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 Table of Contents
Report.........................................................................................................................................................3
Introduction............................................................................................................................................3
Financial Performance................................................................................................................................3
Profitability.............................................................................................................................................3
Net Profit Margin................................................................................................................................3
Liquidity..................................................................................................................................................4
Current Ratio.......................................................................................................................................4
Financial Gearing....................................................................................................................................5
Investment Return on Equity..................................................................................................................5
Limitations of Ratio’s..............................................................................................................................6
Budgeting and Performance Management................................................................................................6
Advantages of Budgeting........................................................................................................................6
Long Term Planning................................................................................................................................6
Monitoring & Control.............................................................................................................................6
Profitability Review................................................................................................................................7
Disadvantages of Budgeting...................................................................................................................7
Approaches to Draw Financial Plan............................................................................................................7
Fixed Plan................................................................................................................................................7
Incremental Plan.....................................................................................................................................7
Performance Management.........................................................................................................................7
Net Present Value and Internal Rate of Return.........................................................................................8
Investment Appraisal..................................................................................................................................9
Sources of Finance..................................................................................................................................9
Risk & Uncertainty..................................................................................................................................9
Conclusion.................................................................................................................................................10
Appendix 1................................................................................................................................................10
Appendix 2................................................................................................................................................10
References.................................................................................................................................................11

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 Report
To: Senior Management Team

From: CFO

Dated: XX-XX-XXX

Subject: Finance

Introduction
The purpose of this report is to inform and have long term outlook on factors using ratios effecting the
financial health of Adidas group over the last 5 years to find out how well they have been able to take
care of the interests of the shareholders. Secondly it will put spotlight on pros and cons of making
budgets in company thus the operations take place with strong monitoring and control. Lastly capital
budgeting method will be used to appraise the investment.

Financial Performance
There are various methods to analyze the financial performance of the company but to analyze the
performance of Adidas group below ratio’s are being chosen from each group to help understand the
level of financial health and various factors contributing towards the effects on the overall financial
health of the Adidas Group as due to COVID businesses are highly impacted as the trends suggest below.

Profitability
Major concern of the shareholder is profitability and also other stakeholders have close look on the level
of profitability to understand the level of profitability Adidas have been able to maintain over the last 5
years which suggests the downward or upward trend clearly stating the profits and margin the company
have been able to manage providing using the resources and capabilities of the human capital.

Net Profit Margin

Net profit margin means how much profit after deducting all the expense Adidas have been able to
make in terms of the sales of the business which can suggest how much net profits in relative terms
Adidas have been able to secure for its shareholders and for other stakeholders. Net profit margin for
the last 5 years of Adidas Group have been as follows.

Years 2016 2017 2018 2019 2020

Revenue ($Bn) 21.35 23.98 25.88 26.48 22.67
Net Income ($Bn) 1.13 1.24 2.01 2.21 0.49
Net Profit Margin % 5.27% 5.17% 7.77% 8.36% 2.17%

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 Adidas have been able to ensure the Net profit margin getting enhanced every year from 2016 to 2019
[ CITATION Gro21 \l 1033 ]and have increased to 8.36% in 2019 from 2016 at one of the highest level
just as per the revenue and net profit because of various reasons such as aggressive marketing
strategies and better ability to understand the needs of the customer and actively responding to them
whereas suddenly in 2020 it have decreased to the lowest in history to 2.17% due to COVID-19 whereas
revenue wasn’t that much reduced whereas profits were only $0.49 billion mainly because there was
increased inflation along with world was stopped which made every process expensive like sourcing,
production was not easy to continue, sudden change in buying habits towards online buying and
increased cost of distributing channels lead to hit lowest possible ever Net profit and it’s all because of
COVID-19.

Liquidity
Liquidity refers to the level of ease with which the assets of the company can be converted to cash to
meet the needs of the business at earliest thus to ensure the level of operations being run smoothly or
even if there’s less cash there are some highly liquid short term assets that can be used to convert
readily into cash and can be utilized for the purposes of needy and emergency circumstances [ CITATION
Chi17 \l 1033 ].

Current Ratio
Current ratio helps identify how much current assets are available to cover the current liabilities where
current assets include receivables, inventory, short term investment and inventory in other terms most
liquid to less liquid current assets are included whereas current liabilities includes obligations which are
due within next 12 months of the year where Adidas have been able to maintain current ratio as below [
CITATION Sal11 \l 1033 ].

