………………………………………... 24

2.2.1 Horizontal analysis………………………………………………………...24

2.2.2 Vertical analysis ………………………………………………………….. 25

2.2.3 Net-working capital………………………………………………………..26

2.3 Ratio analysis……………………………………..………………………………26

2.3.1 Profitability ratios………………………………………………………….28

2.3.2 Activity ratios……………………………………………………………...30

2.3.3 Liquidity ratios……………………………………………………………. 32

2.3.4 Debt management ratios…………………………………………………...34

2.3.5 Financial market ratios……………………………………………………. 36

2.4 Analysis of cumulative indicators………………………………………………. 38

2.4.1 Du Pont pyramidal decomposition………………………………………...38

2.4.2 Bankruptcy indicators and credibility models……………………………..39

2.5 WACC and EVA………………………………………………………………...40

2.5.1 WACC …………………………………………………………………….40

2.5.2 EVA ……………………………………………………………………….43

2.6 Revenue forecast………………………………………………………………... 43

2.7 Financial statements forecast...…………………………………………………. 44

3 FINANCIAL ANALYSIS OF ADIDAS GROUP …..………………………………….. 45

3.1 Characteristics of Adidas group………………..………………………………... 45

3.1.1 Introduction……………………………………………………………… 45

3.1.2 Corporate Bodies of Adidas Group …...………………………………… 46

3.1.3 Businesses of Adidas Group ….………………………………………… 49

3.1.4 Product of Adidas Group..……………………………………………….. 51

3.2 Financial analysis of the financial statements of Adidas group…......................... 52

3.2.1 Horizontal analysis of Balance sheet and Income statement of Adidas…… 55

3.2.2 Vertical analysis of Balance sheet and Income statement of Adidas……….59

3.2.3 Net working capital of Adidas …………………………………………….. 61

3.2.4 Ratio analysis………………………………………………………………. 62

3.2.5 Du Pont pyramidal decomposition………………………………………….79

3.2.6 Altman Z score and credibility models.……………………………………. 80

3.2.7 WACC and EVA of Adidas in 2018……………………………………...... 81

3.3 Comparison with competitor…………………………………………………….. 84

3.3.1 Selection of competitors…………..……………………………………...... 84

3.3.2 Scope of comparison and data collection………………………………...... 85

3.3.3 General information and accounting principles..………………………...... 85

3.3.4 Comparison of capital structure…...……………………………………...... 88

3.3.5 Comparison of revenue and profitability ………………………………...... 89

3.3.6 Comparison of net profit margin and ROE.……………………………...... 92

3.3.7 Comparison of liquidity…………...……………………………………...... 93

3.3.8 Comparison of debt management ratios…......…………………………...... 95

3.3.9 Comparison of share……………………………………………………...... 97

3.4 Revenue forecast for 2019………………………………………………………. 98

3.4.1 Data collection…………..…………………………………….................... 99

3.4.2 Forecast method selection………..…………………………………….........99

3.4.3 Revenue forecast ……..…………..……………………………………........99

3.5 Financial statements forecast for 2019 …………………………………………..102

3.5.1 Assumption…………..…………………………………….........................102

3.5.2 Initial calculation……...…………..…………………………………….....103

3.5.3 Pro-forma income statement and balance sheet for 2019………………......104

3.5.4 Earning per share for 2019………..…………………………………….... 110

3.5.5 Return on equity ROE for 2019…..……………………………………......111

3.5.6 Limitation and conclusion………………………………………………… 111

CONCLUSION……………………………………………………………………………...113

LIST OF REFERENCES…………………………………………………………………… 121

LIST OF PICTURES……………………………………………………………………….. 125

LIST OF TABLES…………………………………………………………………………..127

LIST OF GRAPH.………………………………………………………………………….. 129

LIST OF APPENDICES……………………………………………………………………. 131

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INTRODUCTION

Financial analysis is a process of appraising business and finance-related entity to

determine the performances and suitability. It is used to analyze whether an entity is stable,

solvent, liquid or profitable enough to make decision on a monetary investment.

Financial analysis compares past performance of many consecutive historical periods of the

same company. Moreover, in order to know whether the performance of a company is better or

worse than other companies within the same industry, comparative performance is conducted.

By obtaining the result of comparing past and comparative performance, the future performance

can be prospectively predicted.

The role of the financial analysis is to supply reliable financial information to managers

to utilize to predict future events. Most big companies might analysis only a specific part of

the company’s performance, and supply this financial analysis information to the relevant

executives. Those executives are communicators spreading the financial analysis information

to other influential managers. In case they forecast radical perturbations in the future, they will

persuade management to take precautionary actions. However, in case the company forecast

to have extremely best performance, their expectations will be extended to highlight that the

long term performance will need cautious re-investment of earnings.

Financial statements of a company are the main sources of financial information for

financial analysis to derive ratios, create trend and compare against other companies in the

industry.

This master thesis will devote for analysis of financial performance of Adidas group for

financial analysis of five consecutive accounting periods and of other two companies of similar

size in the same industry using financial analysis methods and provide recommendations for

improvements.

Adidas group is chosen for expanding the thesis and as the source of information,

consolidated financial statements of Adidas such as balance sheet and income statement will be

used for the purpose of analysis.

Adidas is well-known for its famous high quality sport wear products worldwide. The

company has its headquarter in Germany, and its name was inspired by its founder Adolf

Dassler. He began producing shoes together with his brother Rudolf Dassler and enable their

product recognized around the world its three stripes logo in parallel shape. The world

recognized company confronted many financial encounters however company still survived by

exploring external factors distressing Adidas.

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Aim of the thesis

The main aim of the thesis is to perform financial analysis of Adidas Group and on the basis of

its results to appraise the company’s financial health and to formulate recommendation for

improving its economic and financial efficiency.

The performance of financial analysis will be conducted by using tools based on comparison of

financial analysis of five consecutive accounting periods and of other two companies of similar

size in the same industry. The results will be compared with industry average and any deviation

will be investigated. After appraising all outcomes, recommendations will be formulated to

enhance the economic and financial efficiency, profitability and management of the company

for further improvements.

Partial objectives of the thesis

The objectives of this master diploma thesis are:

. Judging Adidas’ ability to meet all its financial obligations

. Assessing the past performance and current position whether the financial condition of Adidas

is sound and recommendation for any difficulty

. Assessing the bankruptcy and failure probability

. Predicting the future growth prospects

In order to achieve the above objectives, the thesis will contain two parts: theory part

and practical part. The theory part describes and explains the relevant basic tools analysis of

financial statements and its usage, which is applied in practical part. The theory part will be

detailed in section of Methodology which mainly describes relevant scientific literature and

annual reports of ADIDAS GROUP are the main source for practical part of this thesis.

All theory part will be put into practice in the practical part which will be detailed in Chapter

3: Financial analysis of Adidas group

Methodology

This section is covered by theatrical aspects of methods which will be employed for the

appraisal of financial performance of Adidas. Horizontal and vertical analysis, net-working

capital, financial ratio analysis, DuPont analysis, bankruptcy prediction method, weighted

average cost of capital WACC and economic value added EVA, and financial forecasting

method will be used for the appraisal. The analysis are to be performed by using ratio analysis.

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Using the above mentioned methods, the following aspects will be taken into account

for the appraisal of the company:

. Profitability

. Activity

. Liquidity

. Debt management

. Financial market

. Bankruptcy prediction

The appraisal of financial performance of Adidas group through methods based on

comparison of financial analysis of six consecutive accounting periods and of other two

companies of similar size in the same industry. The results will be compared with industry

average and any deviation will be investigated. After appraising all outcomes,

recommendations will be formulated to enhance the economic and financial efficiency,

profitability and management of the company for further improvements.

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1 FUNDEMENTAL OF FINANCIAL ANALYSIS

1.1 Characteristic of financial statement analysis

Financial statement analysis engages in study of the link among numbers in financial

statements and the tendency of those numbers over the years.

Examining those tendencies enables a company to forecast what company is going to carry out

for the future. Moreover financial statement analysis enables a company to appraise its

performance aiming at determining issue areas. To sum up, financial statement analysis are both

examination the issues of company and forecast the way a company will carry out for the future.

(Stice, et al., 2011, p. 665)

The financial information comprising in financial statements have to be relevance.

Obviously, for the purpose of being beneficial, information has to be relevant for its intention

toward making economic-decision. This needs forecasts of forthcoming cash flow by relevant

stakeholders who are able to depend partially on related past and present information containing

in financial statements being statement of financial position and statement of comprehensive

income. Relevance will be enhanced when the information is most up to date.

(Alexander, et al., 2016, p.45, 47)

1.2 Financial statements

The three beneficial financial statements are statement of financial position, statement

of comprehensive income and statement of cash flow.

Statement of financial position displays amount of resources (assets) controlled by a company

and in what way it allocates its finance to those assets. Particularly it displays the current and

fixed assets of a company at a specific time (monthly end, quarterly end or year-end). Most of

the time, the company possesses those assets, but some other companies lease those assets on a

long term basis. The way a company allocates its finance for acquiring those assets is shown

by the combination of current liabilities (accounts payable and/or short term borrowing), long

term liabilities (fixed debts and leases), and owner’s equity (preference share, common share,

and retained earnings).

Statement of comprehensive income comprises of information of the company’s operating

performance during a certain period of time (a month, a quarter or a year). Unlike the statement

of financial position, which is at specific point of time, the statement of comprehensive income

shows the movement of sales, expenses, and earnings during a certain period of time.

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Statement of cash flow combines the outcomes of a company’s cash flow of income movement

(depending on the most recent year’s statement of comprehensive income) and the variation on

the statement of financial position (depending on the most recent year’s annual statement of

financial position). Expert employs these cash flow values to forecast the value of a company

and to appraise the risk and return of the company’s bond and stock.

(Reilly, et al., 2012, p. 261)

1.3 Comparative analysis

In order to make explanation of appraisal from financial statement analysis, we have to

determine if the appraisal shows excellent, poor, or medium performance. To conduct that

assessment, it is required yardstick benchmark for comparisons as the following:

- Intra-company-The company being appraised allows benchmark for comparisons due to

its own past performance and link of those financial items. For example, we can compare

the company’s current income with its past years’ income based on its revenues and/or

total assets.

- Competitor- Same or similar competitor of a company being appraised allows benchmark

for comparisons. For example, Adidas’ profit margin can be compared with Nike’s profit

margin.

- Industry-Industry data allows benchmark of comparisons. Those data can be found from

service providers namely Dun & Bradstreet, Standard & Poor’s, and Moody’s.

- Guidelines (rules of thumb)-General benchmark of comparisons is made from experience.

For example, the 2:1 level for current ratio being 2 of current asset against 1 current

liabilities or 1:1 level for the acid-test ratio being 1 current assets by taken off inventory

and prepaid expense against 1 current liabilities. We must use guidelines carefully and it

is important to exercise it in appropriate circumstances.

(Wild, et al., 2009, p. 548)

1.4 Use of financial statements

Internal Uses-information in financial statements provides many utilizations internally

of a company. One of the most important of utilization is performance appraisal. For instance,

executives are regularly appraised and remunerated based on financial assessment of

performance namely profit margin and return on equity. Moreover, numerous division company

regularly conducts comparison the performance of those divisions by making use of the

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financial statement information. One more important internal use is preparation for the future.

Past financial statement information is beneficial to produce predictions for forthcoming and to

examine the faithfulness of hypothesis produced in those predictions.

External Uses-Financial statements are beneficial to stakeholders outside the company,

such as short-term and long-term creditors and potential investors. For instance, creditor will

require the information when granting loan to the company.

This information is used to appraise the suppliers, and suppliers also examine financial

statements of company in deciding to prolong credit to the company. Customers make use of

this information to forecast if company is probable to continue its operation in the future. Credit-

rating agencies depends on information from financial statements when making appraisal of a

company’s overall creditworthiness. The general idea right here is that financial statements are

the main source of information of a company’s financial condition. Such information is

beneficial when appraising main competitors of a company. When thinking of starting a new

product, the main fear will be that whether the competitor will start the same product soon after.

For this case, a company will be fascinate studying its competitors’ financial health to evaluate

whether they are able to develop any vital expansion. Lastly, a company want to acquire another

company. Financial statement information is important to examine prospective purposes and

conclude the proposal. (Ross, et al., 2010, p. 69)

1.5 Limitations of financial analysis

Financial analysis is very beneficial to study a company’s financial health as it enable

to identify many strengths and weaknesses of the company. Nevertheless, there are limitations

occur leading to deficient decisions:

- Once a company perform in multiple industries, conducting comparison of its

ratios to the average of a specific industry will be evidenced pointless. Think of

a company having three kind of industries: sport equipment and tires,

restaurants, and beer product. If we compare that company to restaurant industry

in which that company operates most, divergences of the company’s ratios of

the industry norm might be affected by the characteristics of the other industries

that company also operates.

- Moreover, the industry used as a yardstick benchmark for comparison might

contain companies involving in many businesses. It might misrepresent the

average ratios of the industry.

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- Companies employ different accounting practices. Because financial ratios are

obtained from financial statements, a company’s financial ratios might diverge

from the standard due to the variations of accounting methods used instead of

variations of company’s operations. Some companies have been condemned for

employing “creative accounting” to hide the real financial condition. Those

activities might restraint the ability of financial analysis to appraise the

company. When the internal analyst of the company being evaluated, the issue

might be fewer severe, as more information might handily be acquired. External

analyst usually can’t approach the required information.

- Companies whose financial statements differ by the season of the year might

indicate big divergence from the standard at certain of times but not at other

time.

- There might be very good rationales that a company’s ratios arise to show an

issue when nothing happen, and other way round. Remember the case of a

company that just acquires a new issue of long term debt. From the time that

company gets the proceeds from issuing the bonds and the time that the finance

is spent for its intended purpose, the company might face an unusual big current

ratio. The analyst inspecting this issue, the analyst might improperly infer that

executives are performing bad job of overseeing company’s asset.

- Industry standards are relied on historical data and are not fundamentally suggest

what should be in the future. So management shall not base their decisions

relying entirely on ratio analysis.

- Under specific circumstances, the industry average ratios should be formed the

ratios of companies with similar capacity. In fact, small companies might tend

to possess considerably different ratios than big companies within the operating

industry.

- Big inflation lead the company’s asset to be undervalue in its financial

statements (Purchase price minus depreciation). Inflation can raise the value of

asset. Because the assets are undervalue, ratios namely return on investment,

ROCE, asset turnover are misrepresented.

- Rise of interest rate usually follows the rise of inflation rates. The rise of interest

rates might lower the value of bonds. If the value of a company’s liabilities is

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lowered less than its book value, the liabilities on the company’s financial

statements and the degree of financial leverage will be overvalued.

(Madura, et al., 1988, p. 171-172)

- No discussion of non-financial issues: Merely numerical information are

contained in the financial statements and are shown in financial terms. However

financial statements do not indicate non-financial issues on the qualitative

information on eco-friendly concern of the company's operations toward local

community, effectiveness of top executives, goodwill of the company,

connection between employee and employer, workers’ proficiency, customers’

satisfaction and loyalty, competitive strength and so on which are not shown in

financial terms. These qualitative information are important for a company to

realize the true financial position and the performance outcomes of the company.

A successful company can fail by these issues.

(https://www.accountingtools.com/articles/limitations-of-financial-statements.html).

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2 TOOLS OF FINANCIAL ANALYSIS

2.1 Fundamental Vs. Technical analysis

Fundamental analysis is an investing technique used by investors who seek winning

company’s stock price by analyzing the company’s past performance such as financial

statements, daily management, and other related factors that might influence rate of return of

the company. By looking at historical performance of company, the method is used to forecast

the future value of stock by studying and comparing fiscal data in the previous period to indicate

the true value of equity of a company.

On the other hand, another technique is known as technical analysis. Based on the

historical chart and trend, it can predict the future value of a company’s stock price. People

believe that past performance of a company indicate the trend and pattern which will continue

until some factors change.

The difference is that technical analyst believe that securities change in quite foreseeable

trends and patterns

Differences between fundamental and technical analysis

Fundamental analysis

- Fundamental analyst begin with financial

statements of a company

- From financial statements, the intrinsic

value of company is measured and

decisions are made whether to invest in the

said company or not. Moreover analyst

perform other tasks in addition to the

financial statements.

- Use long term approach to evaluate the

securities. Fundamental analysis employs

data over number of years

- Use for investor hoping that stock price of

a company will increase.

Technical analysis

- Technical analyst begin with charts and

trend

- Technical analyst will not analyze

fundamental of company as this

information is in the charts.

- Use short term approach such as weeks,

days or minutes to evaluate the

securities.

- Use for trader hoping that it can be sold

at a higher price.

(Kulkarni, et al., 2013, p. 236)

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2.2 Analysis of absolute indicators

The basic methodical instrument and the link structure of financial information and

other primary data for financial analysis are expressed by proportion indicators. These

indicators expresses the ratio of two absolute indicators, the connection of a number to another.

The benefit of proportion indicators is the contraction of absolute data which differ on the basis

of the company’s size to the common and comparable basis. It is the better way to perform

comparison most up-to-date financial information of a company in respecting to its past data or

the data of different companies, big or small, or a group of company.

Absolute indicators, basic financial technique aiming at evaluating financial performance of

company, shows the size of financial statement elements. They present information of the

degree of the company’s assets and liabilities, income and expense, by using money as the way

of measure unit.

2.2.1 Horizontal analysis

Analysis of a sole financial figure will restrict its value. One the other hand, most of

financial statement analysis engage in determining and elaborating links among figures, group

of figures, and variation of those figures. Horizontal analysis involve in identifying the financial

statement data over the time. The word “horizontal analysis” emerges the movement from the

left to right of eyes as comparative financial statements is examined over the time.

Comparative financial statements: comparison the figure of more consecutive period of time

usually assists in examining the financial statements. Comparative financial statement assists

this comparison by presenting financial figures shoulder to shoulder row of individual

statement, known as a comparable form.

Change = Analysis period amount - Base period amount

It is calculated the differences for financial statement element as following: period being

analyzed is the point of the financial statements being analyzed and base period is the point or

period for financial statements used to compare against this base period. The base period is

usually the preceding year. We divide amount difference by amount of base period and multiply

by 100 to get percentage difference:

Percentage change % = Analysis period amount−Base period amount

Base period amount x 100

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In general, when horizontal analysis is used to compare amounts to average or median

amount of preceding periods (average or median amount smooth out exceptional variation),

percentage and ratios are regularly rounded to one or two decimal places, however in real

practice, this matter is inconsistent. It is important to evaluate whether the rounding of

calculation will influence decision making of user. The calculation should not be exaggeratedly

thorough leading to lose the important link among a peak of decimal point and digits.

(Wild, et al., 2009, p. 548)

2.2.2 Vertical analysis

Vertical investigation is a device to assess each financial statement elements or a bunch

of elements in terms of a particular base amount. We commonly characterize a key total figure

as the base for statement of comprehensive income which is usually income and for a statement

of financial position is usually total assets. The word “vertical analysis” emerges movement

from up to down (or down-up) of eyes as we study common volume financial statements.

Vertical analysis is also known as common size analysis.

The comparable financial statements (statement of financial position and statement of

comprehensive income) indicate the difference of every element over period of time however

it does not underline the comparable significance of individual element. Vertical analysis is

used to show the difference of the comparable significance of every financial statement element.

Each amount in vertical analysis are reexamined by using percentage. The dividing each

financial statement amount being examined by related base amount gives the examined percent:

Percent % = Analysis amount

Base amount x 100

Vertical analysis of statement of financial position shows every element being the

percentage of a base amount, which total assets is a normal vertical analysis of statement of

financial position. The base amount is determined a 100% value. This indicates that the total

value of liabilities and equity equals to 100% as this amount equals to total assets. Now we

calculate the vertical analysis percent of asset, liability and equity elements as base amount

being total assets. When showing a consecutive statement of financial position in this way,

differences of combination of assets, liabilities, and equity appear.

Vertical analysis of statement of comprehensive income is useful by using statement of

comprehensive income. The base amount is usually income determined to be 100% value. Each

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normal volume of statement of comprehensive income elements appears a percent of income.

When we consider 100% income amount expressing a dollar sale, the rest of elements display

the amount income dollar is apportioned to the cost expense and net income.

(Wild, et al., 2009, p. 553)

2.2.3 Net working capital

Without taking fixed asset into calculation, all other elements of a company and

combination of those elements into one called net-working capital (or working capital).

Net-working Capital = Raw material stock + Work in progress + Finished goods stocks

+ Trade debtors + Other debtors + Prepayments – Trade creditors – Accruals-Social

security and other taxes- Cash in advance –Other creditors

Net-working capital is the different between a company current assets and current

liabilities. It is the amount of cash available for a company needs to finance its daily operations.

Let consider that it is cash that a company deposits in the bank when the company does not

have to finance inventories, offer sale on credit to customers, process prepayments, and more.

When a company carries out the above activities, it will require cash for investment in net-

working capital.

The working capital cycle is the length of time that convert the net of current assets and

current liabilities into cash. When working capital is long, more capital is tied up in its working

capital, so the tied up capital does not generate any return to the company. Therefore, the

company tries to decrease this working capital cycle by receiving account receivables faster

and delaying payment to suppliers as long as possible.

(Rice, 2003, p.156-157)

A company needs adequate working capital to meet current debts, to carry out sufficient

inventory, and to take the advantage of cash discount. A company that runs low on working

capital is less likely to meet current obligations or to continue operation.

(Wild, at al., 2009, p. 557)

2.3 Ratio analysis

Since a sole figure gives little sense, analyst employs financial ratios to explore more

meaning. For instance, a company with net profit of 100000 currency unit will not so revealing

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except when the company realizes the sale figure of 1 million currency unit producing this net

profit. So ratios are aimed at giving purposeful links of each amounts in the financial statements.

