Financial Ratio Analysis

In assessing the significance of various financial data, experts engage in financial analysis, the process of determining and evaluating financial ratios. A ratio is a relationship that indicates something about a company’s activities, such as the ratio between the company’s current assets and current liabilities or between its accounts receivable and its annual sales. The basic source for these ratios is the company’s financial statements that contain figures on assets, liabilities, profits, and losses. Ratios are only meaningful when compared with other financial information.

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Since compared with industry data, ratios help an individual understand a company’s performance relative to that of competitors, and used to trace performance over time (Venture Line, 2005). The following analysis is for Nike, Inc. Nike, Inc. is engaged in the design, development and worldwide marketing of footwear, apparel, equipment and accessory products. The Company sells its products to retail accounts and through a mix of independent distributors, licensees and subsidiaries in over 120 countries around the world.

Nike’s athletic footwear products are designed primarily for specific athletic use, although some of its products are worn for casual or leisure purposes. The Company creates designs for men, women and children. Running, basketball, children’s, cross-training and women’s shoes are the Company’s top-selling product categories. Nike also markets shoes designed for outdoor activities, tennis, golf, soccer, baseball, football, bicycling, volleyball, wrestling, cheerleading, aquatic activities, hiking and other athletic and recreational uses (Yahoo Finance, 2005).

Financial analysis can reveal much about a company and its operations. However, there are a few points to keep in mind about ratios. First, a ratio is a “flag” indicating areas of strength or weakness. One or even several ratios might be misleading, but when combined with other knowledge of a company’s management and economic circumstances, financial analysis can tell much about a corporation. Second, there is no single correct value for a ratio.

Values of a particular ratio that are too high, too low, or just right depends on the perspective of the analyst, and on the company’s competitive strategy. In trend analysis, financial ratios are compared over time, typically years. Year-to-year comparisons can highlight trends and point out a need for action. Trend analysis works best with five years of ratios. The following is a five-year trend table for Nike, Inc.