Years 2016 2017 2018 2019 2020

Current Asset ($Bn) 9.83 9.77 11.59 12.25 13.88
Current Liability ($Bn) 7.49 7.11 8.07 9.8 10.08
Current Ratio 1.31 1.37 1.44 1.25 1.38

Over the last 5 years there have been up and down in the current liabilities from 7.49 to 10.08 whereas
the current assets to meet the level of liabilities increased from 2016, 9.93 billion to 13.88 billion in 2020
which suggest there are enough liquid current assets available to meet the current liabilities apparently
it seems good but the catch here is that there’s more inventory in current assets than ever before stuck
due to sudden reduction in the level of sales due to COVID-19 which means there are less liquid assets
as inventory is not an asset readily convertible to cash because order to cash process is not easier thus

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 cash Is stuck in the form of inventory such as Adidas shoes, tracks suits etc. which is why the current
ratio seems high but not good as inventory is piled up to the alarming level [ CITATION Ric17 \l 1033 ].

Financial Gearing
Gearing means in the overall finance of the company how much portion is being sourced from the debt
holders such as bonds, long terms loans etc which means this is the measure of how much of the profits
will be distributed in the form of interest to debt providers which ultimately means high level of gearing
means there’s less profits available for distribution to equity shareholders as debt holders are prioritized
over equity shareholders [ CITATION Tau18 \l 1033 ].

Gearing levels were only at lowest in 2013 whereas in 2020 it hit to 0.45 which suggest there’s increased
amount of financial risk due to gearing that the equity shareholders are exposed to which have been
eating the profits available to them leading to reduced dividends and also retained earnings level will be
low which can act to provide interest free loan which can be used to invest. High gearing means Adidas
is exposed to the risk of loans being payable immediately in case of any covenant breach which it may
not be able to pay and may lead to further going concern issues for Adidas.

Investment Return on Equity

Investment ratios are of major concern for shareholders as they’re exposed to the risk at highest which
means there needs to be rigorous eye on the level of returns Adidas is generating against the equity
shareholders [ CITATION Bra15 \l 1033 ].

Years 2016 2017 2018 2019 2020

Net Income ($Bn) 1.13 1.24 2.01 2.21 0.49

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 Shareholders Equity ($Bn) 7.14 7.27 7.52 7.91 7.64
Return on Equity 16.85% 17.26% 26.27% 28.47% 6.50%

Adidas was able to increase Return on equity until the end of 2019 right where the COVID-19 hits and
after that throughout 2020 it’s been decreasing thus equity shareholders probably aren’t entitled to any
dividend as because some of the earnings are paid in terms of interest as gearing is high thus return on
equity holders is not up to the mark in 2020 and they’re exposed to risks and may give signaling impact
to shareholders and they may withdraw from Adidas due to low returns [ CITATION Mac21 \l 1033 ].

Limitations of Ratio’s
Below are some of the valid and practical limitations of ratio analysis.

 All the ratios are based on historical data which may no longer be valid
 Figures are based on estimates and judgements which may be inappropriate
 Basing the future decision on financial number which are historical sounds illogical
 Ratio’s may not be consistent if accounting policies and estimates changes
 Ratio’s used currently are showing better picture of the past where future is very uncertain for
business considering the COVID-19 situation

Budgeting and Performance Management

Performance can only be measured If there’s some parameters available to match the actual results
with something already estimated or budgeted so budgets can play important role in monitoring and
controlling the performance which means management can criticize and daunt them to get better
results. Below are some advantages and disadvantages of Budgeting [ CITATION Gil16 \l 1033 ].

Advantages of Budgeting
Long Term Planning
Preparing a budget for the next year can increase the vision of the management as when they know
they may not have enough financial or other resources to meet the business deliverables which are
critical business success there vision will get broader and they’ll start thinking in the long term which
may ensure the long term sustainability of the Adidas [ CITATION Ric16 \l 1033 ].

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 Monitoring & Control
What is measured can be controlled which directly means that if the company have been able to make
the budget it will automatically improve the understanding of management when measuring
performance of any function or any individual which means having budget can act as detriment to
peoples that they know that management have appropriate mechanism that will be used to measure
their performance may enhance the performance [ CITATION Bed18 \l 1033 ].