A company is able to provide a number of possible ratios since the main financial statements

record many separate elements. Many of ratios will have little value. A company should

produce the most appropriate and important ratios to fit the economic situation of the company.

One single number from financial statement is small benefit and a separate ratio produces small

value unless it is related to comparative ratios from other companies. Relevance is produced by

relative financial ratios. So company’s performance is compared relatively to:

- the aggregate economy

- Its industry yardstick benchmark

- Its main competitors

- Its operational budgets

- Its historical performance

As economic situation affects all companies that operate in, having the comparison to

aggregate economy is very beneficial. For instance, during recession, a company will not

foresee to have bigger generating profit margin; with such situation, instead a steady profit

margin can be stimulated. One the other hand, it is an indication of deficiency when a company

produces a little rise in the profit margin during main business development. So economic

situation assist investors in perceiving the way of a company responds toward economic cycle

and forecast of future performance will be enhanced during subsequent economic cycle.

It is very beneficial to compare a company’s performance to the industry that it operates

in because different industry influences the company differently. Industry has significant effect

on the companies with homogeneous product such as steel, rubber, glass and wood product as

these companies, within these industries, are facing simultaneous demand changes. In

conclusion, a well-managed steel company also faces a lower sale and profit margin during a

recession. In this case, the doubt is not related to sale or profit margin decreased; it should be

related to sale decrease of whole steel industry. Moreover, investors ought to study industry’s

performance in relation to the economy to perceive the way industry reacts to the economic

cycle.

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By comparing to its competitors, the ratio analysis produces a performance benchmark

against which to explain those companies’ ratios. The comparison against a company’s

competitors gives a big picture whether a company is performing well or badly. In general, a

company is facing competition of the same industry. It is true that benchmark assists a company

in identifying chances or space available for improvement to stable its stand better toward its

success among different companies

An operational budget describes in a forecast spreadsheet as a company plans to achieve

income and expenses for future years. The budget is then split into month or quarter in order

present needed information for executives to monitor the performance and later make necessary

adjustments. This budget is based on the company’s prior year-performance and future

expectations. A company traces its operational budget comparing to its actual revenues and

expenses.

Historical trend analysis provides the financial story of a business in recent years to

produce a perspective of what a company is going to do. It allows executive to go in the right

direction. It assists executive in overseeing the main decisions to ensure that company is

financially viable. Comparison of three or more years ensure the trend analysis and assist the

executive in measuring operating performance and making adjustment as needed. Executives

might identify each individual division to find the root cause when usual issue occurs. Investor

or stakeholders can compare company’s result of multiple years to see the improvement of the

company performance.

(Reilly, et al., 2012, p. 266)

2.3.1 Profitability ratios

Profitability is the ability of a company to utilize its assets efficiently to make profits

and we are interested in a company’s ability to use its assets efficiently to produce profits and

favorable cash flow. So it is the company’s ability to yield an adequate return to the invested

capital of shareholders by evaluating earnings in relation to the degree and sources of capital.

Profit margin: Profit margin shows a company’s ability to generate net income from sales.

Profit margin is evaluated by net income as a percent of sales.

Profit margin = Net income

Sales

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To make appraisal of profit margin of company, industry must be taken into

consideration. Each industry might need different profit margin. For example, an appliance

company needs profit margin ranging from 10% to 15% whereas a supermarket might need a

profit margin from 1% to 2%.

(Wild, et al., 2009, p. 562)

Return on total assets: To evaluate a company’s performance how effectively a company is

utilizing its assets to generate net income. Return on total assets is calculated as:

Return on total assets = Net income

Average total assets

The bigger ratio, the more effectively that a company is utilizing its assets.

The profit margin and total asset turnover are the basic two basic elements of a

company’s overall performance efficiency. The below equation presents the relation between

return on total assets, profit margin and total asset turnover:

Return on total assets = Profit margin x Total asset turnover

= Net income

Sales x

Sales

Average total assets

(Wild, et al., 2009, p. 563)

Return on capital employed: ROCE

For a company, capital employed is the net operating assets combining between owner’s

equity and long term borrowings. The executives aim at generating high profit as possible using

this assets. The assessment of a company’s performance of efficient use of resources is so called

return on capital employed ROCE. Since capital employed strives to include all the long term

finances used by the company, the return on capital employed reveal the efficiency of the whole

company’s performance instead of any certain financier such as stockholders.

As long term borrowings is included, interest expense is added back to net income to calculate

ROCE. So earnings before interest and tax EBIT is used for calculate ROCE.

Return on capital employed = Earning before intest and tax

Owners′equity+Long term borrowings

EBIT is used because interest expense is tax deductible, so interest net of tax is needed for

adjustment of tax charge.

(Alexander, et al., 2016, p. 137)

30

Return on owners’ equity: It is probably the most important aim of a company to run the

business to earn net income and maximize shareholders’ wealth. The return on owners’ equity

assesses a company’s performance in arriving this aim. Return on owners’ equity is calculated

as:

Return on owners’ equity = Net income−Preferred dividends

Shareholders′equity

Shareholders’ equity is the book value including minority interest in the company’s accounting

records. The dividends on cumulative preferred stock are deducted accordingly regardless the

time it is declared. In case of noncumulative preferred stock, dividends are deducted when it is

declared

(Wild, et al., 2009, p. 563)

2.3.2 Activity ratios

Activity ratios are indicators of how fast a company turns assets into sales or cash.

Generally, the faster executives are able to turn the company’s assets into sales or cash, the

more effectively the firm is performing.

Account receivable turnover assesses how many times a company is able to turn its account

receivables into cash. It is calculated as:

Account receivable turnover = Sales

Average account recceivable

Short term receivables from customers should be taken into account in account receivables.

Account receivable turnover is favorable if a company can collect its account receivables faster.

A high turnover is great since the company does not require to tie big amount of fund to its

account receivables. But an account receivable turnover will be too high; this situation will

happen, so company can apply more restrictive credit term as it negatively impacts sales

volume.

(Wild, et al., 2009, p. 559)

Inventory turnover: The length of time between a company’s inventories are retained and the

inventories are sold might change the requirement of working capital. Inventory turnover is a

measure of this change. Inventory turnover is calculated as:

Inventory turnover = Sales

Average Inventory

Average inventory is used since opening and closing inventory of the period do not show their

common amount.

31

Inventory turnover assists a company in deciding on pricing its products, manufacturing

process, influencing promotions to proceed excess inventory, and acquiring new inventory.

Inventory turnover might be too high when a company holds its inventory very small. It will

lead to limit sales volume. A low inventory turnover indicates a company does not employ its

assets efficiently. In some cases, extra inventory is hold to maintain sales volume of the

company. There is no common standard for inventory turnover besides declaring that it is

favorable to have high ratio if sufficient inventory is satisfied the sale demand.

(Wild, et al., 2009, p. 559)

Day’s sales uncollected: Day’s sales uncollected is the number of day a company will take to

collect cash when inventory is sold out. It is calculated as:

Day’s sales uncollected = Account receivables

Sales x 365

The short term receivables from customers are also included in account receivables.

Day’s sales uncollected measures how many days a company is able to convert current amount

of account receivables into cash. The long duration between the time of sales and the time

collecting cash leads to cash flow difficulty. A day’s sales uncollected means that a company

takes few days to receive its accounts receivable payment. It will be great when the company’s

credit term is available. A good guideline standard determines Day’s sales uncollected should

not be over 1 1/3 times the days in its 1 credit period without discount or its 2 credit period with

discount.

(Wild, et al., 2009, p. 559)

Day’s sales in inventory: A useful measure to assess inventory liquidity of a company.

It shows how long inventory is hold in term of days’ sales. It can explain as the number of days

inventory can be sold out of warehouse when no new are acquired or it can be said that the

number of days of funds are tied up in inventory before it is sold out. Day’s sales in inventory

is calculated as:

Day’s sales in inventory = Ending inventory

Cost of goods sold x 365

Closing inventory is used for Day’s sales in inventory focuses on ending inventory.

(Wild, et al., 2009, p. 559)

Total asset turnover: Total asset turnover assesses a company’s ability to employ its assets to

generate sales and income and is a significant evidence of operating efficiency as executives

32

dedicate great deal of attention to make decision the amount to invest in assets and to employ

the assets efficiently and effectively. The ratio is calculated as follow:

Total asset turnover = Sales

Average total assets

If asset turnover ratio is high, a company is said utilizing its assets effectively to generate sales.

However there are new and old assets with their accounting value as the old assets contain a

lower value than that of new assets. Moreover, each industry might have different investment

in fixed assets. Companies with small investments in fixed assets such as retail and wholesale

trade companies are likely to possess high ratios of total asset turnover than that of

manufacturing company which invest large amount in its fixed assets. The company with high

labor intensive will produce high total asset turnover.

(Ross, et al., 2005, p. 34)

2.3.3 Liquidity ratios

Liquidity is the concerns of a company’s resource available to meet short term

obligation requirements. Analysis of liquidity is aimed at evaluating a company’s funding

requirement to see how profitable a company is in utilizing its assets.

When a company can’t meet its current obligation, its existence will not be sure that it can

continue its operation in the future. In case accounting measurement believes the company’s

existence continues, more analysis must be conducted to validate this belief using liquidity

measures. Moreover, a lack of liquidity causes lower profitability and fewer opportunities. To

company’s creditors, the lack of liquidity might cause problem of interest and principal

collection for company’s creditors. A company’s customers and suppliers of goods and services

also affected by Short term liquidity problems imply that a company is not able to fulfil the

contracts and possible impairment to relation between customer and supplier.

It is not taken into account only the amount of current assets and current liabilities but

also the ratio of the two items. The current ratio is calculated as:

Current ratio = Current assets

Current liabilities

A company with high current ratio indicates a good liquidation stand and an ability to meet its

current obligations. High current ratio indicates more fund invested in current assets in

comparison to current obligations. It is not efficient to use the fund as having an excessive

investment in current assets since current assets usually yield small return on investment in

33

comparison to long term assets. A good guideline is 2:1 or 1.5:1 for the current ratio when

appraising a company’s ability to pay its current debt. The current ratio 2:1 or higher current

ratio is normally considered to be strong credit risk in the short run.

In addition to the above guideline, analysis of current ratio must take more three factors:

type of business, component of current assets, and turnover rate of current asset components:

- Type of business: A service company usually providing small or no credit sales and hold small

inventory tends to have a current ratio less than 1:1 provided that revenues generated is

sufficient to meet its current debt. But a company selling high-priced products or furniture will

have a higher current ratio due to the difficulties in estimating sales demand and sales receipt.

Consequently, a comparison with ratios of successful companies within industry and preceding

periods is more useful when conducting analysis of current ratios. The company’s accounting

method must also be considered, notably inventory method used, which effects the current ratio.

In the time of high cost, LIFO method will report small current asset than that when FIFO is

used.

- Component of current assets: The combination of a company’s current assets is vital to assess

its short term liquidity. For example, cash, cash equivalent, and short-term investment provide

more liquidity than accounts and notes receivable do. Furthermore, short term receivables

usually provide more liquid than inventory does. Certainly cash is the most liquid assets used

immediately to pay current debts. More funds tied up in receivable and inventory will lower a

company’s ability to pay current debt.

- Turnover rate of current assets components: Assets turnover evaluates a company’s efficiency

in utilizing its assets in relation to sales generated. Also, evaluation of turnover for each separate

current assets is first beneficial.

(Wild, et al., 2009, p. 557)

Cash ratio: Cash and cash equivalent are the most liquid asset of a company. Cash ratio can

be calculated as:

Cash ratio= 𝐂𝐚𝐬𝐡 and cash equivalent

𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐥𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬

A low cash ratio will not be a problem if the company is able to obtain loan on short notice. But

the sources of borrowing are not known whether from bank or by using guaranteed credit line

whenever the company can choose. There is no standard measure on liquidity of a company’s

reserve borrow power.

(Brealy, et al., 2011, p. 719)

34

Acid-test ratio: The acid-test ratio (quick ratio) measures a company’s ability of short term

liquidity without relying on inventory. Quick asset are cash, cash equivalents (short term

investments), and account receivables.

Acid-test ratio = Cash and cash equivalents+Account receivables

Current liabilities

The standard guideline for a good acid test ratio is 1:1 indicating that a company will not face

short term liquidity matter. It leads to liquidity concern when the ratio is smaller than 1 showing

that that current liabilities is bigger than quick assets. Make sure that company is able to obtain

enough cash from sales or from other source faster to pay off its obligation or due date of the

obligation is late until next period.

(Wild, et al., 2009, p. 558)

2.3.4 Debt management ratios

Debt management ratios aim at evaluating a company’s long run financial viability and

its ability to meet long term liabilities. The most important component of debt management

analysis is the combination of a company’s capital structure ranging from the most permanent

equity financing to riskier or more temporary short term financing. Debt financing is viewed to

be less expensive than equity financing because interest expense is tax deductible but dividend

is not so most companies seek to have an optimum capital structure that will maximize

shareholders’ wealth. The analysis stresses on a company’s ability to both meet its long term

obligation and provides protection to those creditors.

Debt and equity ratio: one component of analysis to evaluate the share of a company’s assets

contributing to its shareholders and creditors. The debt ratio presents total liabilities being a

percent of total assets. The equity ratio presents the supportive evidence by expressing total

equity being a percent of total assets.

A company is said to be less risky when its capital structure (equity and long term liabilities)

possesses larger share of equity. Interest and principal payment is a risk factor for debt

financing. One more factor is equity financing; in case of loss incurred to the company, equity

financing takes in the share of that loss absorb and later the assets will be satisfied creditors’

claims. For shareholder believe that when a company generate a return on borrowed capital

higher than the cost of borrowing, the extra net income will increase to shareholders’ wealth.

The combination of debt into capital structure is known as financial leverage since debt might

35

effect on generating net income to shareholders. A company is considered be largely leveraged

when a big portion of their assets is financed by debt financing.

Debt to equity ratio: is the proportion of total liabilities to equity. It is an evaluation of financial

leverage degree of a company’s capital structure. It is calculated as:

Debt to equity ratio = Total liabilities

Total equity

A company in variable industry will have lower ratios while the other in the stable industry,

less risky, will have higher ratios. The Lower the debt-to-equity ratio, the more preferable for a

company because it represents less risk.

(Wild, et al., 2009, p. 559)

The debt ratio: also known as debt to assets ratio, a financial ratio shows the level of a

company’s leverage. It is the proportion of a company’s assets that are employed by debt.

When ratio greater than 1 shows that a considerable portion of debt is funded by assets. In other

words, the company has more liabilities than assets.

The Formula of Debt Ratio Is: Debt ratio=Total debt/Total assets

When ratio is bigger than 1, a large portion of debt is used to finance the assets or we can say a

company has more liabilities than equity. A high ratio shows that a company may be at risk of

default on its loans in case creditor were to raise interest rates immediately.

Debt ratio is employed for company’s growth as it provides sustainable uses of debt for

businesses.

https://www.investopedia.com/terms/d/debtratio.asp

Financial Leverage

The amount of debt that a company employs to finance more assets is called Financial

Leverage or equity multiplier.

Formula: Financial leverage = Total assets/Shareholders’ equity

Too much level of financial leverage leads to the risk of failure as the company is facing more

difficulties to pay back the debt.

36

When the debt portion rises, the amount of financial leverage also rises. It is good if the

uses of debt which provides returns bigger than the financial expense related to the debt.

Nowadays more companies employ financial leverage rather than raising more equity portion

that can lower the earnings per share for shareholders.

Financial leverage enables a company to generate a disproportionate amount to its

assets and its financial expenses is tax deductible. So financial leverage enables a company to

generate extra returns to shareholders, however it contains the risk of outright bankruptcy in

case cash flows fall less than what company predict its expectations.

https://www.accountingtools.com/articles/2017/5/14/financial-leverage

Time interest earned: It measures company’s ability to meet interest obligation. The available

amount of earnings before interest and tax is used to cover interest expense. Time interest

earned is calculated as:

Time interest earned = Earnings before interest and tax

Interest expense

The ratio suggest how many times a company is able to pay the interest expense with its

earnings before interest and tax. The bigger the ratio, the safer for creditors. One guideline

claims that creditors are pretty safe when a company generates earnings before interest and tax

two times or more than interest expense each period.

(Wild, et al., 2009, p. 559)

2.3.5 Financial market ratios

Financial market evaluation is beneficial for assessment of a public company. This

evaluation employs publicly traded stock price by prospect market of risk and return for the

company.

Price earnings ratio: A better sense of stock market value of a company is evaluated by its

expected future cash flow as investors want to purchase stock at a financially sound company.

Earnings are very important when valuing a company stock price since investors are interested

in how profitable a company is and will be in the future. Earnings per share comparing to stock

market value per share indicates the fact of what market will expect or at what price that a

company’s current earnings will be bought.

Price earnings ratio = Market price per share

Earning per share

37

Generally investors will not make decisions based on one single ratio. A company’s stock price

with high PE ratio will be great for investment when its earnings last longer beyond current

market expectations. Likewise, a company’s stock price with low PE ratio is said to be a bad

investment when it is not able to maintain earnings and fall under market expectation.

(Wild, et al., 2009, p. 563)

Book value per share: It represent the value of equity available to common shareholders as per

share basis.

Book value per share = Equity available to common share

Number of common share outstanding

Conceptually, book value per share is the net assets, which assets minus debt, and it might be

viewed what will happen when a company’s operations stop.

(Wild, et al., 2009, p. 470)

Basic earnings per share: EPS or known as net income per share measures the amount of net

income generated per share of company’s common stock or the amount of money that each

share will receive when all net income is distributed. Weighted average common share

outstanding is used for income period. BEPS is calculated as:

Basic earnings per share = Net income−Preferred dividend

Weighted average common share outstanding

Basic earnings per share is similar to other profitability or financial market prospect ratios. The

higher earnings per share, the better since a company is able to generate more net income for

its shareholders. A high basic earnings per share always leads to higher stock price of a

company. However many factors can manipulate this ratio, so investors should carefully make

decision on their investment opportunity.

(Wild, et al., 2009, p. 468)

Diluted earnings per share

A company is said to possess complex capital structure when its capital structure

contains options or convertible securities (preferred share or debt). This company shall

acknowledge the possible effect on its EPS as those securities will be converted to lower EPS.

Diluted EPS takes into account the maximum possible dilution effect resulting from convertible

securities that are not regarded as common stockholder’s equity for current period.

Diluted EPS = Net income−Preferred dividend

Weighted average share outstanding+Diluted share

(White, et al., 1997, p.173)

38

Dividend cover: The dividend cover states the number of times a company is able to cover

current year’s dividend from net income of year. This provides the evidence of assurance level

for the future dividend distribution will be.

Dividend cover = Net income

Total dividend of common share

The higher the ratio is perceived to be greater coverage or safer margin from net income to

dividends which will result in higher dividend payout in the future. It is absolutely workable

for a company to keep the dividend cover lower than 1 or even negative. Executives always

prefer to maintain level of dividend as an indicator to market expectation of performance even

in period of bad results.

(Alexander, et al., 2016, p. 331)

Dividend yield: A method of estimate of dividend return of stock by measuring cash dividend

paid out in relation to market price of share.

Dividend yield is determined by the annual amount of dividend attributable to common shares

as a percentage of market price:

Dividend yield = Dividend per share

Market price per share

Investor purchases shares in a company’s stock hoping to have gain in the form of cash dividend

and of stock price rise. Investors are interested in a company with high dividend because they

want their investments to produce regular cash flow for them. On the other hand, a company

might have small or even no dividends since the company uses this fund to finance the

expansion of operation. Yet this company is still attractive to investors as they believe that its

stock price will rise in the future.

(Wild, et al., 2009, p. 563)

2.4 Analysis of cumulative indicators

2.4.1 Du Pont pyramidal

DuPont analysis is a useful tool used to break down related elements of return on equity.

Breaking down of ROE enables investors to evaluate the main financial performance to

discover strengths and weaknesses.

Basically, return on equity ROE is calculated by net income divided by equity

ROE = Net income/ equity

39

The tool explores more than profit margin analysis to know how efficiently a company is using

its assets and how well a company is using debt financing to generate return in the form of sales

and cash.

Financial leverage links the difference between ROA and ROE. Below is the breakdown of

ROE:

ROE = Profit margin x Asset turnover x Financial leverage

= Net income

Sale x

Sale

Total asset x

Total asset

Equity

= ROA x Financial leverage

(ROA = Net income/Total asset)

Due to these three performances, a company might increase ROE by sustaining a high profit

margin, raising asset turnover, and leveraging assets more effectively.

(Ross, et al., 2005, p.37)

2.4.2 Bankruptcy indicator model

Altman Z-Score

The Altman Z-Score was named after Edward Altman who was a professor at the New

York University. It is a statistical technique used to evaluate the probability of bankruptcy of a

company.

Its formula identifies seven common pieces of information, which can be found at the

company's public disclosure.

The Standard Z-Score = (1.2 x X1) + (1.4 x X2) + (3.3 x X3) + (0.6 x X4) + (1.0 x X5)

X1 = (Working Capital/Total Assets)

X2 = (Retained Earnings/Total Assets)

X3 = (Operating Earnings/Total Assets)

X4 = (Market value of equity/Total Liabilities)

X5 = (Sales/Total Assets)

The meaning of range of overall Z score:

Z ≤ 1.80 : Bankruptcy zone

1.80 < Z ≤ 3.00 : Grey area

Z > 3.00 : Safe zone

40

The lower score, the higher the chance of bankruptcy. When a company has a Z-Score

more than 3.0 showing financial soundness; less than 1.8 showing a high chance of

bankruptcy.

https://investinganswers.com/financial-dictionary/financial-statement-analysis/altman-z-score-5188

2.5 Weighted average cost of capital WACC and Economic value added EVA

2.5.1 WACC

WACC technique starts a long with perception that task of levered company is financed

by debt and equity at the same time. The weighted average of the cost of debt and cost of equity

is the cost of capital.

E is assigned for equity portion of company’s total assets

D is assigned for debt portion of company’s total assets

Re is assigned for the cost of equity and

Rd is assigned for the cost of debt.

When a company pays corporate tax rate, the correct cost of debt is Rd(1-tax rate), known as

after tax cost of debt. The formula Rwacc to identify the weighted average cost of capital is:

Rwacc= E/(E+D) x Re + D/(E+D) x Rd (1-tax rate)

E/(E+D) is the weighted average target ratio of equity and D/(E+D) is weighted average ratio

of debt. Target ratios are usually shown based on market value but not accounting value (book

value)

(Ross, et al., 2005, p. 481)

Cost of equity Re:

The cost of equity is the rate of return a shareholder require to invest in the equity of a

company. Using capital asset pricing model (CAPM), Re = Rf – β(E(Rm)-Rf)

Rf: A security will contain risk and return as risk is defined as risk free and expected

return of asset as the risk free rate. The risk free rate is used to measure the expected return on

risky investment, with risk creating an expected risk premium that is included to risk free rate.

The risk-free rate shall conform to a country that the security is being traded, and maturity of

security shall agree with the time horizon of the security.

41

Beta β measures the risk of investment by evaluate sensitivity of an investment to the

price changes in market portfolio (risk determination estimates security level of risk to total

market portfolio). The higher sensitivity of a company to market condition, the bigger the beta.

A company’s beta is 1.5 meaning that the security possesses 150% of the return volatility of

market average. The beta is 1 meaning that the expected return of a security is same as the

average market return. The beta is -1 meaning that security possesses an ideal adverse

correlation to the market.

Beta β is determined by the following factors:

- Type of business: Other things staying the same, cyclical industry might possess higher

beta than non-cyclical industry does. Company having business of housing and

automobile possesses higher beta than company having business of food processing and

tobacco that are not so sensitive to economic cycle.

- Operating leverage: Degree of operating leverage shows the link of fixed cost and total

cost of the cost structure of a company. Higher operating leverage meaning high fixed

cost compared to total cost leads to higher operating income and also lead to bigger beta

for the high operating leverage company.

Degree of operating leverage = % change in operating profit

% change in sale

- Financial leverage: When financial leverage rises, beta of company will also rise. It is

foreseen fixed interest charged on liability raising earnings per share at right period and

lowering it at terrible period. The rise of financial leverage raises the variance in earning

per share and forces security of the company more risky. In case a company is operated by

equity portion without debt portion so zero beta debt, and interest expense is a tax

deductible to a company.

Unlevered beta is the comparison of the risk of an unlevered company (company with no

debt) to the risk of the market. Beta is unlevered to eliminate the financial effect of debt.

Making comparison to a company’s unlevered betas provide an investor a greater concept

of evaluating the level of risk taken when he or she acquires the stock.

βL = βU (1+(1-tax rate)(D/E))

βL: levered beta for equity company βU: unlevered beta (beta of asset) of the company

Tax rate: marginal tax rate D/E: Debt to equity ratio (in market value term)

(Damodaran, 2011, p. 101-105)

42

The marginal tax rate is the tax rate on the last dollar of income earned by the firm and

generally will not be equal to the effective or average rate. It is used because interest expense

save tax on the marginal income. We expect that as leverage increase (measured by debt to

equity ratio) equity investors bear increase amount of market risk of company leading to high

beta. The tax factor in the equation capture the benefit created by tax deductible interest

payment.

The unlevered beta of a firm is determined by the type of business company operates

and its operating leverage. This unlevered beta is often referred to as asset beta because its value

is determined by assets owned by company. Thus the equity (levered) beta is determined by

riskiness of business and amount of financial leverage risk it has taken on. Because financial

leverage multiplies the underlying business risk, it stand the reason that firm have high business

risk should be reluctant to take on financial leverage. It also stand to reason that firm operating

in stable business should be much more willing to take on financial leverage. Utilities for

example, have high debt ratios but not high beta.

E((Rm)-Rf): risk premium is equals to expected return of the market minus the risk-

free rate. It is a compensation required by investor for investing security in the market portfolio

containing all risky assets without any riskless asset in the market. This premium does not

associate with each separate risky asset but to the class of those risky assets. It shows the extra

return in addition to the risk free rate. It is also said that when market or an asset class is so

volatile, investor will require higher risk premium.

(Damodaran, 2011, p. 135)

Cost of debt: It is a measurement of the current cost of borrowing that a company obtains

to finance its operation. It is identified by two factors. The first factor is the current level of

interest rate. When market rate rises, the cost of debt will rises. The other factor is default risk

of company. Higher default risk, higher interest rate (default spread) charged by lender to offset

for the extra risk.

Tax provides advantage to cost of debt. Interest expense is allowed for tax deduction.

Tax rate is used to calculate the after tax cost of debt. Tax benefit cumulating from interest

expense produces the after-tax cost of debt smaller than pre-tax cost of debt. High tax rate

makes high tax benefit.

After tax cost of debt Rd = (risk free rate+default spread) x (1-tax rate) (Damodaran, 2011, p. 155)

43

2.5.2 EVA

One technique to calculate the return of a net dollar to investors. What will earnings be?

after expense of the cost of capital is subtracted from earnings.

To calculate net income, a company begins with revenues and then subtract other cost and

expense such as wages, cost of goods sold, administration expense, interest expense and taxes.

However a company never subtract the cost of capital. After subtracting the dollar return

required by investors from net income is known as economic value added (EVA). It is the

additional return to shareholders’ wealth:

Economic value added = Residual income = Income earned – Income required

= Income earned–Cost of capital x investment

The economic value added will be zero if the rate of return on investment is equals to

the cost of capital. Economic value added measure is more superior to earnings or earnings

growth, the way of measuring performance. A company making more EVA will make award

to its executives and value to its shareholders. Moreover EVA might stress on the section of the

business that is not operating well.

(Brealy, et al., 2011, p. 299)

2.6 Revenue forecast

Holt-Winters method takes into account the seasonality. The Holt-Winters seasonal

method consists of the forecast equation and three smoothing equations: one for the level Lt,

one for the trend Tt , and one for the seasonal component St, with corresponding smoothing

parameters α, β and γ. n is used for the frequency of the seasonality for example, for quarterly

data n=4 or monthly data n=12. Number of periods in a season is p.

There are two variations, depending on the nature of seasonal item.

. Additive method

. Multiplicative method

Additive method

The additive method is employed when the seasonal variations are nearly steady through

the series. Using the additive method, the seasonal component is appeared in absolute terms

within the scale of the observed series, and within the level equation the series is seasonally

modified by deducting the seasonal component. Within each year, the seasonal component will

add together to nearly zero.

44

The equation for the additive method: Ft+n = Lt + nTt +St-p+n

Lt = α (Yt –St-p) + (1−α) (Lt-1+Tt-1)

Tt = β (Lt−Lt-1) + (1−β) Tt-1

St = γ (Yt−Tt) + (1−γ) St-p

Multiplicative method

The multiplicative method is favored when the seasonal variations fluctuates in

proportion to the level of the series. Using the multiplicative method, the seasonal component

is appeared within relative terms (percentages), and the series is seasonally modified by

splitting through the use of seasonal component. Within a specific period, the seasonal

component will make up to n.

The equation of the multiplicative method: Ft+n = (Lt + nTt) St-p+n

Lt = α (𝑌𝑡

𝑆𝑡−𝑝)+ (1−α) (Lt-1+Tt-1)

Tt = β (Lt – Lt-1) + (1−β) Tt-1

St = γ (𝑌𝑡

𝐿𝑡) + (1−γ) St-p

(https://otexts.com/fpp2/holt-winters.html)

2.7 Financial statements forecast

Forecasting financial statements is an important task of the company’s predictive

accounting system concerning the forecast of the future financial performance using statistical

understanding processes. The pro-forma financial statements are future financial performance

showing predictive revenue and expense hence the overall operating results. One of the basic

method used is related to the percent of sales method with the assumption that specific assets,

liabilities and expense are continuously proportional to sale volume.

Some fixed asset accounts that usually do not change proportionately to sales and stay at

specific amount however it will increase unrelated to sale volume sometimes during the year.

(https://bizfluent.com/how-7791703-forecast-financial-statements.html)

45

3 FINANCIAL ANALYSIS OF ADIDAS GROUP

4.1 Characteristics of Adidas group

4.1.1 Introduction

Adidas group refers to Adidas group AG, a world’s number two footwear and apparel

Germany-based public company which is going for the gold (pursue to achieve best possible

outcome). In 2005, Adidas group concluded a merging agreement with Reebok International

Inc. which is the world's number three sports footwear and apparel brand. The company resulted

revenues of lager than around $9.5 billion, making a real competitor to the world's dominant

brand in the industry, Nike’s revenues of $12.5 billion in 2005. Moreover the merger shown

Adidas's decision to put more focus directly over its main footwear and apparel operations.

Apart of that endeavor, the company finished proceeds of its Salomon winter sports division,

acquired in 1997, to Finland's Amer Sports Corporation in October 2005. The proceeds were

the company's Mavic bicycle division, and other brands, containing Arc'Teryx, Bonfire and

Cliché. However Adidas has maintained its golf equipment, footwear and apparel division,

TaylorMade-Adidas, as well as its Maxfli line of golf balls, golf clubs, and accessories. In 2018,

a worldwide operating company, with some 94 subsidiaries around the world, Adidas has

marked China to be a vital growth market and the company has struggled to be an official

supporter and provider to that country's Olympic Games event in 2008. Doing so, the company

expect to stand itself as the brand of preference when the Chinese market changes from merely

manufacturing the world's sports shoes to the world's largest consumer sports footwear market.

Adidas stays listed on the Frankfurt Stock Exchange and now is managed by CEO Kasper

Rorsted in 2018.

Chronological Key Dates:

1926: Dassler family builds a factory to make athletic shoes.

1936: American runner Jesse Owens, wearing Dassler shoes, wins a gold medal in the

1936 Olympic Games.

1948: The Dassler brothers part ways, and Adi Dassler starts his own shoe company.

1949: Adidas is registered as a company.

1957: Adidas introduces a pioneering soccer shoe.

1978: Adi Dassler dies, and control of his company is handed to his family.

1990: French entrepreneur Bernard Tapie buys Adidas.

46

1993: Adidas acquires Sports Inc., a U.S. company; Tapie sells Adidas to a group of

European investors, and Robert Louis-Dreyfus joins Adidas as CEO.

1995: Adidas goes public.

1997: Adidas acquires Salomon Worldwide and is renamed Adidas- Salomon AG.

2000: The company restructures in an effort to boost its image as a "lifestyle" brand.

2001: First Adidas Originals retail stores open in Berlin and Tokyo.

2002: The company acquires Arc'Teryx, a high-end equipment and apparel group

based in Vancouver; opens first Adidas Originals store in United States.

2003: Cycling division Mavic-Adidas Cycling is formed; company fails in attempt to

acquire golf ball manufacturer Top Flite.

2005: The company agrees to sell Salomon to Amer Sports in Finland; announces

acquisition of Reebok International, to be completed in 2006.

Company Perspectives:

The Adidas group endeavors to be the worldwide pioneer within sporting products

industry with sports brands built on an enthusiasm for sports and a sporting lifestyle. They are

buyer centered as they persistently make better the quality, appearance, feel and picture of their

products and their organizational structures to coordinate and surpass customer expectation and

to supply them with the most noteworthy esteem. They are advancement and plan pioneers who

look for to assist athletes of all expertise levels achieve high performance with all goods brought

to the market. They are a worldwide social and environmentally responsible organization,

inventive and monetarily remunerating for their staff and shareholders. They are committed to

persistently fortifying their brands and products to enhance their competitive position and

financial performance.

(https://www.referenceforbusiness.com/history2/99/Adidas-Group-AG.html)

3.1.2 Corporate Bodies of Adidas

Being a worldwide operating public listed company headquartered in Herzogenaurach,

Germany, Adidas AG is subject to the provisions of the German stock corporation law. The

Executive Board, the Supervisory Board and the Annual General Meeting makes up the central

corporate bodies of adidas AG. Every corporate body has its own responsibilities which are

rigidly isolated in compliance with German stock corporation law.

47

Below Picture exhibits the important connections among the Executive Board, the Supervisory

Board and the Annual General Meeting of adidas AG.

Picture 1: Corporate bodies of Adidas

Source: www.adidas-group.com/en/investors/corporate-governance/bodies/

Executive board

The Executive Board is accountable for managing the company, especially for its

strategic orientation, for the internal control and risk management system further as for

compliance. It demonstrates the company judicially and extra-judicially. Moreover it identifies

business targets, company policy and the organization of the company. The executive Board

reports to the supervisory Board frequently, comprehensively and on a timely manner on all

issues related to the company's strategy, planning, business development, financial position and

operation results furthermore as on specific issues of company risk and opportunity. The

Supervisory board approves all important decisions.

The rights and responsibilities of supervisory Board are locked in German stock law, within the

Articles of Association of adidas AG and within the service contracts of the members of the

executive Board. More details of the cooperation of the executive Board are controlled by the

Rules of Procedure of the executive Board and the Business Allocation plan. The documents

48

particularly specify necessities for meetings and resolutions furthermore for the cooperation

with the supervisory Board.

Supervisory board

The Supervisory Board is responsible for the appointment and dismissal of members of

the executive board furthermore for supervising and guiding the executive Board for running

business. The executive Board reports to the Supervisory Board frequently and

comprehensively on business development and planning furthermore on the risk management

comprising of compliance, and facilitates the company’s strategy and its execution along with

the Supervisory Board. Furthermore, the Official Board supplies and get the approval by the

Supervisory Board the annual financial statements of Adidas AG and the annual consolidated

financial statements of the adidas group in the view of the auditor’s reports. Supervisory Board

approves certain business transactions and measures of the Executive Board with particular

significance.

The rights and duties of the Supervisory Board are tied down in German stock enterprise

law, within the Co-Determination Act and within the Articles of Affiliation of adidas AG.

Besides directing tasks and duties, the Rules of Strategy of the Supervisory Board and of the

audit Committee further set out the individual requirements for being selected as member, the

meeting procedures, and approving resolutions.

The Supervisory Board of adidas AG comprises of sixteen individuals, and as per

German Co-Determination Act (Mitbestimmungsgesetz - MitBestG), it comprises of an

equivalent number of shareholder representatives and of employee representatives. According

to the rule, Supervisory Board member’s seat is for a-five-year term. The future election of

Supervisory Board is planned for the year 2019.

Annual general meeting

The corporate body is the Annual General Meeting where our shareholders use their

membership rights and exercise their voting rights. In term of guideline, every share entitles to

the equal voting rights ("One share - one vote").

Adidas AG has its Annual General Meeting in the first six months of each financial year. The

Annual General Meeting specifically decides upon the apportionment of retained earnings,

approval of the activities of the executive Board and of the Supervisory Board, amendment of

the Articles of Association, and on measures to extend or decrease capital furthermore on the

49

appointment of auditor. More than that, the Annual General Meeting chooses the shareholder

representatives to the Supervisory Board.

The invitation letter along with agenda of Annual General Meeting is delivered by

executive board to all shareholders who are recorded within the share register of adidas AG.

Reports and reports that are lawfully required for the Annual General Meeting, along with the

agenda, are produced and are accessible at the Company's website as of the day the meeting is

gathered.

Shareholder recorded within the share registered of adidas group AG at the day of the

Annual General Meeting and who lists for the Annual General Meeting in a timely manner is

called to attend the Annual General Meeting. Shareholders who are not able to attend the

Annual General Meeting personally can appoint a bank, a shareholders’ affiliation or any other

individual of their preferences to practice their voting rights on their behalf. Moreover, the

Company supplies its shareholders the opportunity of conceding power of representation and

voting guidance to proxies designated by the Company for the purpose of representation at the

Annual General Meeting. It is conceivable to enroll on the Company's website by making use

of the Company's password-protected shareholder entrance. Shareholders who enlist by means

of the shareholder entrance have the opportunity to straightforwardly print out their entrance

pass themselves also to alter power and guidance online up to the conclusion of the general

debate.

The advantage of mail and Web administrations is reasonably assisted by adidas AG.

The whole Annual General Meeting is air live and in full length online. Resolutions passed by

the Annual General Meeting, along with the discourse and statement of our Chief Executive

Officer Mr. Kasper Rorsted, are made accessible immediately on the Company's website.

(https://www.adidas-group.com/en/investors/corporate-governance/bodies/)

3.1.3 Businesses of Adidas

Brand

There are two main brands of Adidas AG: Adidas brand and Reebok brand.

50

Picture 2: Brand of Adidas

(source: www.adidas-group.com/en/group/profile/)

Adidas brand

The adidas brand incorporates a long history and deep-rooted association with sport.

Everything we do is based in sport.

This is often what ‘The Badge of Sport’ symbolize as a brand mark. Our wide and

different sports portfolio, ranging from major worldwide sports such as soccer and running, to

territorial pulse sports such as American soccer and rugby, has empowered the brand to rise

above the societies and turned to be one of the foremost recognized and famous global brands,

on and off the field of play. The adidas brand’s mission is to be the finest sports brand within

the globe, by planning, building and offering the finest sports items around the world, with the

leading benefit and experience.

(https://www.adidas-group.com/en/brands/adidas/)

Reebok brand

Reebok is an American-motivated worldwide brand with a profound wellness legacy

and a clear mission: To be the finest fitness brand in the world. Not a simple one. However in

the event that there's one brand that could make it occur, Reebok, the brand that was essentially

portion of a wellness development that until the end of time changed the way we see at spandex

and headbands. Beyond any doubt, typically not the 1980s any longer – the world has gone

forward. But so has Reebok and it proceeds to be brave. Brave is knowing enormity doesn’t

come from sameness. The past long time have been marked by a change from conventional

sports to wellness. The three sides of the Reebok Delta, an image of change and transformation,

51

portray the physical, mental and social changes that happen when people grasp the issue of

improving themselves within the gym, within their lives and within the world.

(https://www.adidas-group.com/en/brands/reebok/)

3.1.4 Product of Adidas

Picture 3: Product range of Adidas

(Source:https://images.search.yahoo.com/yhs/search;_ylt=AwrVk9hTh5BcLToASKgPxQt.=click)

The Adidas gather has 4 primary subsidiaries. The primary brand is its possess brand

title – Adidas, which is display in dress and footwear. The secondary brand is Reebok which

has overwhelmed Adidas and is one of the driving subsidiaries within the Adidas group. Rock,

the third brand, specializes in outdoor footwear, apparel’s and extras and 4th is Taylor made

which is centered on playing golf dress, outfit etc. Out of all the over subsidiary’s, Reebok is

the most grounded taken after by Adidas.

Adidas possesses diverse products. The main product of Adidas is, off course, footwear.

Coming in different pattern and fashion, Adidas footwear is powerful and strong. The

subordinate product of Adidas is apparel’s and accessories. Apparel’s like T-Shirts, coats,

sweatshirts, shorts etc are in awesome request. Where Reebok is more grounded in footwear,

Adidas is more grounded in apparel’s.

(https://www.marketing91.com/marketing-mix-adidas/)

52

3.2 Financial analysis of the financial statements of Adidas group

The analysis data are based on the annual reports and the audited consolidated financial

statements of Adidas group, which are prepared in accordance with the International Financial

Reporting Standards (IFRS).

Adidas group prepared and presented annual report at the 31 December of the year, and

the annual report is made available publicly on the company’s website.

Adidas group uses euro currency (€) to prepare and report its consolidated financial statements.

Rounding numbers presented in those financial statements may not add up equally to the total

figures provided.

Consolidated financial statements; consolidated financial position (Balance sheet),

consolidated statements of income (Income statement), and consolidated statements of cash

flow (Cash flow statement) from 2013 to 2018 and other important information will be used for

focusing and performing analysis.

Both theory and practice provided by result of financial methods are entirely compared

to the competitors. Two companies, Nike Inc. and Puma AG are carefully chosen for

comparison based on two main criteria. Firstly, a competitive and comparable company should

have its market capitalization similar to that of Adidas group, making to compare the result to

those of Nike Inc. and Puma AG, similar size and format. Secondly, Nike Inc, and Puma AG

are operating in the same industry of Adidas group.

Rounding differences may arise in percentages and totals.

53

Balance sheet of Adidas

Table 1: Balance sheet of Adidas (€ million)

Year 2013 2014 2015 2016 2017 2018

Assets

Current assets

Non-current assets

6,857

4,742

7,347

5,070

7,497

5,846

8,886

6,290

8,645

5,374

9,813

5,799

Total assets 11,599 12,417 13,343 15,176 14,019 15,612

Liabilities

Current liabilities

Non-current liabilities

Total liabilities

Equity

Attributable to shareholder

Non control interest

Total equity

4,732

1,386

6,117

5,489

(8)

5,481

4,378

2,422

6,799

5,624

(7)

5,618

5,364

2,332

7,696

5,666

(18)

5,648

6,765

1,957

8,721

6,472

(17)

6,455

6,291

1,711

8,002

6,032

(15)

6,017

6,834

2,414

9,248

6,377

(13)

6,364

Total liabilities and equity 11,599 12,417 13,343 15,176 14,019 15,612

Source: Annual report of Adidas from 2013 to 2018

Appendix A: Balance sheet of Adidas from 2013 to 2018

54

Income statement of Adidas

Table 2: Income statement of Adidas (€ million)

Year 2013 2014 2015 2016 2017 2018

Net sales

Cost of sales

Gross profit

Royalty and commission income

Other operating income

Other operating expense

Goodwill impairment losses

Operating profit

Financial income

Finance expense

Income before taxes

Income taxes

Net income from continuing

operation

Income (loss) from discontinued

operation, net of taxes

14,203

(7,202)

7,001

103

142

(6,013)

(52)

1,181

26

(94)

1,113

(340)

773

17

14,534

(7,610)

6,924

102

138

(6,203)

(78)

883

19

(67)

835

(271)

564

(68)

16,915

(8,748)

8,168

119

96

(7,2890

(34)

1,059

46

(67)

1,039

(353)

686

(46)

18,483

(9,383)

9,100

105

262

(7,885)

-

1,582

28

(74)

1,536

(454)

1,082

(62)

21,218

(10,514)

10,704

115

133

(8,882)

-

2,070

46

(93)

2,023

(668)

1,354

(254)

21,915

(10,552)

11,363

129

48

(9,172)

-

2,368

57

(47)

2,378

(669)

1,709

(5)

Net income

Shareholder

Non-controlling interests

790

787

3

496

490

6

640

634

6

1,020

1,017

2

1,100

1,097

3

1,704

1,702

3

Source: Annual report of Adidas from 2013 to 2018

Appendix B: Income statement of Adidas from 2013 to 2018

3.2.1 Horizontal analysis of Balance sheet and Income statement of Adidas

Horizontal analysis of Balance sheet

Table 3: Horizontal analysis of balance sheet (€ million)

Year

2014/2013 2015/2014 2016/2015 2017/2016 2018/2017

Absolute

change

Percentage

change

Absolute

change

Percentage

change

Absolute

change

Percentage

change

Absolute

change

Percentage

change

Absolute

change

Percentage

change

Assets

Current assets

Non-current assets

491

328

7.16%

6.91%

150

777

2.04%

15.32%

1,389

444

18.52%

7.59%

(241)

(916)

-2.71%

-14.56%

1,168

425

13.51%

7.91%

Total assets 818 7.05% 927 7.46% 1,833 13.73% (1,157) -7.62% 1,593 7.51%

Liabilities

Current liabilities

Non-current liabilities

Total liabilities

Equity

Attributable to shareholder

Non control interest

Total equity

(354)

1,036

682

135

1

137

-7.48%

74.72%

11.14%

2.47%

-15.49%

2.49%

987

(90)

897

41

(11)

30

22.45%

-3.71%

13.19%

0.73%

166.21%

0.53%

1,401

(375)

1,026

806

1

807

26.11%

-16.09%

13.33%

14.23%

-4.01%

14.29%

(474)

(246)

(719)

(440)

2

(438)

-7.00%

-12.55%

-8.25%

-6.80%

-13.01%

-6.78%

543

703

1,246

345

2

347

8.63%

41.09%

15.57%

5.72%

-13.33%

5.77%

Total liabilities and equity 818 7.05% 927 7.46% 1,833 13.73% (1,157) -7.62% 1,593 11.36%

Source: own calculation

55

56

The result of horizontal analysis of the main asset items of Adidas from 2013 to 2018

are shown in table 3. According to analysis, current assets increased gradually year to year from

7.16% in 2014 to 18.52% in 2016. This was result of increase the use of natural hedge and

arranges forward exchange contract and currency option to protect against foreign exchange

rate risk in 2014 (annual report of Adidas 2014, p. 232) and decreased slightly by 2.71% in

2017 then increased again 13.51% in 2018 being 0.43 time bigger than that of 2013.

Non-current assets growth fluctuated from 6.91% in 2014, then arrived 15.32% in 2015

and declined to 7.59% in 2016, and continued to decline by 14.56% in 2017 and a small rise

7.91% in 2018. Besides the impairment loss of furniture and fixture, there was significant

investment in PPE during the periods. In 2014, Adidas acquired land, land lease and building

improvements which previously leased (annual report of Adidas 2014, p. 210), and in 2016,

construction progress at the company’s headquarter and expansion of warehouse (annual report

of Adidas 2016, p. 161). Big portion of decline of goodwill and trademark in 2017 was the

result from selling out golf equipment business (annual report of Adidas 2017, p. 172) and CCM

Hockey business (annual report of Adidas 2017, p.173) trademark and the increase in

construction of company’s headquarter in 2018 (annual report of Adidas 2018, p. 174).

Overall, total assets of Adidas grew gradually by 7.05% from 2014 to its peak of 13.73%

in 2016 except decline by 7.62% in 2017 then raised by 7.51% in 2018.

Current liabilities mostly were short-term borrowing, account payable, other current financial

liabilities and current accrued liabilities fluctuated over the periods. It decreased by 7.48% in

2014 even though there was increased in income taxes liabilities, the short term borrowing,

account payable, and other current financial liabilities reduced by 57.70%, 9.50%, and 19.60%

respectively. Then it gradually increased 22.45% in 2015 and 26.11% in 2016 and declined by

7.00% in 2017 after that slightly increased 8.63% in 2018.

Non-current liabilities increased dramatically 74.70% in 2014 due to increase 142.70% of

Eurobond issued to finance company’s operation then slightly decreased from 2015 to 2017

due to redeem of bond and dramatically increased 41.09% in 2018 due to new issued equity

neutral convertible bond.

Equity increased from 2014 to 2018 over the period except small declined in 2017. In

2014, Adidas pay backed treasury share amount 5 million euros leading to small decrease in

share capital. Reserves comprised of capital reserve, hedging reserve, cumulative currency

translation differences, and other reserves. As capital reserve stayed the same from 2013, in

2014, there were rise of cumulative currency translation differences by 29.20% (106 million

euros) arising from translation of financial statements of foreign operations and heading reserve

57

617.65% (210 million euros) due to re-measurement of defined benefit plans. The small decline

of equity in 2017 was result from the decrease of reserve amount of 830 million euros being

110.80% offset the increase of retained earnings by 806 million euros 14.6% making equity

better. In 2018, Adidas reissued of treasury shares of conversion of convertible bond making

increase in capital reserve. This adding up with retained earnings of the year even though there

was decline of other reserve.

58

Table 4: Horizontal analysis of Income statement (€ million)

Year

2014/2013 2015/2014 2016/2015 2017/2016 2018/2017

Absolute

change

Percentage

change

Absolute

change

Percentage

change

Absolute

change

Percentage

change

Absolute

change

Percentage

change

Absolute

change

Percentage

change

Net sales

Cost of sales

Gross profit

Royalty and commission

income

Other operating income

Other operating expense

Goodwill impairment

losses

Operating profit

Financial income

Finance expense

Income before taxes

Income taxes

Net income from

continuing operation

Income (loss) from

discontinued operation,

net of taxes

331

408

(77)

(1)

(4)

190

25

(297)

(7)

(27)

(278)

(69)

(209)

(84)

2.33%

5.67%

-1.10%

-1.09%

-2.62%

3.16%

48.50%

-25.18%

-26.67%

-28.36%

-24.95%

-20.18%

27.04%

-509.36%

2,381

1,137

1,244

16

(42)

1,086

(44)

176

27

(1)

203

82

122

22

16.38%

14.95%

17.96%

16.09%

-30.32%

17.51%

-55.94%

19.90%

140.45%

-1.18%

24.36%

30.11%

21.60%

32.41%

1,568

635

932

(14)

166

596

(34)

523

(18)

7

497

101

396

(16)

9.72%

7.26%

11.41%

-11.47%

171.54%

8.17%

-100.00%

49.34%

-39.09%

11.27%

47.87%

28.6%

57.79%

-35.25%

2,735

1,131

1,604

10

(129)

997

-

488

18

19

487

214

273

(192)

14.80%

12.05%

17.63%

9.52%

-49.24%

12.64%

-

30.85%

64.29%

25.68%

31.71%

47.14%

25.23%

-309.68%

697

38

659

14

(85)

290

-

298

11

(46)

355

1

354

249

3.28%

0.36%

6.16%

12.17%

-63.91%

3.27%

-

14.40%

23.91%

-49.46%

17.55%

0.15%

26.13%

98.03%

Net income

Shareholder

Non-controlling interests

(293)

(297)

2

-37.17%

-37.71%

67.16%

144

144

-

28.98%

29.32%

0.50%

380

383

(4)

59.40%

60.40%

-65.81%

80

80

1

7.84%

7.87%

50.00%

604

605

-

54.91%

55.15%

-

Source: own calculation

59

As result of horizontal analysis of income statement in table 4, the revenue (net sales)

keep on increasing over the periods from 2014 to 2018. The increase was at least 2.33% in 2014

to the highest 16.38% in 2015. Although the sale growth year by year, there was a small decline

of gross profit 1.10% in 2014 because increase of cost of sale 5.67% was faster than increase

of revenue 2.33%. The increase of operating expense and goodwill impairment loss further

deteriorated operating profit by 25.18% in 2014. Even though financial expense was in favor

condition, there was a big loss from discontinued operation, making net income decline by

37.17%.

The gross profit in remaining periods increased at least 6.16% in 2018 and the highest

increase 17.96% in 2015. Finally, net income kept on increasing considerably from 2015 to

2018.

3.2.2 Vertical analysis of Balance sheet and Income statement of Adidas

Table 5: Vertical analysis of balance sheet

Year 2013 2014 2015 2016 2017 2018

Assets

Current assets

Non-current assets

59.12%

40.88%

59.17%

40.83%

56.19%

43.83%

58.55%

41.45%

59.53%

40.47%

62.86%

37.14%

Total assets 100% 100% 100% 100% 100% 100%

Liabilities

Current liabilities

Non-current liabilities

Total liabilities

Equity

Attributable to shareholder

Non control interest

Total equity

40.79%

11.95%

52.74%

47.33%

-0.07%

47.26%

35.25%

19.50%

54.76%

45.30%

-0.05%

45.24%

40.20%

17.47%

57.67%

42.46%

-0.13%

42.33%

44.58%

12.37%

57.47%

42.65%

-0.11%

42.53%

43.32%

12.37%

55.69%

44.42%

-0.10%

44.31%

43.77%

15.46%

59.24%

40.85%

-0.08%

40.76%

Total liabilities and equity 100% 100% 100% 100% 100% 100%

Source: own calculation

The vertical analysis was conducted to Adidas’ balance sheet to identify the composition

of its capital structure and its funding sources. Table 5 demonstrated the assets structure of

Adidas for the period from 2013 to 2018. The portion of current assets made up on average

59.59% while portion of non-current assets was on average around 40.41% of its total assets.

Adidas was a low capital-intensive company as it was allocating its capital more to current

assets as company needed more short-term cash for its liquidity.

60

The total current assets made up considerably of account receivable of between 24.64%

to 27.33% and inventory of from 34.38% to 42.71% over the periods.

The big portion of non-current assets were PPE of average of 31.51%, goodwill of average of

23.14% and trademarks of average of 23.71% over the period from 2013 to 2018. Accounts

payable was the big portion around 31.4% to 38.6% of current liabilities in all years from 2013

to 2018.

Over the period, the portion of total liabilities gradually increased from 52.74% to

59.24% exceeding Adidas’ net assets (equity). Most of company’s assets were financed by

liabilities.

There were rising of long term and short term borrowing to replace equity portion from

2013 to 2018 that’s why equity portion gradually declined annually from 47.26% in 2013 to

40.76% in 2018.

Table 6: Vertical analysis of Income statement

Year 2013 2014 2015 2016 2017 2018

Net sales

Cost of sales

Gross profit

Royalty and commission income

Other operating income

Other operating expense

Goodwill impairment losses

Operating profit

Financial income

Finance expense

Income before taxes

Income taxes

Net income from continuing

operation

Income (loss) from discontinued

operation, net of taxes

100%

50.71%

49.29%

0.73%

1.00%

42.34%

0.37%

8.31%

0.18%

0.66%

7.84%

2.39%

5.44%

0.12%

100%

52.36%

47.64%

0.70%

0.95%

42.68%

0.54%

6.08%

0.13%

0.46%

5.75%

1.87%

3.88%

-0.47%

100%

51.71%

48.29%

0.70%

0.57%

43.09%

0.20%

6.26%

0.27%

0.39%

6.14%

2.09%

4.05%

-0.27%

100%

50.77%

49.23%

0.57%

1.42%

42.66%

-

8.565

0.15%

0.40%

8.31%

2.46%

5.85%

-0.34%

100%

49.55%

50.45%

0.54%

0.63%

41.86%

-

9.76%

0.22%

0.44%

9.53%

3.15%

6.39%

-1.20%

100%

48.15%

51.85%

0.59%

0.22%

41.85%

-

10.81%

0.26%

0.21%

10.85%

3.05%

7.80%

-0.02%

Net income

Shareholder

Non-controlling interests

5.56%

5.54%

0.02%

3.41%

3.37%

0.04%

3.78%

3.75%

0.03%

5.52%

5.50%

0.01%

5.18%

5.17%

0.01%

7.78%

7.77%

0.01%

Source: own calculation

61

According to table 6, on average, gross profit stand around 49.45% of revenue annually.

There were a bit increase in cost of sale in 2014 and 2015 being 52.36% and 51.71%

respectively increasing faster than the increase of revenue deteriorating gross profit of those

years.

Goodwill impairment losses incurred from 2013 to 2015 but not in remaining period.

In 2013, Adidas incurred considerably the financial expense 0.66% even though liabilities was

so low yet comparing to later periods.

Overall, Adidas was performing well over the year 2013 to 2018 as net income

accounted for 5.56% in 2013, a bit lower of 3.41% in 2014 and 3.78% in 2015 then increased

to 5.52% in 2016 and finally reached 7.78% in 2018.

3.2.3 Net working capital of Adidas

Table 7: Net working capital of Adidas (€ million)

Year 2013 2014 2015 2016 2017 2018

Current asset 6,857 7,347 7,497 8,886 8,645 9,813

Current liabilities 4,732 4,378 5,364 6,765 6,291 6,834

NWC 2,125 2,970 2,133 2,121 2,354 2,979

Source: Own calculation

According to table 7, the net working capital of Adidas were improved over the period

from 2013 to 2018. The lowest was in 2016 and the highest was in 2018. It showed good

indicator that the current assets were greater than current liabilities indicating that Adidas had

enough current assets to pay off its current liabilities in case those current liabilities were fall

due immediately.

62

Graph 1: Net working capital of Adidas

Source: own graph

3.2.4 Ratio analysis

Profitability analysis

Profit margin

Table 8: Profit margin (€ million, except profit margin)

Year 2013 2014 2015 2016 2017 2018

Net income 790 496 640 1,020 1,100 1,704

Revenue 14,203 14,534 16,915 18,483 21,218 21,915

Profit margin 5.56% 3.41% 3.78% 5.52% 5.18% 7.78%

Source: own calculation

According to table 8, except the decline in 2014 and 2015, profit margin increased

gradually reaching the highest of 7.78% in 2018. Adidas was performing well.

2,125

2,970

2,133 2,121 2,354

2,979

-

500

1,000

1,500

2,000

2,500

3,000

3,500

-

2,000

4,000

6,000

8,000

10,000

12,000

2013 2014 2015 2016 2017 2018

Net

wo

rkin

g ca

pit

al €

mill

ion

€m

illio

n

Year

Net working captital of Adidas

Current assets Current liabilities NWC

63

Graph 2: Profit margin of Adidas

Source: own graph

Return on total assets (ROA)

Table 9: Return on total assets ROA (€ million, except ROA)

Year 2013 2014 2015 2016 2017 2018

Net income 790 496 640 1,020 1,100 1,704

Average total assets - 12,008 12,880 14,260 14,598 14,816

ROA - 4.13% 4.97% 7.15% 7.54% 11.50%

Source: own calculation

Based on table 9, ROA was growing gradually from lowest 4.13% in 2014 to the highest

11.50% in 2018. Adidas was using its assets effectively.

5.56% 3.41% 3.78% 5.52% 5.18% 7.78%

-

5,000

10,000

15,000

20,000

25,000

2013 2014 2015 2016 2017 2018

€m

illio

n

Year

Profit margin of Adidas

Net income Revenue Profit margin

64

Graph 3: Return on total assets ROA of Adidas (€ million, except ROA)

Source: Own graph

Return on capital employed (ROCE)

Table 10: Return on capital employed ROCE (€ million, except ROCE)

Year 2013 2014 2015 2016 2017 2018

EBIT 1,207 903 1,105 1,610 2,116 2,425

Average capital employed - 7,453 8,009 8,195 8,070 8,253

ROCE - 12.11% 13.80% 19.65% 26.22% 29.38%

Source: own calculation

ROCE was growing gradually every year from 12.11% in 2014 to 29.38% in 2018.

Adidas was employing its capital employed effectively.

-

4.13%4.97%

7.15% 7.54%

11.50%

-

0.02

0.04

0.06

0.08

0.10

0.12

0.14

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2013 2014 2015 2016 2017 2018

RO

A %

€m

illio

n

Year

ROA of Adidas

Net income Average total assets ROA

65

Graph 4: Return on capital employed ROCE of Adidas

Source: own graph

Return on owners’ equity

Table 11: Return on owners’ equity ROE (€ million)

Year 2013 2014 2015 2016 2017 2018

Net income 790 496 640 1,020 1,100 1,704

Shareholders’ equity - 5,549 5,633 6,051 6,236 6,191

ROE - 8.94% 11.36% 16.86% 17.64% 27.53%

Source: own calculation

ROE was growing gradually every year from 8.94% in 2014 to 27.53% in 2018. Adidas

was using its shareholders’ equity fund more effectively.

Summary of profitability ratios

Table 12: Summary of profitability ratios

Year 2013 2014 2015 2016 2017 2018

Profit margin 5.56% 3.41% 3.78% 5.52% 5.18% 7.78%

ROA - 4.13% 4.97% 7.15% 7.54% 11.50%

ROCE - 12.11% 13.80% 19.65% 26.22% 29.38%

ROE - 8.94% 11.36% 16.86% 17.64% 27.53%

Source: own calculation

-

12.11%13.80%

19.65%

26.22%29.38%

-

0.05

0.10

0.15

0.20

0.25

0.30

0.35

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2013 2014 2015 2016 2017 2018

RO

CE

%

€m

illio

n

Year

ROCE of Adidas

EBIT Average capital employed ROCE

66

Activity ratios

Account receivable turnover

Table 13: Account receivable turnover (€ million, except turnover)

Year 2013 2014 2015 2016 2017 2018

Revenue 14,203 14,534 16,915 18,483 21,218 21,915

Average account receivable - 1,877 1,998 2,125 2,258 2,367

Account receivable turnover - 7.74 8.47 8.7 9.4 9.26

Source: own calculation

Account receivable turnover was growing gradually from 7.74 times in 2014 to 9.26

times in 2018 due to increase in revenue every year as Adidas was performing more

effectively.

Inventory turnover

Table 14: Inventory turnover (€ million, except turnover)

Year 2013 2014 2015 2016 2017 2018

Revenue 14,203 14,534 16,915 18,483 21,218 21,915

Average inventory - 2,580 2,820 3,438 3,728 3,569

Inventory turnover - 5.63 6.00 5.38 5.69 6.14

Source: own calculation

Due to effective performance that increase revenue every year, inventory turnover (revenue

comparing to average inventory) was growing gradually from 5.63 times in 2014 to 6.14 times

in 2018

Day’s sales uncollected

Table 15: Day’s sales uncollected (days)

Year 2013 2014 2015 2016 2017 2018

Account receivable 1,809 1,946 2,049 2,200 2,315 2,418

Revenue 14,203 14,534 16,915 18,483 21,218 21,915

Day’s sales uncollected 46.48 48.87 44.22 43.45 39.82 40.27

Source: own calculation

This ratio indicates how many days company takes to collect its accounts receivable,

the smaller, the better. Day’s sales uncollected was becoming better and better as it decreased

67

year by year from 46.48 days in 2013 to 39.82 days in 2017 and a bit increase to 40.27 days in

2018.

Day’s sales in inventory (days)

Table 16: Day’s sales in inventory (days)

Year 2013 2014 2015 2016 2017 2018

Ending inventory 2,634 2,526 3,113 3,763 3,692 3,445

Cost of goods sold 7,202 7,610 8,748 9,383 10,514 10,552

Day’s sales in inventory 133 121 130 146 128 119

Source: own calculation

The longest inventory day was 146 days in 2015 then declined to 119 days in 2018. The

shorter days, the better.

Total assets turnover

Table 17: Total assets turnover (€ million, except turnover)

Year 2013 2014 2015 2016 2017 2018

Revenue 14,203 14,534 16,915 18,483 21,218 21,915

Average total assets - 12,008 12,880 14,260 14,598 14,816

Total assets turnover - 1.21 1.31 1.30 1.45 1.48

Source: own calculation

Total assets turnover kept on increasing from 1.21 times in 2014 to 1.48 times in 2018.

Summary of activity ratios

Table 18: Summary of activity ratios

Year 2013 2014 2015 2016 2017 2018

Account receivable turnover - 7.74 8.47 8.7 9.4 9.26

Inventory turnover - 5.63 6.00 5.38 5.69 6.14

Day’s sales uncollected 46.48 48.87 44.22 43.45 39.82 40.27

Day’s sales in inventory 133 121 130 146 128 119

Total assets turnover - 1.21 1.31 1.30 1.45 1.48

Source: own calculation

68

Liquidity ratios

Current ratio

Table 19: Current ratio (€ million, except ratio)

Year 2013 2014 2015 2016 2017 2018

Current assets 6,857 7,347 7,497 8,886 8,645 9,813

Current liabilities 4,732 4,378 5,364 6,765 6,291 6,834

Current ratio 1.45 1.68 1.4 1.31 1.37 1.44

Source: own calculation

For good practice, current ratio should be equal to 1 the lowest as this ratio represent

the cover of current asset over current liabilities. Adidas possessed its current assets more than

enough which was bigger than 1 from 1.45 times to 1.68 times each year from 2013 to 2018.

Cash ratio

Table 20: cash ratio (€ million, except ratio)

Year 2013 2014 2015 2016 2017 2018

Cash and cash equivalent 1,587 1,683 1,365 1,510 1,598 2,629

Current liabilities 4,732 4,378 5,364 6,765 6,291 6,834

Cash ratio 0.34 0.38 0.25 0.22 0.25 0.38

Source: own calculation

When using cash and cash equivalent to cover the current liabilities, cash and cash

equivalent was not enough to cover its current liabilities. Cash and cash equivalent of Adidas

accounted for 34% in 2013 and declined to 22% lowest in 2016 and raised to 38% in 2018 of

current liabilities.

Acid-test ratio

Table 21: Acid-test ratio (€ million, except ratio)

Year 2013 2014 2015 2016 2017 2018

Cash and cash equivalent 1,587 1,683 1,365 1,510 1,598 2,629

Account receivable 1,809 1,946 2,049 2,200 2,315 2,418

Current liabilities 4,732 4,378 5,364 6,765 6,291 6,834

Acid-test ratio 0.72 0.83 0.64 0.55 0.62 0.74

Source: own calculation

69

When using cash and cash equivalent and account receivable to cover current liabilities,

Adidas did not have enough (around 55% to 83%) of cash and cash equivalent and account

receivable to cover its current liabilities. The ratios were 0.72 in 2013 and reaching the highest

0.83 in 2014 and declined to 0.55 in 2016 and raised to 0.74 in 2018.

Summary of liquidity ratios

Table 22: summary of liquidity ratios

Year 2013 2014 2015 2016 2017 2018

Current ratio 1.45 1.68 1.4 1.31 1.37 1.44

Cash ratio 0.34 0.38 0.25 0.22 0.25 0.38

Acid-test ratio 0.72 0.83 0.64 0.55 0.62 0.74

Source: own calculation

Graph 5: Liquidity ratios of Adidas

Source: own graph

Debt management ratios

Debt to equity ratio

Table 23: Debt to equity ratio of Adidas (€ million, except ratio)

Year 2013 2014 2015 2016 2017 2018

Total liabilities 6,117 6,799 7,696 8,721 8,002 9,248

Total equity 5,481 5,618 5,648 6,455 6,017 6,364

Debt to equity ratio 1.12 1.21 1.36 1.35 1.33 1.45

Source: own calculation

1.45 1.68

1.40 1.31 1.37 1.44

0.34 0.38 0.25 0.22 0.25 0.38 0.72 0.83

0.64 0.55 0.62 0.74

-

0.50

1.00

1.50

2.00

2013 2014 2015 2016 2017 2018

Liq

uid

ity

rati

os

Year

Liquidity ratios of Adidas

Current ratio Cash ratio Acid-test ratio

70

This ratio indicated how bigger comparing total liabilities to total equity. The total

liabilities of Adidas were bigger than its total equity. Total liabilities of Adidas kept on rising

comparing to its equity. The lowest was 1.12 times in 2013 to the highest 1.45 times in 2018.

Adidas used more liabilities to finance its assets.

Graph 6: Debt to equity ratio of Adidas

Source: Own graph

Debt ratio

Table 24: Debt ratio of Adidas (€ million, except ratio)

Year 2013 2014 2015 2016 2017 2018

Total liabilities 6,117 6,799 7,696 8,721 8,002 9,248

Total assets 11,599 12,417 13,343 15,176 14,019 15,612

Debt ratio 0.53 0.55 0.58 0.57 0.57 0.59

Source: Own calculation

Comparing debt to assets of Adidas, its debt accounted for 53% of total assets in 2013

and it was increasing every year reaching the highest 59% in 2018. Adidas was using more

liabilities to finance its assets.

1.12 1.21

1.36 1.35 1.33 1.45

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

-

2,000

4,000

6,000

8,000

10,000

2013 2014 2015 2016 2017 2018

Deb

t to

eq

uit

y ra

tio

€m

illio

n

Year

Debt to equity ratio of Adidas

Total liabilities Total equity Debt to equity ratio

71

Graph 7: Debt ratio of Adidas

Source: Own graph

Financial leverage

Table 25: Financial leverage of Adidas (€ million, except leverage)

Year 2013 2014 2015 2016 2017 2018

Total assets 11,599 12,417 13,343 15,176 14,019 15,612

Shareholders’ equity 5,481 5,618 5,648 6,455 6,017 6,364

Financial leverage 2.12 2.21 2.36 2.35 2.33 2.45

Source: Own calculation

Comparing total assets to shareholders’ equity, the financial leverage of Adidas was

2.12 times in 2013. The total assets of Adidas was from 1.12 times bigger than its shareholders’

equity in 2013 to 1.45 times in 2018. Adidas was using more liabilities to finance its assets.

0.53

0.55

0.58 0.57 0.57

0.59

0.48

0.50

0.52

0.54

0.56

0.58

0.60

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2013 2014 2015 2016 2017 2018

Deb

t ra

tio

€m

illio

n

Year

Debt ratio of Adidas

Total liabilities Total assets Debt ratio

72

Graph 8: Financial leverage of Adidas

Source: Own graph

Time interest earned ratio

Table 26: Time interest earned ratio of Adidas (€ million, except ratio)

Year 2013 2014 2015 2016 2017 2018

EBIT 1,207 903 1,105 1,610 2,116 2,425

Finance expense 94 67 67 74 93 47

Time interest earned ratio 12.85 13.41 16.62 21.76 22.75 51.60

Source: own calculation

Comparing EBIT to finance expense, Adidas generated its EBIT 11.85 times bigger than

its finance expense in 2013 and the trend was increasing gradually to 50.60 times in 2018.

Adidas had enough EBIT to cover its finance expense every year.

2.12

2.21

2.36 2.35 2.33

2.45

1.90

2.00

2.10

2.20

2.30

2.40

2.50

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2013 2014 2015 2016 2017 2018

Fin

anci

al le

vera

ge

€m

illio

n

Year

Financial leverage of Adidas

Total assets Shareholders' equity Financial leverage

73

Graph 9: Time interest earned ratio of Adidas

Source: Own graph

Summary of Debt management ratios

Table 27: Summary of debt management ratios

Year 2013 2014 2015 2016 2017 2018

Debt to equity ratio 1.12 1.21 1.36 1.35 1.33 1.45

Debt ratio 0.53 0.55 0.58 0.57 0.57 0.59

Financial leverage 2.12 2.21 2.36 2.35 2.33 2.45

Time interest earned

ratio 12.85 13.41 16.62 21.76 22.75 51.60

Source: own calculation

12.85 13.41 16.62

21.76 22.75

51.60

-

10.00

20.00

30.00

40.00

50.00

60.00

-

500

1,000

1,500

2,000

2,500

3,000

2013 2014 2015 2016 2017 2018

Tim

e in

tere

st e

arn

ed r

atio

€m

illio

n

Year

Time interest earned ratio of Adidas

EBIT Interest expense Time interest earned ratio

74

Graph 10: Debt management ratios of Adidas

Source: Own graph

Financial market ratios

Table 28: Data of share of Adidas

Year 2013 2014 2015 2016 2017 2018

Share price at year end 92.64 € 57.62 € 89.91 € 150.15 € 167.15 € 182.40 €

Dividend per share 1.50 € 1.50 € 1.60 € 2.00 € 2.60 € 3.35 €

Number of share

outstanding at year end

209,216,186 204,327,044 200,197,417 201,489,310 203,861,234 199,171,345

Number of Dilutive share - - - 5,958,632 1,848,957 285,955

Source: Annual report of Adidas from 2013 to 2018

Price earnings ratio

Table 29: Price earnings ratio of Adidas (€, except ratio)

Year 2013 2014 2015 2016 2017 2018

Share price at year end 92.64 € 57.62 € 89.91 € 150.15 € 167.15 € 182.40 €

Earnings per share - 2.37 € 3.13 € 5.06 € 5.41 € 8.45 €

Price earnings ratio - 24.30 28.68 29.65 30.88 21.60

Source: own calculation

0.53 0.55 0.58 0.57 0.57 0.59

2.12 2.21 2.36 2.35 2.33 2.45

12.85 13.4116.62

21.76 22.75

51.60

0.00

10.00

20.00

30.00

40.00

50.00

60.00

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

2013 2014 2015 2016 2017 2018

Tim

e in

tere

st e

arn

ed r

atio

Deb

t m

anag

emen

t ra

tio

s

Year

Debt management ratios of Adidas

Debt to equity ratio Debt ratio Financial leverage Time interest earned ratio

75

The ratio showed how big the share price was comparing earnings per share. The share

price at year end of Adidas was 23.30 times bigger than its earnings per share and it continue

to rise till 2017 then declined to 20.60 times in 2018.

Book value per share

Table 30: Book value per share of Adidas (€)

Year 2013 2014 2015 2016 2017 2018

Equity for shareholders

5,489,055,767

5,624,428,951

5,665,630,566

6,471,851,762

6,032,000,00

6,377,000,00

# of share outstanding

at year end

209,216,186 204,327,044 200,197,417 201,489,310 203,861,234 199,171,345

Book value per share 26.24 27.53 28.30 32.12 29.59 32.02

Source: own calculation

The book value per share of Adidas was lowest 26.24 € per share in 2013 and it

increasing gradually to highest 32.12 € per share in 2016 and a bit decline to 32.02 € per share

in 2018.

Basic earnings per share EPS

Table 31: Basic earnings per share EPS (€, except weighted average of common share)

Year 2013 2014 2015 2016 2017 2018

Net income attributable

to shareholders

787,096,092

490,308,376

634,050,381

1,017,000,000

1,097,000,000

1,702,000,000

Weighted average

of common share

-

206,771,615

202,262,231

200,843,364

202,675,272

201,516,290

Basic earnings per share - 2.37 3.13 5.06 5.41 8.45

Source: own calculation

Basic earnings per share of Adidas was increasing every year from 2.37 € per share in

2014 to 8.45 € per share in 2018. Adidas was generating more and more net income as it

performed more effectively.

76

Diluted earnings per share

Table 32: Diluted earnings per share of Adidas (€, except weighted average common share

and number of dilutive share)

Year 2013 2014 2015 2016 2017 2018

Net income attributable

to shareholders

787,096,092

490,308,376

634,050,381

1,017,000,000

1,097,000,000

1,702,000,000

Weighted average

of common share

-

206,771,615

202,262,231

200,843,364

202,675,272

201,516,290

Number of Dilutive share - - - 5,958,632 1,848,957 285,955

Diluted earnings per share - 2.37 3.13 4.92 5.36 8.42

Source: own calculation

When taking into account all convertible diluted share, diluted earnings per share and

basic earnings per share of Adidas were the same in 2014 and 2015 as there was no any

convertible share. But they were slightly lower than basic EPS from 2016 to 2018.

Graph 11: Basic earnings per share EPS and Diluted earnings per share of Adidas

Source: own graph

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

2013 2014 2015 2016 2017 2018

€

Year

Basic EPS and Diluted EPS of Adidas

Basic earning per share Diluted earning per share

77

Dividend cover

Table 33: Dividend cover of Adidas (€, except cover)

Year 2013 2014 2015 2016 2017 2018

Net income attributable

to shareholders

787,096,092

490,308,376

634,050,381

1,017,000,000

1,097,000,000

1,702,000,000

Total dividend for

shareholder

282,000,000 314,000,000 303,000,000 320,000,000 405,000,000 528,000,000

Dividend cover 2.79 1.56 2.09 3.18 2.71 3.22

Source: own calculation

The net income attributable to shareholders of Adidas were enough to cover its total

dividend for shareholder. Adidas’ net income attributable to shareholders was 1.79 bigger than

its total dividend for shareholders in 2013 and it declined in 2014 and arriving the highest 3.22

times (2.22 times bigger than total dividend for shareholders).

Dividend yield

Table 34: Dividend yield of Adidas (€, except dividend yield)

Year 2013 2014 2015 2016 2017 2018

Dividend per share 1.50 1.50 1.60 2.00 2.60 3.35

Market price per

share at year end

92.64 57.62 89.91 150.15 167.15 182.40

Dividend yield 1.62% 2.60% 1.78% 1.33% 1.56% 1.84%

Source: own calculation

Dividend per share of Adidas increased every year. But its market price per share

declined in 2014 then increase gradually since then to 182.40 € per share in 2018.

The dividend yield of Adidas rise from 1.62% in 2013 to 2.6% in 2014 then declined to 1.33%

in 2016 and increased to 1.84% in 2018.

78

Graph 12: Dividend yield of Adidas

Source: own graph

Summary of financial market ratios

Table 35: Summary of financial ratios of Adidas (€, except price earnings ratio, dividend

cover, dividend yield)

Year 2013 2014 2015 2016 2017 2018

Price earnings ratio - 24.30 28.68 29.65 30.88 21.60

Book value per share - 24.30 28.68 29.65 30.88 21.60

Basic earnings per

share

- 2.37 3.13 5.06 5.41 8.45

Diluted earnings per

share

- 2.37 3.13 4.92 5.36 8.42

Dividend cover 2.79 1.56 2.09 3.18 2.71 3.22

Dividend yield 0.02 0.03 0.02 0.01 0.02 0.02

Source: own calculation

1.50 1.50 1.60 2.00 2.60 3.35

92.64

57.62

89.91

150.15

167.15

182.40

1.62%

2.60%

1.78%

1.33%

1.56%

1.84%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

200.00

2013 2014 2015 2016 2017 2018

Div

iden

d y

ield

(%

i)

€

Year

Dividend yield of Adidas

Dividend per share

Market price per share

Dividend yield

79

3.2.5 Du Pont pyramidal decomposition

Table 36: Du Pont analysis of Adidas

Year 2013 2014 2015 2016 2017 2018

Profit margin 5.56% 3.14% 3.78% 5.52% 5.18% 7.78%

Assets turnover - 1.21 1.31 1.30 1.45 1.48

Financial leverage - 2.16 2.29 2.36 2.34 2.39

ROE - 8.94% 11.36% 16.86% 17.64% 27.53%

Source: own calculation

Note: Assets turnover is calculated by revenue over the average of total assets

Financial leverage is calculated by average total assets over average equity

As Adidas was performing more effectively to generate more net income making profit

margin rise year by year, even though its profit margin declined in 2014, it started to increase

gradually from 2015 to 2018.

The assets turnover of Adidas increased year by year from 1.21 times in 2014 to 1.48 times in

2018.

The financial leverage of Adidas also increased year by year as Adidas used more

liabilities to finance its assets. As Adidas used more liabilities to finance its assets (total

liabilities were bigger than shareholders’ equity) and profit margin increase year by year, its

ROE gradually increased from 8.94% in 2014 to 27.53% in 2018.

80

3.2.6 Altman Z score

Table 37: Altman Z score of Adidas (€ million, except score)

Year 2013 2014 2015 2016 2017 2018

Net working capital

Total assets

2,125

11,599

2,970

12,417

2,133

13,343

2,121

15,176

2,354

14,019

2,979

15,612

X1 0.18 0.24 0.16 0.14 0.17 0.19

Retained earnings

Total assets

4,959

11,599

4,839

12,417

4,874

13,343

5,521

15,176

5,858

14,019

6,054

15,612

X2 0.43 0.39 0.37 0.36 0.42 0.39

Operating profit

Total assets

1,181

11,599

883

12,417

1,059

13,343

1,582

15,176

2,070

14,019

2,368

15,612

X3 0.10 0.10 0.15 0.15

Market value of equity

Book value of total

liabilities

19,382

6,117

11,773

6,799

18,000

7,696

30,254

8,721

34,075

8,002

36,329

9,248

X4 3.17 1.73 2.34 3.47 4.26 3.93

Revenue

Total assets

14,203

11,599

14,534

12,417

16,915

13,343

18,483

15,176

21,218

14,019

21,915

15,612

X5 1.22 1.17 1.27 1.22 1.51 1.40

Z score 4.28 3.28 3.64 4.32 5.34 5.03

Source: own calculation

Note: market value of equity was calculated by multiplying the number of share outstanding

with the share price at year end.

Z score is up to 1.80 showing that the company is in bankruptcy zone, Z score ranges

from 1.80 to 3.00, showing that the company is in grey zone, and Z score is bigger than 3.00,

the company is in the safe zone.

According to table 37 of Adidas’ 6 years performance, its Z score were the lowest of

3.28 in 2014 and the highest of 5.34 in 2017. Adidas possessed no Z score less than 3.00. So

Adidas were all years in safe zone as it performed effectively from 2013 to 2018.

81

Graph 13: Z score of Adidas

Source: own graph

3.2.7 WACC and EVA

Weighted average cost of capital WACC of Adidas in 2018

Cost of debt of Adidas for 2018

Table 38: Gross debt as at December 2018 (€ million)

Period Up to 1 year Between

1 and 3 years

Between

3 to 5 years

More than

5 years

Total

Bank borrowings including

commercial paper

66 38 38 66 207

Eurobond - 597 - 387 984

Equity neutral convertible bond - - 484 - 484

Total 66 635 522 453 1,676

Source: annual report of Adidas 2018, p. 177

In 2018, weighted average interest rate on gross borrowings was 2.1% (annual report of

Adidas 2018, p. 177)

The cost of debt was calculated using financial expense divided by total debt. Since

financial expense was the amount paid out to creditors in that particular year, so cost of debt

was expressed in percentage:

Financial expense in 2018: 47

Total debt in 2018: 1,676

4.28

3.283.64

4.32

5.345.03

0.00

1.80

3.60

5.40

7.20

2013 2014 2015 2016 2017 2018

Z sc

ore

Year

Z score of Adidas

82

Pre-tax cost of debt in 2018: 47

1,676 = 2.80%

Note: Financial expense and total debt were in € million.

Cost of equity of Adidas for 2018

Capital asset pricing model CAPM, most widely used, will be used to calculate the cost

of equity: Re = Rf – β(E(Rm-Rf). We need to find Rf β and E(Rm) in order to apply the above

formula.

Data

To calculate cost of equity of Adidas, each value of component of model has to be found from

the following source:

- Historical share price of Adidas from 01 January 2013 to 31 December 2018 at

https://www.investing.com/equities/adidas-salomon-historical-data

- Historical price of DAX index from 01 January 2013 to 31 December 2018 from

http://en.boerse-frankfurt.de/index/pricehistory/DAX/1.1.2013_30.12.2018#History

- Data of German 10-year government bond yield at https://fred.stlouisfed.org/series/

IRLTLT01DEM156N#0

The value components of CAPM are:

Rf = 𝟎.𝟒𝟕%+𝟎.𝟔𝟔%+𝟎.𝟓𝟑%+𝟎.𝟒𝟖%+𝟎.𝟒𝟓%+𝟎.𝟑𝟑%+𝟎.𝟐𝟖%+𝟎.𝟐𝟗%+𝟎.𝟑𝟕%+𝟎.𝟒𝟎%+𝟎.𝟑𝟏%+𝟎.𝟏𝟗%

𝟏𝟐= 0.40%

β = 0.793

E(Rm) = 5.46%

Then Re = 0.40% + 0.793 (5.46%-0.40%) = 4.41%

Note:

. Rf was calculated by averaging twelve-month yield of the German 10-year government bond

yield from January 2018 to December 2018

. Beta is sensitivity of the expected excess asset returns to the expected excess market returns

how share price of Adidas changed relative to the DAX index.

. E(Rm) was calculated by sum of monthly return from DAX from 01 January 2013 to 31

December 2018 and dividing it by 6 (6 years data). Monthly return of DAX index was calculated

by using closing price minus opening price then dividing the opening price.

83

Weighted average cost of capital WACC of Adidas for 2018

WACC of Adidas is calculated using the following components:

Market value of equity € 36,329 million (182.4 € * 199,171,345 share = € 36,328,853,328 (share

price at year end 31 December 2018)

Book value of Debt = € 1,676 million at 31 December 2018 (Annual report of Adidas 2018,

p.177)

Re = 4.41%

Rd = 2.80%

Corporate tax rate was 28.13% in 2018

WACC = 𝐸

𝐸+𝐷∗ 𝑅𝑒 +

𝐸

𝐸+𝐷∗ 𝑅𝑑(1 − 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒)

= 36,329

36,329+1,676∗ 4.41% +

36,329

36,329+1,676∗ 2.8% (1-28.13%) = 4.30%

Note:

. Book value of debt in 2018 was used instead of market value of debt since the market value

of debt was typically difficult to find.

. Cost of equity in 2018

. Cost of debt in 2018

. Corporate tax rate was calculated by using income tax expense dividing income from

continuing operation before income tax expense in 2018: 669

2,378 = 28.13%

Economic value added EVA of Adidas for 2018

Economic value added = Residual income = Income earned – Income required

= Income earned – (Cost of capital * investment)

= Net income attributable to shareholders – (WACC * capital employed)

= 1,702 – (4.30% * 8,791) = 1,323.99 € million

Note: Investment equals to capital employed made up of Equity and long term liabilities that is

(6,377 + 2,414= 8,791 € million) in 2018.

The result shows that Adidas generated the return of 1,323.99 € million to shareholders.

The economic value added was positive implying that the rate of return on investment of Adidas

was bigger than its cost of capital. Adidas was making more EVA awarding to its executives

and value to its shareholders. But Adidas should be aware to improve some of business

operating which was not processing well.

84

3.3 Comparison with competitor

Certain financial indicators will be compared with those of selected Adidas’ competitors

as it's very important to evaluate the financial performance of Adidas compared to its

competitors. Here is the list of top ten competitors of Adidas:

Table 39: Top ten competitors of Adidas

N Name

1 Nike Inc

2 Callaway Gold company

3 Puma AG

4 Fila Holding S.P.A

5 Converse

6 New Balance corporation

7 K-Swiss

8 Asics

9 Li Ning

10 Air Jordan

Source: https://www.marketing91.com/top-10-adidas-competitors/

3.3.1 Selection of competitors

As far as the market force is concerned in term of market capitalization and industries,

there were two serous competitors, namely Nike Inc., number one competitor, and PUMA AG,

sibling rivalry. Nike Inc. and PUMA AG are all famous companies for sport wears

manufacturers. They all operates in the same industry of that of Adidas.

Here are brief introductions of the two chosen companies:

Nike Inc., incorporated on September 8, 1969, is engaging in the design, development,

marketing and selling of sport wear such as footwear, apparel, equipment, accessories and

services. The segments operation of company consist of North America, Western Europe,

Central & Eastern Europe, Greater China, Japan and Emerging Markets. The portfolio brands

of Nike inc., consists of NIKE Brand, Jordan Brand, Hurley and Converse. Nike supplies its

products to retail accounts through its retail outlet and online web, and through a combined

independent wholesalers and agents across the world. Nike’s products are produced by

independent suppliers.

https://www.reuters.com/finance/stocks/company-profile/NKE.N

85

At 31 May 2018, the closing share price of NIKE was 71.80 USD with share outstanding

of 1,601 million making its market capitalization of 114,983,000,000.00 USD or

98,284,000,000.00 € million (1EUR=1.1699 USD at 31 May 2018) on New York stock

exchange.

Puma AG is a sport wear company that fashions, creates, supplies, and markets

footwear, attire, and embellishments. The Company supplies performance and sport-inspired

lifestyle products in many categories, such as football, running and preparing, golf, and

motorsports. It too authorizes licenses to authorized independent contractors to fashion, create,

produce, and supply fragrances, eyewear, and watches. The Company makes its sales through

Puma retail stores and manufacturing plant outlets, and online. It supplies its products using

brand name of Puma, Cobra Golf, and Dobotex.

https://craft.co/puma

At 31 December 2018, the closing share price of Puma was 427 € with share outstanding

of 14,915,470 making its market capitalization of 6,384,277,690 € on Frankfurt stock exchange.

3.3.2 Scope of comparison and data collection

The comparison of financial indicators will be conducted over previous 6 financial

years: 2013, 2014, 2015, 2016, 2017 and 2018. General information and accounting principle,

total assets, revenue and profitability, liquidity, capital structure and Equity information are to

be compared. The exchange rate at each year end will be used to convert those currency into

EURO currency.

In order to have data available to conduct comparison, annual report of Nike Inc and

that of Puma AG were obtained through their respective websites.

3.3.3 General information and accounting principles

Adidas: The statutory annual financial statements of Adidas AG related to the

distribution of dividend were prepared in accordance with the German Commercial Code

(Handelsgesetzbuch - HGB) and the German Stock Enterprise Act (Aktiengesetz - AktG). The

annual consolidated financial statements and the interim financial report of the Adidas AG were

prepared by the executive Board in agreement with the principles of the international financial

reporting standards (IFRS) as pertinent within the European Union. The supervisory board

examined and approved the annual accounts. The annual financial statements of Adidas AG

86

were prepared in accordance with the German Commercial Code were therewith embraced.

Adidas has its financial year end on 31 December every year.

https://www.adidas-group.com/en/investors/corporate-governance/accounting-and-annual-audit/

Nike Inc,: Management of NIKE, Inc. is dependable for the information and

representations attached in the annual report. The financial statements were prepared in

accordance with accounting principles generally accepted (US GAAP) in the United States of

America and contained specific sums based on best estimates and judgments. Other financial

related information is reliable with these financial statements. Nike has its financial year end

on 31 May every year and its consolidated financial statements were prepared in USD (USD or

$). (Annual report of NIKE 2018, p.91)

Table 40: Financial information of Nike from 2013 to 2018 ($ million)

Year 2013 2014 2015 2016 2017 2018

Total assets 17,584 18,594 21,600 21,396 23,259 22,536

Revenue 25,313 27,799 30,601 32,376 34,350 36,397

Net income 2,485 2,693 3,273 3,760 4,240 1,933

Basic EPS 2.76 3.05 3.80 2.21 2.56 1.19

Total liabilities 6,428 7,770 8,893 9,138 10,852 12,724

Total equity 11,156 10,824 12,707 12,258 12,407 9,812

Source: Annual report of Nike from 2013 to 2018

Table 41: Financial information of Nike from 2013 to 2018 (€ million)

Year 2013 2014 2015 2016 2017 2018

Total assets 13,520 13,665 19,690 19,182 20,728 19,263

Revenue 19,463 20,430 27,895 29,026 30,612 31,111

Net income 1,911 1,979 2,984 3,371 3,779 1,652

Basic EPS 2.12 2.24 3.46 1.98 2.28 1.02

Total liabilities 4,942 5,710 8,107 8,193 9,671 10,876

Total equity 8,578 7,955 11,583 10,990 11,057 8,387

Source: own calculation using exchange rate at 31 May from 2013 to 2018

available at www.ecb.europa.eu/stats/eurofxref/

87

Table 42: Exchange rate at 31 May from 2013 to 2018

Year 2013 2014 2015 2016 2017 2018

Exchange rate EURO to USD 1.3006 1.3607 1.0970 1.1154 1.1221 1.1699

Source: www.ecb.europa.eu/stats/eurofxref/

Puma, with the “PUMA” brand name, PUMA SE and its subsidiaries are engaged in the

development and sale of a broad range of sports and sports lifestyle products, including

footwear, apparel and accessories. The company is a European stock corporation (Societas

Europaea/SE) and parent company of the PUMA Group; its registered office is on PUMA WAY

1, 91074 Herzogenaurach, Germany. The competent registry court is in Fürth (Bavaria), the

register number is HRB 13085. The consolidated financial statements of PUMA SE and its

subsidiaries (hereinafter shortly referred to as the “Group” or “PUMA”) were prepared in

accordance with the “International Financial Reporting Standards (IFRS)” accounting standards

issued by the International Accounting Standards Board (IASB), as they are to be applied in the

EU, and the supplementary accounting principles to be applied in accordance with Section 315e

(1) of the German Commercial Code. The IASB standards and interpretations, as they are to be

applied in the EU, which are mandatory for financial years as of January 1, 2018, have been

applied. The preparation of the consolidated financial statements was based on historical

acquisition and manufacturing costs, with the exception of the profit or loss assessment of

financial assets and liabilities at fair value. The items contained in the financial statements of

the individual Group companies are measured based on the currency that corresponds to the

currency of the primary economic environment in which the company operates. The

consolidated financial statements are prepared in Euros (EUR or €). The presentation of

amounts in millions of Euros with one decimal place may lead to rounding differences since

the calculation of individual items is based on figures presented in thousands.

(Annual report of PUMA 2018, p. 5)

Puma has its year end at 31 December every year.

88

Table 43: Financial information of Puma from 2013 to 2018 (€ million, except Basic EPS)

Year 2013 2014 2015 2016 2017 2018

Total assets 2,309 2,550 2,620 2,765 2,854 3,207

Revenue 2,985 2,972 3,387 3,627 4,136 4,648

Net income 21 85 62 88 168 230

Basic EPS 0.36 4.29 2.48 4.17 9.09 12.54

Total liabilities 811 932 1,001 1,043 1,197 1,485

Total equity 1,497 1,618 1,619 1,722 1,657 1,722

Source: Annual report of Puma from 2013 to 2018

3.3.4 Comparison of capital structure

Table 44: Comparison of capital structure (€ million)

Year 2013 2014 2015 2016 2017 2018

Total assets

Adidas

Nike

Puma

11,599

13,520

2,309

12,417

13,665

2,550

13,343

19,690

2,620

15,176

19,182

2,765

14,019

20,728

2,854

15,612

19,263

3,207

Total liabilities

Adidas

Nike

Puma

6,117

4,942

811

6,799

5,710

932

7,696

8,107

1,001

8,721

8,193

1,043

8,002

9,671

1,197

9,248

10,876

1,485

Total equity

Adidas

Nike

Puma

5,481

8,578

1,497

5,618

7,955

1,618

5,648

11,583

1,619

6,455

10,990

1,722

6,017

11,057

1,657

6,364

8,387

1,722

Source: Own compilation

In term of total assets, Nike is the biggest assets than Adidas and Puma. Adidas was the

second in term of total assets. If combining total assets of Adidas and Nike, it is nearly or equal

to that of Nike. Puma possessed the least total asses among the three companies. All of the three

companies’ total assets were increasing from year to year.

Considering the total liabilities, Adidas had the largest total liabilities than the other two

in 2013 and 2014. Nike’s total liabilities increased gradually year to year. From 2015, its total

89

liabilities was the largest companies in term of total liabilities, which 10 times bigger than Puma

in 2018. The total liabilities of Puma was the smallest among the three. Its total liabilities also

increased gradually over the period from 2013 to 2018.

In terms of total equity, Nike had the highest amount of total equity and Puma had the

lowest amount. Nike had around 5 times of total equity comparing to Puma over the period.

Adidas came the second among the three companies. The total equity of Adidas increased

gradually from 2013 to 2016 then fluctuated by decreasing in 2017 and increasing in 2018. Nike

were around twice of Adidas in 2017. Puma, the smallest company in term of equity, possessed

its total equity at small change over the period since it started to increase its total equity in 2014.

3.3.5 Comparison of Revenue and profitability

Table 45: Comparison of revenue and profitability (€ million, except basic EPS)

Year 2013 2014 2015 2016 2017 2018

Revenue

Adidas

Nike

Puma

14,203

18,355

2,985

14,534

22,897

2,972

16,915

28,108

3,387

18,483

30,714

3,627

21,218

28,642

4,136

21,915

31,788

4,648

Net income

Adidas

Nike

Puma

790

1,802

21

496

2,218

85

640

3,006

62

1,020

3,567

88

1,100

3,535

168

1,704

1,688

230

Basic EPS

Adidas

Nike

Puma

4.01

2.12

0.36

2.37

2.24

4.29

3.13

3.46

2.48

5.06

1.98

4.17

5.41

2.28

9.09

8.45

1.02

12.54

Source: own compilation

Nike generated the largest revenue in the period being compared. Its revenue increased

from 18,355 EUR million in 2013 to 31,788 EUR million in 2018. Nike increased its revenue

faster than Adidas did over the period. Adidas generated the second largest amount of revenue

over the period. Adidas’ revenue increased over the period. It generated 21,915 EUR million in

2018. Adidas came the second for revenue comparison. Its revenue increased year by year over

the period. In 2018, Adidas generated revenue of 21,915 EUR million. Puma came the smallest

90

in terms of revenue. Its revenue increased gradually over the period being compared. In 2018,

Puma generated a revenue of 4,648 EUR million.

Comparing net income, Nike, the first company in term of net income, had its

performance from 1,802 EUR million in 2013 to 3,567 EUR million in 2016, then its net income

dropped sharply to 3,535 EUR million in 2017 to 1,688 EUR million EUR in 2018. Although

its net income declined to 496 EUR million in 2014, Adidas had its best performance as its net

income increased year by year from 640 EUR million in 2015 to 1,704 EUR million in 2018.

Puma generated the third in term of net income during the period. Its net income raised

gradually from 21 EUR million in 2013 to 230 EUR million in 2018.

Comparing basic EPS, Puma generated the highest EPS of 9.09 EUR in 2017 and 12.54

EUR in 2018 than Adidas and Nike even though its EPS were used to be lowest among the

three company from 0.36 EUR in 2013 to 4.17 EUR in 2016. EPS of Adidas used to be the

highest ranging from 4.01 EUR in 2013 to 5.06 EUR in 2016, then it came the second in term

of EPS in 2017 and 2018 after Puma. Nike was the second in term of EPS from 2.12 EUR in

2013 but EPS increased slowly to 3.46 EUR in 2015 then fluctuated to 1.98 EUR, 2.28 EUR

and 1.02 in 2016, 2017 and 2018 respectively.

Graph 14: Revenue comparison among Adidas, Nike, and Puma

Source: own graph

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2013 2014 2015 2016 2017 2018

Rev

enu

e (€

mill

ion

)

Year

Revenue comparison

Adidas Nike Puma

91

Graph 15: Net income comparison among Adidas, Nike and Puma

Source: own graph

Graph 16: Basic earnings per share EPS comparison among Adidas, Nike, and Puma

Source: own graph

0

500

1000

1500

2000

2500

3000

3500

4000

2013 2014 2015 2016 2017 2018

Net

inco

me

(€m

illio

n)

Year

Net income comparison

Adidas Nike Puma

4.01

2.373.13

5.06 5.41

8.45

2.12 2.243.46

1.98 2.281.02

0.36

4.29

2.48

4.17

9.09

12.54

0

2

4

6

8

10

12

14

2013 2014 2015 2016 2017 2018

Bas

ic E

PS

(€)

Year

Basic EPS comparison

Adidas Nike Puma

92

3.3.6 Comparison of net profit margin and Return on equity ROE

Table 46: Comparison of net profit margin and Return on equity ROE among Adidas, Nike,

and Puma

Year 2013 2014 2015 2016 2017 2018

Net profit margin

Adidas

Nike

Puma

Average

5.56%

9.82%

0.71%

5.36%

3.41%

9.69%

2.85%

5.32%

3.78%

10.70%

1.82%

5.43%

5.52%

11.61%

2.44%

6.52%

5.18%

12.34%

4.06%

7.19%

7.78%

5.31%

4.94%

6.01%

ROE

Adidas

Nike

Puma

Average

-

-

-

-

8.94%

24.5%

5.44%

12.96%

11.36%

27.82%

3.81%

14.33%

16.86%

30.12%

5.29%

17.42%

17.64%

34.38%

9.94%

20.65%

27.53%

17.40%

13.60%

19.51%

Source: own calculation

Nike had the highest net profit margin from 2013 to 2017 then it declined in 2018 as it

came the second with 5.31% being lower than average after Adidas whose net profit margin of

7.78% being higher than average. Puma came the third in term of net profit margin over the

period. Beside the decline in 2015, net profit margin of Puma increased year to year. In 2018

Puma generated net profit margin of 4.94% which was below average.

Considering ROE, ROE of Adidas increased year to year over the period while ROE of

Nike decreased sharply in 2018, and also ROE increased over the time from 2016 to 2018 even

though it decline in 2015. Nike had the highest ROE from 2014 to 2017 compared with its

competitors. Its ROE were 24.5%, 27.82%, 30.12%, and 34.38% in 2014, 2015, 2016 and 2017

respectively. But Adidas came first in term of ROE of 27.53% comparing Nike’s ROE of

17.40% and that of 13.60% of Puma in 2018.

93

3.3.7 Comparison of Liquidity

Table 47: Comparison of liquidity among Adidas, Nike, and Puma

Year 2013 2014 2015 2016 2017 2018

Current ratio

Adidas

Nike

Puma

Average

1.45

3.47

2.19

2.37

1.68

2.72

2.05

2.15

1.40

2.52

1.91

1.94

1.31

2.80

1.97

2.03

1.37

2.93

1.78

2.03

1.44

2.51

1.83

1.93

Quick ratio

Adidas

Nike

Puma

Average

0.72

1.64

1.18

1.18

0.83

1.12

1.03

0.99

0.64

1.14

0.93

0.90

0.55

1.19

0.92

0.89

0.62

1.37

0.87

0.95

0.74

1.28

0.85

0.96

Cash ratio

Adidas

Nike

Puma

Average

0.34

0.85

0.56

0.58

0.38

0.44

0.49

0.44

0.25

0.61

0.39

0.42

0.22

0.59

0.37

0.39

0.25

0.70

0.39

0.45

0.38

0.70

0.39

0.49

Source: own calculation

From table 47, even though its current ratio fluctuated over the period, Nike has the

highest current ratio among the companies being compared. Its current ratio were 3.47, 2.72,

2.52, 2.80, 2.93 and 2.51 in the year 2013, 2014, 2015, 2016, 2017 and 2018 respectively higher

than average value of all years compared. This indicated that Nike had the highest ability to pay

off its short-term obligations when it came due.

Puma was the second company for current ratios. Its current ratio were 2.19, 2.05, 1.91,

1.97, 1.78 and 1.83 in 2013, 2014, 2015, 2016, 2017 and 2018 respectively. Its current ratio

dropped gradually since 2013 till 2018. Puma’s current ratios were lower than the average value

over the period being compared. However Puma had enough current assets to cover its current

liabilities once it felt due immediately.

Adidas’ current ratio, the third, were 1.45, 1.68, 1.40, 1.31, 1.37, and 1.44 in 2013, 2014,

2015, 2016, 2017, and 2018 respectively. Its current ratio was below the average value of the

ratio. The result indicated that current assets of Adidas were higher than its current liabilities.

94

So, Adidas had enough ability pay off its current liabilities using its current assets. The current

ratio of Adidas decreased in 2015, and increased in 2018.

Comparing quick ratio, Nike’s quick ratios were the highest among all companies.

These ratios were 1.64, 1.12, 1.14, 1.19, 1.37, and 1.28 in 2013, 2014 2015, 2016, 2017 and

2018, respectively. Its quick ratios fluctuated over the period. Nike had more than enough cash

and cash equivalent and account receivable to cover its current liabilities

Puma came the second in term of quick ratio. Puma’s quick ratio, similar level to average, were

1.18, 1.03, 0.93, 0.92, 0.87 and 0.85 in 2013, 2014, 2015, 2016, 2017, and 2018 respectively.

Its quick ratios were higher than those of Adidas over the period as immediate rise of its cash

and cash equivalents.

Adidas’ quick ratio was the lowest among all companies. Its quick ratios were ranging

0.55 to 0.83 over the period. These figures were lower than the average value of all years. The

result of those ratios indicated that Adidas had around 55% to 83% to meet its current

obligations using its most liquid assets.

Comparing cash ratio, Nike’s cash ratio were higher than the average value of the ratio.

These ratio showed the ability of Nike to meet its short-term obligations using only its cash and

cash equivalents. The ratios decreased in 2014 and in 2016. Nike could cover 44% to 85% of

its current liabilities using cash and cash equivalents over the period. Its ratio was lower than

that of Puma in 2014.

Puma’s cash ratio were 0.56, 0.49, 0.39, 0.37, 0.39, and 0.39 in 2013, 2014, 2015, 2016,

2017 and 2018, respectively. Its cash ratios were, the second after Nike, a bit below the average

over the period except in 2014. These ratio indicates that Puma could cover around 37% to 56%

of its current liabilities using only cash and cash equivalents over the period compared.

Adidas’ cash ratio were 0.34, 0.38, 0.25, 0.22, 0.25, and 0.38 in 2013, 2014, 2015, 2016,

2017 and 2018 respectively. Adidas could cover around 0.22%% to 38% of its current liabilities

with cash and cash equivalents only. This mean that Adidas had the lowest cash and cash

equivalents available among the companies. In fact, Nike had more cash and cash equivalents

equaling to the total cash and cash equivalent of Adidas and of Puma each year except in 2014.

95

3.3.8 Comparison of debt management ratios

Table 48: Comparison of debt management ratios among Adidas, Nike, and Puma

Year 2013 2014 2015 2016 2017 2018

Financial leverage

Adidas

Nike

Puma

Average

2.12

1.58

1.54

1.75

2.21

1.72

1.58

1.84

2.36

1.70

1.62

1.89

2.35

1.75

1.61

1.90

2.33

1.87

1.72

1.97

2.45

2.30

1.86

2.20

Debt ratio

Adidas

Nike

Puma

Average

0.53

0.37

0.37

0.42

0.55

0.42

0.38

0.45

0.58

0.41

0.38

0.46

0.57

0.43

0.38

0.46

0.57

0.47

0.42

0.49

0.59

0.56

0.46

0.54

Debt to equity ratio

Adidas

Nike

Puma

Average

1.12

0.58

0.54

0.75

1.21

0.72

0.58

0.84

1.36

0.70

0.62

0.89

1.35

0.75

0.61

0.90

1.33

0.87

0.72

0.97

1.45

1.30

0.86

1.20

Source: own calculation

Adidas possessed the highest financial leverage, being 2.12, 2.21, 2.36, 2.35, 2.33 and

2.45 in 2013, 2014, 2015, 2016, 2017 and 2018 respectively. It showed how leveraged a

company was, the lower the ratio, the better. Adidas had financial leverage higher than the

average level. Debt ratio of Adidas were 53%, 55%, 58%, 57%, 57%, and 59% in 2013, 2014,

2015, 2016, 2017 and 2018 respectively. Debt to equity ratio of Adidas were 1.12, 1.21, 1.36,

1.35, 1.33, and 1.45 in 2013, 2014, 2015, 2016, 2017, and 2018 respectively. Also, these ratios

were higher than average. High financial leverage, high debt ratio and debt to equity ratio mean

that Adidas used more debt than the other to finance its total assets.

Nike came the second in terms of financial leverage ranging from 1.58 to 2.30 from

2013 to 2018, debt ratio ranging from 0.37 to 0.56 and debt to equity ratio ranging from 0.58 to

1.30 over the period. Its financial leverage, debt ratio, and debt to equity ratio were a bit lower

than the average level except in 2018.

96

Puma had the least financial leverage, debt ratio and debt to equity ratio. All those ratios

were lower than average level. Puma’s financial leverage were 1.54, 1.58, 1.62, 1.61, 1.72, and

1.86 in 2013, 2014, 2015, 2016, 2017, and 2018 respectively. Its financial leverage increased

gradually over the period. This mean that Puma employed less debt than equity to finance its

total assets. Debt ratio of Puma increased from 0.37 in 2013 to 0.46 in 2018. Even though the

ratios increased, Puma’s debt were smaller than its equity portion all years as it mean that less

financial stress toward the company. Debt to equity ratio of Puma were 0.54, 0.58, 0.62, 0.61,

0.72, and 0.86 in 2013, 2014, 2015, 2016, 2017 and 2018 respectively. These ratios were lower

than average level.

In short, Puma had lowest debt than equity comparing to other two companies. It

possessed the least leveraged, with the lowest debt level to its total assets and had the lowest

debt to equity ratio.

97

3.3.9 Comparison of share

Table 49: Comparison of capital structure among Adidas, Nike, and Puma

Year 2013 2014 2015 2016 2017 2018

Adidas

Number of share

outstanding at year end

Weighted average number

of share outstanding

Share price at year end (€)

Dividend per share (€)

Dividend yield

Market capitalization

at year end (€)

209,216,186

-

92.64

1.50

1.62%

19,381,787,471

204,327,044

206,771,615

57.62

1.50

2.60%

11,773,324,275

200,197,417

202,262,231

89.91

1.60

1.78%

17,999,749,762

201,489,310

200,843,364

150.15

2.00

1.33%

30,253,619,897

203,861,234

202,675,272

167.15

2.60

1.56%

34,075,405,263

199,171,345

201,516,290

182.4

3.35

1.84%

36,328,853,328

Nike

Number of share

outstanding at year end

Weighted average number

of share outstanding

Share price at year end (€)

Dividend per share (€)

Dividend yield

Market capitalization

at year end

1,791,000,000

-

23.70

0.62

2.63%

42,384,000,000

1,742,000,000

1,767,000,000

28.26

0.68

2.42%

49,181,000,000

1,712,000,000

1,724,000,000

46.34

0.98

2.12%

79,347,000,000

1,682,000,000

1,698,000,000

49.51

0.56

1.12%

83,259,000,000

1,643,000,000

1,658,000,000

47.22

0.62

1.32%

77,608,000,000

1,601,000,000

1,624,000,000

61.37

0.67

1.09%

98,284,000,000

Puma

Number of share

outstanding at year end

Weighted average number

of share outstanding

Share price at year end (€)

Dividend per share (€)

Dividend yield

Market capitalization

at year end

14,939,913

-

235.00

0.50

0.21%

3,510,879,555

14,939,913

14,939,913

172.55

0.50

0.29%

2,577,881,988

14,939,913

14,939,913

198.65

0.50

0.25%

2,967,813,717

14,939,913

14,939,913

249.65

0.75

0.30%

3,729,749,280

14,946,356

14,943,161

363.00

12.50

3.44%

5,425,527,228

14,951,470

14,947,323

427.00

3.50

0.82%

6,384,277,690

Source: own calculation

Adidas had the second highest number of share outstanding around 200 million of shares

so the weighted average number of share also highest among other companies over the period.

Its market price of share also came the second, which were 92.64 EUR in 2013, dropped in

2014 to 57.62 EUR then increased gradually to 182.4 EUR in 2018 after Puma. Dividend per

share of Adidas were the highest, being 1.5 EUR per share in 2013 and this increased year to

year to 1.6 EUR per share in 2015, 2 EUR, 2.6 EUR and 3.35 EUR per share in 2016, 2017 and

98

2018 respectively. Adidas came the first in term of dividend yield after Nike over the period

except in 2013 that dividend yield of Adidas was lower than that of Nike. Adidas’ dividend

yield were 1.62%, 2.6%, 1.78%, 1.33%, 1.56%, and 1.84% in 2013, 2014, 2015, 2016, 2017,

and 2018. Even though Adidas had the highest number of share outstanding but its market price

of share were lower than those of Puma. This made market capitalization of Adidas being the

second after Nike.

Nike’s DPS comes the second after Adidas. Nike’s DPS stood at 0.62 EUR in 2013 and

it rise to 0.98 EUR per share in 2015 but dropped to 0.56 EUR per share in 2016 then increased

gradually to 0.67 EUR per share in 2018. Nike’s market prices of share were traded at lowest

prices of all companies being 23.70 EUR, 28.60 EUR, 46.34 EUR, 49.51 EUR, 47.22 EUR,

and 61.37 EUR in 2013, 2014, 2015, 2016, 2017, and 2018 respectively. Dividend yield of Nike

was the highest 2.63% only in 2013, then its dividend yield started to drop lower than those of

Adidas. Even though Nike had lowest market price of share but it possessed highest number of

share outstanding so weighted average number of share outstanding, it made Nike to be a

company with the highest market capitalization as its market capitalization were higher than

sum of those of Adidas and of Puma each year over the period.

Puma paid out dividend of 0.5 EUR for 2013, 2014 and 2015 and it increased to

0.75EUR, 12.50 EUR and 3.50 EUR in 2016, 2017, and 2018 respectively making Puma being

the first company with highest dividend per share in 2017 and 2018. Its dividend yield was the

lowest among the companies in three consecutive years (2013, 2014, and 2015) but it become

the highest dividend yield 3.44% in 2017 as that time Puma increased its DPS to 12.50 EUR.

Puma possessed number of share outstanding around 15 million and market price of share,

except decline of its market price of share in 2014, increased gradually from 172.5 EUR in 2014

to 427 EUR in 2018 being the highest market price of share among all three companies. Puma

possessed smallest number of share outstanding but its market price of share increase year to

year; its market capitalization stood the third being 3,510,879,555 EUR, 2,577,881,988 EUR,

2,967,813,717 EUR , 3,729,749,280 EUR, 5,425,527,228 EUR, 6,384,277,690 EUR in 2013,

2014, 2015, 2016, 2017, and 2018 respectively.

3.4 Revenue forecast for 2019

Financial forecasting is a critical part of business planning even though some events

may affect business unpredictably, company still enable to employ the forecasts for guidance

of decision making.

99

3.4.1 Data collection

Totally there were twenty-four (24) quarter data of revenue, quarter 1 to quarter 4 from

2013 to 2018. Those data were accessible and obtained from Adidas’ annual report through the

website of Adidas at https://www.adidas-group.com/media/filer_public

3.4.2 Forecast method selection

There are a lot of methods used to forecast revenue. Since Adidas’ revenue of previous

years contained sequential time series data showing the trend and seasonality, Trend and

seasonality were observed from its quarterly revenue data, multiplicative Holt-Winter method

will be used to forecast the revenue of Adidas for 2019.

3.4.3 Revenue forecast

α = 0.5 β = 0.5 γ = 0.5 p = 4

100

Table 50: Revenue forecast of Adidas for 2019

St Lt Tt

96.4125 3309.719

alpha gamma delta 1.03745895

0.5 0.5 0.5 0.952766206

1.089839637

Year Quarter Yt T 0.919935207

2013 1 3751 1 148.7709 3510.848 1.052930899

2 3383 2 121.5446 3605.166 0.945570894

3 3879 3 79.67667 3642.975 1.077314352

4 3190 4 15.92262 3595.144 0.903621646

2014 1 3533 5 -47.995 3483.231 1.033609526

2 3465 6 9.309233 3549.844 0.960834995

3 4118 7 75.13789 3690.811 1.09652914

4 3419 8 79.56646 3774.806 0.90468177

2015 1 4083 9 103.532 3902.304 1.039957304

2 3907 10 118.6368 4036.045 0.96443091

3 4758 11 164.7528 4246.914 1.108436029

4 4167 12 213.346 4508.853 0.914431781

2016 1 4769 13 179.2375 4653.982 1.032335579

2 4422 14 117.2044 4709.154 0.951726586

3 5413 15 131.4793 4854.908 1.111695151

4 4687 16 166.2794 5055.987 0.920725773

2017 1 5447 17 179.809 5249.326 1.034996324

2 5038 18 145.9096 5361.336 0.945708873

3 5677 19 45.75215 5306.931 1.090714183

4 5056 20 80.41149 5422.001 0.926611375

2018 1 5548 21 44.90962 5431.409 1.028231173

2 5261 22 66.5856 5519.671 0.949422711

3 5873 23 16.15784 5485.401 1.080687154

4 5234 24 52.90277 5575.049 0.932718636

2019 1 5787 25

2 5394 26

3 6196 27

4 5397 28

Ft

Notes:

p-number of periods

T-period

Yt-Actual revenue

Lt-Expected revenue

St-Seasonality

Tt-Trend

Ft-Revenue forecast

101

Let assume that (all fluctuations are on average 0.5 - value ranging from 0.00 to 1.00):

- α the coefficient for the level smoothing = 0.5,

- β the coefficient for the trend smoothing = 0.5 and

- γ the coefficient for the seasonal smoothing = 0.5

The initial St and Lt is to be found for the first season. First, initial St is calculated by

yearly average of first year (year 2013) minus center average of those period T to yearly average

of final year (year 2018) subtracting center of average of that year. Second, specific seasonal

indexes are computed using revenue of each quarter compare to yearly average, initial center

of average and initial slope. Raw seasonal index is the sum of average of specific seasonal

index. Then normalized seasonal index is calculated by comparing each total raw seasonal index

to average of those total raw seasonal.

Initial trend Tt is then calculated by yearly average of 2013 subtracting center of average of

2013 and initial St.

center of avg

Q1 Q2 Q3 Q4 yearly avg t

3751 3383 3879 3190 3550.75 2.5

3533 3465 4118 3419 3633.75 6.5

4083 3907 4758 4167 4228.75 10.5

4769 4422 5413 4687 4822.75 14.5

5447 5038 5677 5056 5304.50 18.5

5548 5261 5873 5234 5479.00 22.5

1.101249 0.965869 1.077812 0.86324267

1.012573 0.966381 1.118427 0.90488786

0.999723 0.934567 1.112473 0.95281241 <--- specific seasonal indexes

1.019424 0.926162 1.111281 0.94355789

1.055644 0.95847 1.060585 0.92785645

1.040046 0.968735 1.062562 0.93071743

1.03811 0.953364 1.090523 0.92051245 <--- raw seasonal

1.037459 0.952766 1.08984 0.91993521 <--- normalized seasonal

96.4125 : slope estimated by average of first difference

of yearly averages

3,309.719 : level estimated by subtracting 2.5*

(slope estimate) from first year's average

Next step is to apply the below equation in order to find Tt of each quarter in 2018.

[1]𝐿𝑡 = 0.5 (𝑌𝑡

𝑆𝑡−𝑝) + (1 − 0.5)(𝐿𝑡−1 + 𝑇𝑡−1)

[2] 𝑇𝑡 = 0.5 (𝐿𝑡 − 𝐿𝑡−1) + (1 − 0.5)𝑇𝑡−1

[3] 𝑆𝑡 = 0.5 (𝑌𝑡

𝐿𝑡) + (1 − 0.5)𝑆𝑡−𝑝

102

n equals to 4 (4 quarters of year 2019) using 𝐹𝑡+𝑛 = (𝐿𝑡 + 𝑛 𝑇𝑡)𝑆𝑡−𝑝+𝑛, the forecast revenue

for 2019 are as below:

Quarter 1: 5,787 € million

Quarter 2: 5,394 € million

Quarter 3: 6,196 € million

Quarter 4: 5,397 € million

Total forecast revenue for 2019: 22,774 € million (It is the result of forecast only, the actual

revenue will be different)

Graph 17: Revenue and revenue forecast of Adidas for 2019

Source: own graph

3.5 Financial statements forecast for 2019

Using the percentage of forecast revenue, Pro-forma income statement and pro-forma

Balance sheet will be produced for 2019.

3.5.1 Assumption

Assumptions are needed to produce for overall items of income statement and balance

sheet. Some specific items increase proportionately to the revenue meaning changing following

the same percentage change of revenue. Below items of income statements are proportional to

revenue:

0

1000

2000

3000

4000

5000

6000

7000

0 5 10 15 20 25 30

Re

ve

nu

e (€

mill

ion

)

Quarter

Revenue and Revenue forecast of Adidas

forecasts yt

103

. Cost of sales

.Other operating expense

The below items are not proportional, so they will be kept the same amount for 2019.

. Royalty and commission income

.Other operating income

.Financial income

The below items are proportional to other items:

. Financial expense is proportional to the sum of short term borrowings and long term

borrowings

.Income tax expense is proportional to income from continuing operation before income taxes

The below are the assumption for balance sheet items that are proportional to revenue:

. Cash and cash equivalent

. Account receivables

.Inventories

. Account payable

.Retained earnings

Retained earnings changes proportionately to revenue since the retained earnings are

affected by net income, comprehensive income, dividend etc.

In case the total assets does not equal total liabilities and equity and the total assets is

bigger than total liabilities and equity, the difference will be financed by short term borrowing.

3.5.2 Initial calculation

Some calculations are needed to produce such as revenue growth comparing to previous

year (2018). The percentage of each items are found proportionately to revenue. The percentage

of financial expense and income tax expense will also be calculated. The calculation of forecast

items will be produced using the financial result data of 2018.

Revenue growth rate = Revenue in 2019−Revenue in 2018

Revenue in 2018x100 =

𝟐𝟐,𝟕𝟕𝟒−𝟐𝟏𝟐𝟏𝟖

21218 x100 = 3.92%

104

Table 51: Percentage of items proportional to revenue

Year 2018 % of revenue

Revenue

Cost of sales

Other operating expense

Cash and cash equivalents

Account receivable

Inventories

Account payable

Retained earnings

21,915

10,552

9,172

2,629

2,418

3,445

2,300

6,054

100.00%

48.15%

41.85%

12.00%

11.03%

15.72%

10.50%

27.62%

Source: own calculation

Assume that all the above percentage of items from income statement and balance sheet will

occur in proportion to revenue for 2019.

Interest rate and income tax rate are calculated as the following:

Interest rate = Financial expense/(short term borrowings + long term borrowings)

= 47/(66+1,609) = 2.81%

Income tax rate = Income tax expense/income before taxes

= 669/1,709 = 28.13%

3.5.3 Pro-forma Income Statement and Balance Sheet for 2019

Revenue forecast for 2019 = 22,774 € million

Revenue growth = 3.92%

Interest rate = 2.81%

Income tax rate = 28.13%

105

Table 52: Income Statement in 2018 and Pro-forma Income Statement for 2019 of Adidas

(€ million)

Year 2018 2019

Revenue (net sales)

Cost of sales

Gross profit

Royalty and commission income

Other operating income

Other operating expense

Goodwill impairment losses

Operating profit

Financial income

Earning before interest and taxes

Financial expense

Income before taxes

Income taxes

Net income from continuing operations

Losses from discontinued operations, net of tax

Net income

Net income attributable to shareholders

Net income attributable to NCI

21,915

10,552

11,363

129

48

9,172

-

2,368

57

2,424

47

2,378

669

1,709

5

1,704

1,702

3

22,774.00

10,965.61

11,808.39

129.00

48.00

9,531.51

-

2,453.88

57.00

2,510.88

47.00

2,463.88

693.16

1,770.72

5.00

1,765.72

1,762.54

3.18

Source: own calculation

Financial expense and Income tax expense for 2019 are calculated as the following:

. Financial expense = 2.81% * (66+1,609) = 47 € million

. Income tax expense = 28.13% * 2,463.88 = 693.16 € million

106

Table 53: Balance sheet in 2018 and Pro-forma Balance sheet for 2019 of Adidas (€ million)

Year 2018 2019

ASSETS

Cash and cash equivalents

Short-term financial assets

Accounts receivable

Other current financial assets

Inventories

Income tax receivable

Other current assets

Assets classified as held for sale

Total current assets

Property, plant and equipment

Good will

Trademarks

Other intangible assets

Long-term financial assets

Other non-current financial assets

Deferred tax assets

Other non-current assets

Total non-current assets

2,629

6

2,418

542

3,445

48

725

-

9,813

2,237

1,245

844

196

276

256

651

94

5,799

2,732.05

6.00

2,512.78

542.00

3,580.03

48.00

725.00

-

10,145.86

2,237.00

1,245.00

844.00

196.00

276.00

256.00

651.00

94.00

5,799.00

TOTAL ASSETS 15,612 15,944.86

107

Year 2018 2019

LIABILITIES

Short-term borrowings

Accounts payable

Other current financial liabilities

Income taxes

Other current provisions

Current accrued liabilities

Other current liabilities

Liabilities classified as held for sale

Total current liabilities

Long-term borrowings

Other non-current financial liabilities

Pensions and similar obligations

Deferred tax liabilities

Other non-current provisions

Non-current accrued liabilities

Other non-current liabilities

Total non-current liabilities

TOTAL LIABILITIES

EQUITY

Share capital

Reserves

Retained earnings

Shareholder’s equity

Non-controlling interest

TOTAL EQUITY

66

2,300

186

268

1,232

2,305

477

-

6,834

1,609

103

246

241

128

19

68

2,414

9,248

199

123

6,054

(13)

6,364

66.00

2,390.15

186.00

268.00

1,232.00

2,305.00

477.00

-

6,924.15

1,609.00

103.00

246.00

241.00

128.00

19.00

68.00

2,414.00

9,338.15

199.00

123.00

6,291.30

(13.00)

6,600.30

TOTAL LIABILITIES AND EQUITY 15,612 15,938.45

Source: own calculation

Total assets in 2019 is 15,944.86 € million and Total liabilities and equity in 2019 is

15,938.45 € million, making difference of 6.41 € million. This 6.41 € million is assumed to

108

finance through short term borrowings, so short-term borrowings will increase by 6.41 € million

in 2019. Then Income statement and Balance sheet for 2019 are re-calculated as the following:

Table 54: Income Statement in 2018 and Pro-forma Income Statement for 2019 (€ million)

Year 2018 2019

Revenue (net sales)

Cost of sales

Gross profit

Royalty and commission income

Other operating income

Other operating expense

Goodwill impairment losses

Operating profit

Financial income

Earning before interest and taxes

Financial expense

Income before taxes

Income taxes

Net income from continuing operations

Losses from discontinued operations, net of tax

Net income

Net income attributable to shareholders

Net income attributable to NCI

21,915

10,552

11,363

129

48

9,172

-

2,368

57

2,424

47

2,378

669

1,709

5

1,704

1,702

3

22,774.00

10,965.61

11,808.39

129.00

48.00

9,531.51

-

2,453.88

57.00

2,510.88

47.18

2,463.70

693.11

1,770.59

5.00

1,765.59

1,762.41

3.18

Source: Own calculation

Financial expense and income tax expense are recalculated as below:

. Financial expense = 2.81% * (72.41+1,609) = 47.18 € million

. Income tax expense = 28.13% * 2,463.70 = 693.11 € million

109

Table 55: Balance sheet in 2018 and Pro-forma Balance sheet for 2019 of Adidas (€ million)

Year 2018 2019

ASSETS

Cash and cash equivalents

Short-term financial assets

Accounts receivable

Other current financial assets

Inventories

Income tax receivable

Other current assets

Assets classified as held for sale

Total current assets

Property, plant and equipment

Good will

Trademarks

Other intangible assets

Long-term financial assets

Other non-current financial assets

Deferred tax assets

Other non-current assets

Total non-current assets

2,629

6

2,418

542

3,445

48

725

-

9,813

2,237

1,245

844

196

276

256

651

94

5,799

2,732.05

6.00

2,512.78

542.00

3,580.03

48.00

725.00

-

10,145.86

2,237.00

1,245.00

844.00

196.00

276.00

256.00

651.00

94.00

5,799.00

TOTAL ASSETS 15,612 15,944.86

110

LIABILITIES

Short-term borrowings

Accounts payable

Other current financial liabilities

Income taxes

Other current provisions

Current accrued liabilities

Other current liabilities

Liabilities classified as held for sale

Total current liabilities

Long-term borrowings

Other non-current financial liabilities

Pensions and similar obligations

Deferred tax liabilities

Other non-current provisions

Non-current accrued liabilities

Other non-current liabilities

Total non-current liabilities

TOTAL LIABILITIES

EQUITY

Share capital

Reserves

Retained earnings

Shareholder’s equity

Non-controlling interest

TOTAL EQUITY

66

2,300

186

268

1,232

2,305

477

-

6,834

1,609

103

246

241

128

19

68

2,414

9,248

199

123

6,054

(13)

6,364

72.41

2,390.15

186.00

268.00

1,232.00

2,305.00

477.00

-

6,930.56

1,609.00

103.00

246.00

241.00

128.00

19.00

68.00

2,414.00

9,344.56

199.00

123.00

6,291.30

(13.00)

6,600.30

TOTAL LIABILITIES AND EQUITY 15,612 15,944.86

Source: own calculation

3.5.4 Earnings per share for 2019

Weighted average number of share outstanding and weighted average number of diluted

share are used to calculate basic and diluted EPS. The number of weighted average of share

111

outstanding and weighted average of diluted share were known in 2018 and it is assume that

those will not change in 2019, then basic EPS and diluted EPS can be calculated as below:

Table 56: Basic EPS and diluted EPS for 2019 of Adidas

(€, except weighted average number of share outstanding)

Year 2018 2019

Net income attributable to shareholders 1,702,000,000 1,762,410,000

Weighted average number of share outstanding-basic

Basic EPS

201,516,290

8.45

201,516,290

8.75

Weighted number of share outstanding-diluted

Diluted EPS

201,802,245

8.43

201,802,245

8.73

Source: own calculation

3.5.5 Return on equity ROE for 2019

Return on equity ROE for 2019 is calculated using net income and Shareholders’ equity

as the following:

Table 57: Return on equity ROE for 2019 (€ million, except ROE)

Year 2018 2019

Net income

Average shareholders’ equity

1,704.00

6,190.50

1,765.59

6,494.65

ROE 27.53% 27.19%

Source: own calculation

Note: Average shareholders’ equity for 2019 is calculated by using shareholders’ equity in 2018

and forecasted shareholders’ equity in 2019.

3.5.6 Limitation and conclusion

The percentage-of-sales method is the fastest method to predict the forecast and it

produces a high-quality forecast for the items proportional, however there are some limitations

as follows:

. The assessments made is approximations and it generally lack detail of what will change of

operation (type of assets) in the future.

. Revenue will be depend on economic environment that the demand may fluctuate over the

time in the future so there will be problems arising when using assumption of the past

experience to forecast for the future

112

. The model pays more attention to Income statement and balance sheet but not cash flow

statement

The pro-forma income statement and pro-forma balance sheet of Adidas for 2019 are

produced under the assumptions and those pro-forma financial statements are only predicted

that the actual results of financial performance of Adidas in 2019 will be different from the

forecast results of pro-forma income statement and of pro-forma balance sheet for 2019.

113

CONCLUSION

The appraisal of financial performance of Adidas group is done by performing the

financial analysis using the methods stated in the Methodology, Introduction, with the aim to

obtain the answers for the thesis partial objectives stated in Partial objectives, Introduction.

Financial statements of Adidas group covering the period of last 8 years, from 01 January 2013

to 31 December 2018, and more other sources of data were used for the analysis.

The view on Adidas group is very good. Adidas is a well-known company, sound

financial company with a long famous and prestige history as it is also shown by the analysis

results being performed. The analysis paid focus on the following areas of the company’s

financial performances:

. Profitability

. Activity

. Liquidity

. Debt management

. Financial market

. Bankruptcy prediction

These financial indicators are interconnected to each other as it affects each other that’s

why they are so important to be part of the analysis to obtain the whole view of the past and

present financial performance of Adidas group.

Furthermore, to examine Adidas’ past and current performance, the comparison was

done with its competitors, Nike and Puma. The comparison evidently proved that Adidas has a

greater position among its competitors.

As the general view is already provided, in the conclusion, the focus on responses to the

thesis objectives with the assistance from the results obtained by performing financial analysis.

The responses will be provided to the following four objectives:

- Past and current performance of financial condition of Adidas

- Adidas’ ability to meet all its financial obligations

- Difficulties and recommendations

- Adidas in 2019 and Adidas beyond 2019

Past and current performance of financial condition of Adidas

Past and current performance of financial condition of Adidas can be described by

financial result from the year 2013 to the recent result of 2018.

114

Adidas increased its revenue year to year from 2013 to 2018. As in 2018, Adidas generated the

revenue amount of 21,915 € millions which produced the net income amount of 1,704 €

millions. Adidas had the profit margin of 7.78% in 2018. Comparing this result to those of its

competitors in the same period, Adidas came first for the great result in term of net income, as

Adidas’ net profit margin used to be the second compared to its competitors from 2013 to 2017.

Please refer to 3.3.6: Comparison of net profit and Return on equity ROE.

Adidas’ total assets grew over the period from 11,599 € millions in 2013 to 15,612 €

millions in 2018. This mean that its total assets grew by 35% or 4,013 € millions in absolute

term. Please refer to Section 3.2.1: Horizontal Analysis of Balance Sheet.

Retained earnings is also the best indicator to evaluate the performance of a company.

Adidas’ retained earnings was 4,959 € millions in 2013 and 6,054 € millions in 2018 meaning

it growth at 22% or 1,095 € millions in 2018. This was the big growth in retained earnings

indicating that Adidas was performing very well.

From the above condition, certainly it could be said that Adidas’ past and current

performance of financial condition is very financially sound as it was generating and increased

good revenue and profit comparing to its competitors. Furthermore, its total assets were

increasing, indicating the company had more resources to generate extra revenue.

Adidas’ ability to meet all its financial obligations

The financial obligations are the liabilities of a company arising during its course of

business operations. Since the liability also includes debt of the company, there are two kinds

of liabilities: current (short term borrowings, account payable, other current financial liabilities,

income taxes and other current provisions etc.) and non-current liabilities (long term

borrowings, other non-current financial liabilities, pensions and similar obligations, deferred

tax liabilities, etc).

Current liabilities are those which must be settle within one year, and non-current

liabilities are those obligation that must be settled longer than one year.

The following judgments for current liabilities and non-current liabilities:

Ability to meet its current Liabilities

The ability to meet its current liabilities was connected to the liquidity of Adidas. The

liquidity ratios were used to measure liquidity of Adidas.

115

Looking at current assets and current liabilities of Adidas in the last 6 years from 2013

to 2018, Adidas possessed more current assets than current liabilities in all 6 years indicating

that its net working capital were positive in all years. Adidas had enough ability to meet its

current financial obligation when it fall due immediately. Adidas’ current assets and current

liabilities were growing over the period from 6,857 € millions and 4,732 € millions in 2013 to

9,813 € millions and 6,834 € millions 2018 by increasing 43% or 2,956 € millions and 44% or

2,102 € millions respectively. The growth of the current assets was bigger than that of the

current liabilities.

Considering the trend of liquidity ratios, they were not so good as current ratio, quick

ratio and cash ratio fluctuated by increasing in 2014 then declined till 2017 and rise in 2018. If

comparing the results with the competitors, Adidas had the worst results in term liquidity.

Please refer to section 3.2.4: Summary of Liquidity Ratios and section 3.3.7: Comparison of

Liquidity Ratios.

With its current assets level to generate more revenue, certainly it could be said that

Adidas will not have any difficulties to meet its current obligations when it fall due

immediately.

Ability to meet non-current financial obligation

All liabilities items which are longer than one year are categorized into this group. The

largest portion of this group is long term borrowings. Long term borrowings of Adidas were

653 € millions, 1,584 € millions, 1,463 € millions, 982 € millions, 983 € millions, 1,609 €

millions which were 65%, 63%, 50%, 57%, 67% of total non-current liabilities in 2013, 2014,

2015, 2016, 2017, and 2018 respectively. The Adidas’ ability to meet the long-term

liabilities can be assessed by using debt management ratios. The conclusion will be based on

the comparison with the competitors. The comparison with competitors using debt management

ratios were: financial leverage, debt ratio and debt to equity ratio. For comparing with

competitors, the average ratios were calculated using each indicators of all three companies,

Adidas, Nike, and Puma. And this average is different from industry average.

Generally, the lower liabilities, the better the company. Investors will prefer low ratios.

The result of Adidas’ debt management ratios were higher than those of Nike and of Puma and

even they were higher than the average value of the three companies. It can be said that the non-

current liabilities of Adidas were higher than those of its competitors. Please refer to section

3.3.8: Comparison of debt management ratios.

116

Considering the size of Adidas, it would obviously need big external financing. Adidas

built its brand name and its fame over the long period of time and Adidas always followed the

requirement of its creditors and never defaulted its debts. Even though, Adidas was in a risky

position as it employed more debt than equity to finance its total assets, Adidas generated and

increased its revenue over the period of time since 2013 till 2018 and even increase of its

forecast revenue in 2019. It is sure that in the long run Adidas will be able to generate enough

income to increase its net asset.

Problems and recommendations

Some problems of Adidas were determined during writing this thesis. Those problems

were derived from assessing its past and current results of its financial performance. Since the

assessment of those problems was done on the basis of only numbers, the following problems

occurred but not limited to:

-Profit margin was decreasing from 2014 to 2017

-Current ratio was decreasing from 2015 to 2018

-Cash ratio was decreasing from 2015 to 2017

-Acid test ratio was decreasing from 2015 to 2017

-Financial leverage was increasing from 2013 to 2018

For the above results of financial analysis, Please see Chapter 4: Financial Analysis of Adidas

Group,

The following recommendations were produced for the above problems:

- Boost sale;

- Cut down cost of sales and operational expense at lower level;

- Increase net income

- Submit invoice early and switch short term borrowings to long term borrowings, negotiate

for longer payment to suppliers

- Increase more cash and cash equivalents level

- Find more equity finance instead of obtaining more debt to finance assets for operation in

order to reduce financial risk

Being the big size and long history of Adidas, these recommendations will not be easy

to attain as some factors may affect the performance of Adidas and some other external factors

117

that are out of control of Adidas such as the world economy situation, competitions from other

companies in the same industry, politics and government policy, and customer’s preference.

Adidas in 2019 and Beyond 2019

In this section, the general view of what occurred till 2018 and financial forecast of

Adidas for 2019 will be elaborated. More than that, strategy and goals of Adidas after 2019 will

be presented.

Adidas in 2019

Annual general meeting of Adidas in May 2019

Adidas will organize an annual general meeting on 09 May 2019 in the Stadthalle Furth,

Furth, Germany.

There are some issues which will be discussed in this annual general meeting. Firstly,

Supervisory board will discuss and approve consolidated financial statement for the year 2018

and other important management reports. Secondly, the executive board and the supervisory

board propose to resolve the appropriation of payment of a dividend of 3.35 € per share.

Thirdly, the executive board and the supervisory board propose to approve the actions of

member of executive board in office for 2018. Fourthly, the executive board and the supervisory

board propose to approve the actions of member of supervisory board in office for 2018. Fifthly,

Supervisory board election will be conducted for the term of office of al supervisory board

member.

https://www.adidas-group.com/en/investors/annual-general-meeting/

Financial forecast 2019

Using Holt-Winters method, the forecast of financial performance of Adidas was

conducted for revenue forecast and percentage of sale model to derive the pro-forma financial

statements for 2019. Please refer to section 3.4: Revenue forecast for 2019 and section 3.5.3:

Pro-forma Financial statements for 2019.

The followings the main indicators of the forecast for 2019:

- Revenue-22,774 € million

- Net income- 1,765.59 € million

- Profit margin- 7.75%

- Basic EPS-8.75 €

118

- ROE- 27.19%

Mr. Kasper Rorsted, CEO of Adidas, presented his view for 2019 outlook in annual

report 2018 as below:

“Staying true to our core belief, through sport we have the power to change lives, we will

continue to create value in 2019. And we will do this by executing upon our strategic choices

and acceleration topics with diligence. Regarding our financial performance, we are targeting

a currency-neutral sales increase between 5% and 8%. By further leveraging our scalable

operating model, net income is expected to once again grow significantly faster than revenues

to a level of around 1.9 € billion. Operating margin is expected to increase to at least 11.3%.

These figures will keep us firmly on track toward our 2020 financial ambition.” (Kasper R.,

Adidas, Annual report 2018, p. 20, visited on 15 AprilMarch 2019)

Beyond 2019

On 08 March 2017, Adidas released its goals on increasing sales and earnings until 2020

as part of its long term strategic business plan for the followings:

- Strategy execution to be accelerated

- Currency-neutral revenues to increase on average between 10% to 12% annually

from 2015 to 2020

- Growth of net income on average from 20% to 22% annually

- E-commerce revenues forecast to receive 4 € billions by 2020

In order to achieve the above goals, Adidas set out the following strategies:

. Company culture: Adidas’ unique culture plays a vital role for achieving this long term goals

. Digital: websites of Adidas drive direct sales

. One Adidas: One Adidas’ roof with the set of measures are to unify all businesses process

with the company.

. North America: Adidas will continue to invest more into its US market share together with

other regions such as Western Europe and China.

. Portfolio: Adidas will continue its focus on its brand portfolio namely Adidas and Reebok

brands.

. Speed: Adidas put itself aiming to be the first true fast sport company.

. Cities: Adidas possesses its 6 core sale and marketing activities centers namely New York,

Los Angeles, London, Paris, Shanghai, and Tokyo.

119

. Open source: The model of collaboration with external partners from world industry of sport

and entertainment and consumers.

https://www.adidas-group.com/en/media/news-archive/press-releases/2017/adidas-increases-sales-and-

earnings-guidance-until-2020/

Final remarks

As already stated, the appraisal of financial performance of Adidas was conducted on

many areas of the company. Those areas were profitability, activity, liquidity, debt

management, and financial market. Furthermore, comparison of Adidas to its competitors, Nike

and Puma, was conducted to be a good source of reference to assist in forming the overall view

of financial performance of Adidas in the last 6 years and how it stood among its competitors

from the same industry.

Finally, Adidas has an obvious long-term strategy and financial goals. At the same time,

it possesses full of knowledge, experience and enough resources to attain its goals. It is believed

that Adidas will continue to generate and increase revenue year to year and achieve its goals in

2019 and after 2019. It is time to wait and see that all those goals will come true.

120

121

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124

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/financial-reports/2018/, 13 March 2019

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news-events-and-reports/?toggle=earnings, 03 April 2019

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relations/financial-reports, 03 April 2019

125

LIST OF PICTURES

Picture 1: Corporate bodies of Adidas……………………………………………………. 47

Picture 2: Brand of Adidas ………………………………………………………………. 50

Picture 3: Product range of Adidas……………………………………………………...... 51

126

127

LIST OF TABLES

Table 1: Balance sheet of Adidas ………………………………………………………... 53

Table 2: Income statement of Adidas…………………………………………………….. 54

Table 3: Horizontal analysis of balance sheet……………………………………………. 55

Table 4: Horizontal analysis of Income statement………………………………………...58

Table 5: Vertical analysis of balance sheet………………………………………………..59

Table 6: Vertical analysis of Income statement ………………………………………….. 60

Table 7: Net working capital of Adidas…………………………………………………... 61

Table 8: Profit margin…………………………………………………………………….. 62

Table 9: Return on total assets ROA…………………………………………………….. 63

Table 10: Return on capital employed ROCE……………………………………………. 63

Table 11: Return on owners’ equity ROE………………………………………………... 65

Table 12: Summary of profitability ratios………………………………………………... 65

Table 13: Account receivable turnover……………………………………………………65

Table 14: Inventory turnover……………………………………………………………... 66

Table 15: Day’s sales uncollected…………………………………………………………66

Table 16: Day’s sales in inventory………………………………………………………...67

Table 17: Total assets turnover…………………………………………………………… 67

Table 18: Summary of activity ratios…………………………………………………….. 67

Table 19: Current ratio…………………………………………………………………….68

Table 20: cash ratio……………………………………………………………………….. 68

Table 21: Acid-test ratio………………………………………………………………….. 68

Table 22: summary of liquidity ratios……………………………………………………..69

Table 23: Debt to equity ratio of Adidas…………………………………………………. 69

Table 24: Debt ratio of Adidas…………………………………………………………… 70

Table 25: Financial leverage of Adidas…………………………………………………... 71

Table 26: Time interest earned ratio of Adidas…………………………………………... 72

Table 27: Summary of debt management ratios …………………………………………. 73

Table 28: Data of share of Adidas………………………………………………………... 74

Table 29: Price earnings ratio of Adidas…………………………………………………. 74

Table 30: Book value per share of Adidas ……………………………………………….. 75

Table 31: Basic earnings per share EPS …………………………………………………. 75

Table 32: Diluted earnings per share of Adidas …………………………………………. 76

128

Table 33: Dividend cover of Adidas …………………………………………………….. 77

Table 34: Dividend yield of Adidas ………………………………………………………77

Table 35: Summary of financial ratios of Adidas ………………………………………... 78

Table 36: Du Pont analysis of Adidas …………………………………………………… 79

Table 37: Altman Z score of Adidas …………………………………………………….. 80

Table 38: Gross debt as at December 2018 ……………………………………………… 81

Table 39: Top ten competitors of Adidas ………………………………………………... 84

Table 40: Financial information of Nike from 2013 to 2018…………………………….. 86

Table 41: Financial information of Nike from 2013 to 2018…………………………….. 86

Table 42: Exchange rate at 31 May from 2013 to 2018 …………………………………. 87

Table 43: Financial information of Puma from 2013 to 2018……………………………. 88

Table 44: Comparison of capital structure………………………………………………...88

Table 45: Comparison of revenue and profitability………………………………………. 89

Table 46: Comparison of net profit margin and Return on equity ROE

among Adidas, Nike, and Puma ………………………………………………..92

Table 47: Comparison of liquidity among Adidas, Nike, and Puma …………………….. 93

Table 48: Comparison of debt management ratios among Adidas, Nike, and Puma…….. 95

Table 49: Comparison of capital structure among Adidas, Nike, and Puma……………... 97

Table 50: Revenue forecast of Adidas for 2019……………………………………….... 100

Table 51: Percentage of items proportional to revenue…………………………………. 104

Table 52: Income Statement in 2018 and Pro-forma Income Statement for 2019……….105

Table 53: Balance sheet in 2018 and Pro-forma Balance sheet for 2019 of Adidas……..106

Table 54: Income Statement in 2018 and Pro-forma Income Statement for 2019……….108

Table 55: Balance sheet in 2018 and Pro-forma Balance sheet for 2019 of Adidas……. 109

Table 56: Basic EPS and diluted EPS for 2019 of Adidas……………………………….111

Table 57: Return on equity ROE for 2019………………………………………….……111

129

LIST OF GRAPH

Graph 1: Net working capital of Adidas ………………………………………………… 62

Graph 2: Profit margin of Adidas………………………………………………………… 63

Graph 3: Return on total assets ROA of Adidas…………………………………………. 64

Graph 4: Return on capital employed ROCE of Adidas…………………………………..65 Graph 5: Liquidity ratios of Adidas……………………………………………………… 69

Graph 6: Debt to equity ratio of Adidas…………………………………………………. 70

Graph 7: Debt ratio of Adidas …………………………………………………………… 71

Graph 8: Financial leverage of Adidas…………………………………………………… 72

Graph 9: Time interest earned ratio of Adidas ……………………………………………73

Graph 10: Debt management ratios of Adidas ……………………………………………74

Graph 11: Basic earnings per share EPS and Diluted earnings per share of Adidas……... 76

Graph 12: Dividend yield of Adidas………………………………………………………78

Graph 13: Z score of Adidas……………………………………………………………… 81

Graph 14: Revenue comparison among Adidas, Nike, and Puma………………………... 90

Graph 15: Net income comparison among Adidas, Nike and Puma …………………...... 91

Graph 16: Basic earnings per share EPS comparison among Adidas, Nike, and Puma …. 91

Graph 17: Revenue and revenue forecast of Adidas for 2019…………………………...102

130

131

LIST OF APPENDICES

Appendix A: Balance sheet of Adidas from 2013 to 2018

Year 2013 2014 2015 2016 2017 2018

Assets

Cash and cash equivalents

Short term financial assets

Accounts receivable

Other current financial assets

Inventories

Income tax receivable

Other current assets

Assets classified as held for sale

Total Current assets

Property, plant and equipment

Goodwill

Trademarks

Other intangible assets

Long term financial assets

Other non-current financial assets

Deferred tax assets

Other non-current assets

Total non-current assets

1,587

41

1,809

183

2,634

86

506

11

6,857

1,238

1,204

1,419

164

120

30

486

81

4,742

1,683

5

1,946

398

2,526

92

425

272

7,347

1,454

1,169

1,432

162

129

42

577

105

5,070

1,365

5

2,049

367

3,113

97

489

12

7,497

1,638

1,392

1,628

188

140

99

637

124

5,846

1,510

5

2,200

729

3,763

98

580

-

8,886

1,915

1,412

1,680

167

194

96

732

94

6,290

1,598

5

2,315

393

3,692

71

498

72

8,645

2,000

1,220

806

154

236

219

630

108

5,374

2,629

6

2,418

542

3,445

48

725

-

9,813

2,237

1,245

844

196

276

256

651

94

5,799

Total assets 11,599 12,417 13,343 15,176 14,019 15,612

Liabilities

Short term borrowings

Accounts payable

Other current financial liabilities

Income taxes

Other current provisions

Current accrued liabilities

Other current liabilities

Liabilities classified as held for sale

Total current liabilities

Long term borrowings

Other non-current financial liabilities

Pensions and similar obligations

Deferred tax liabilities

Other non-current provisions

681

1,825

113

240

450

1,147

276

-

4,732

653

22

255

338

25

288

1,652

91

294

470

1,249

287

46

4,378

1,584

9

284

390

38

366

2,024

143

359

456

1,684

331

-

5,364

1,463

18

273

368

50

636

2,496

201

402

573

2,023

434

-

6,765

982

22

355

387

44

137

1,975

362

424

741

2,180

473

-

6,291

983

22

298

190

80

66

2,300

186

268

1,232

2,305

477

-

6,834

1,609

103

246

241

128

132

Non-current accrued liabilities

Other non-current liabilities

Total non-current liabilities

Total liabilities

Share capital

Reserves

Retained earnings

Shareholder’s Equity

Non control interest

Total equity

64

29

1,386

6,117

209

321

4,959

5,489

(8)

5,481

81

35

2,422

6,799

204

581

4,839

5,624

(7)

5,618

120

40

2,332

7,696

200

592

4,874

5,666

(18)

5,648

120

46

1,957

8,721

201

749

5,521

6,472

(17)

6,455

85

53

1,711

8,002

204

(29)

5,858

6,032

(15)

6,017

19

68

2,414

9,248

199

123

6,054

6,377

(13)

6,364

Total liabilities and equity 11,599 12,417 13,343 15,176 14,019 15,612

Source: Annual report of Adidas from 2013 to 2018

Appendix B: Income statement of Adidas from 2013 to 2018

Year 2013 2014 2015 2016 2017 2018

Net sales

Cost of sales

Gross profit

Royalty and commission income

Other operating income

Other operating expense

Goodwill impairment losses

Operating profit

Financial income

Finance expense

Income before taxes

Income taxes

Net income from continuing

operation

Income (loss) from discontinued

operation, net of taxes

14,203

(7,202)

7,001

103

142

(6,013)

(52)

1,181

26

(94)

1,113

(340)

773

17

14,534

(7,610)

6,924

102

138

(6,203)

(78)

883

19

(67)

835

(271)

564

(68)

16,915

(8,748)

8,168

119

96

(7,2890

(34)

1,059

46

(67)

1,039

(353)

686

(46)

18,483

(9,383)

9,100

105

262

(7,885)

-

1,582

28

(74)

1,536

(454)

1,082

(62)

21,218

(10,514)

10,704

115

133

(8,882)

-

2,070

46

(93)

2,023

(668)

1,354

(254)

21,915

(10,552)

11,363

129

48

(9,172)

-

2,368

57

(47)

2,378

(669)

1,709

(5)

Net income

Shareholder

Non-controlling interests

790

787

3

496

490

6

640

634

6

1,020

1,017

2

1,100

1,097

3

1,704

1,702

3

Source: Annual report of Adidas from 2013 to 2018