Profitability Review
When considering the profitability of the company in the day to day terms the management may not be
able to take a wider look on the long term successful and sustainable profits which means that there
may be short termism which means ensuring short term profits, projects and investments at the cost of
long term sustainable profits for which if the budgets are made it can ensure because of proper level of
understanding available can enhance the long term vision of Adidas management rather than focusing
on small short term prospects.

Disadvantages of Budgeting
Below are the major disadvantages of preparing the budgets which may deter the company to not to
prepare the budget.

 Preparing budgets can be time consuming and it will be like management is not action oriented
rather they just keep preparing the budgets
 There may be window dressing in the budget which mean that there may be slacks the manager
may add deliberately to gain unfair advantage
 Preparing budgets and sticking to it may lead to less resilience where the change was required
according to the practical circumstances
 There are chances that where the performance in terms of spending would have been better if
budgets were not followed, they may try to steal the difference to match to the budget

Approaches to Draw Financial Plan

There are various approaches that can be used to draw plans to ensure the control and proper
management of funds and making sure the planned are achieved within time limits and other allocated
resources.

Fixed Plan
These are made at the start of the period and they remain fix and had to be followed no matter what
but its biggest flaw is there’s no flexibility which mean any change required at some point which would
add value to the activity or operations may get ignored leading to significant problems just because of
having rigid approach which can’t be applied to every activity blindly [ CITATION Mas14 \l 1033 ].

Incremental Plan
This is where there’s flexibility to add incremental changes that requires change thus encourage
flexibility and adds overall value to by adjusting according to the situation which enhances the overall
value provided and act as a measure to gauge performance of the management and takes into account
for any major changes [ CITATION Hud15 \l 1033 ].

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 Performance Management
At each level of the organization there are decisions that needs to be made to ensure the critical success
factors are being achieved which are then measure through key performance indicators to ensure
whether the Adidas have been able to manage and perform through right skills and plans which is
according to the objectives defined and the strategies are being implemented according to the
managements plan provided by the strategic management to ensure the strategic drift is prevented and
there’s appropriate performance being given to sustain in the longer run that will ensure strategy is
implemented correctly[ CITATION Lat17 \l 1033 ] .

Despite the difficulties with performance management, Adidas is reluctant to change their present
methodologies, dreading the interruption that change brings and the expected expenses. Change merits
considering because, as Deloitte found, performance management might be costing the association a lot
of cash without conveying equivalent worth. In addition, the expenses of helpless assurance and
absence of commitment that outcome from a clumsy interaction might be limitless. Organizations are
continually looking for performance enhancements, and coming up short on a strong performance
management approach is a botched freedom to assist workers with playing out their latent capacity.
[ CITATION Lat15 \l 1033 ]

Net Present Value and Internal Rate of Return

NPV is the sum of present value of the cash flows at discount rate and the decision is then based in it
whether the project should be accepted or not. If the NPV is positive project is financially viable but still
non-financial aspects should have to be considered in detail, and if the NPV is negative project is at loss
and should not be accepted non-financial aspects should be considered very well as sometimes business
may have to accept the project and it doesn’t matter if there are returns as otherwise the sustainability
would be compromised otherwise [ CITATION Dud15 \l 1033 ].

IRR is the discount rate at which the project have zero NPV and it provides idea of how much the
company have expected thus If expected is lower than IRR then project is good to go and if this is not
the case then it should have to be rejected because the project doesn’t satisfy the needs of the
shareholders.

Even though utilizing one rebate rate works on issue, there are various circumstances that mess up IRR.
On the off chance that an examiner is assessing two undertakings, the two of which share a typical
rebate rate, unsurprising incomes, equivalent danger, and a more limited time skyline, IRR will
presumably work. The catch is that markdown rates ordinarily change considerably over the long haul.
For instance, consider utilizing the pace of return on a T-bill over the most recent 20 years as a rebate
rate. One-year T-bills returned between around 0.1% and 6.4% over the most recent 20 years, so
unmistakably the markdown rate is evolving [ CITATION Rem08 \l 1033 ].

NPV method is complex as at each stage there’s judgement required which is mostly based on the
estimates thus there are likely chances of more errors which can make the decision to reject or accept
the project completely invalid or valid where it should be vice versa.

Both IRR and NPV can be utilized to decide how attractive a task will be and whether it will enhance the
organization. While one uses a rate, the other is communicated as a dollar figure. While some lean
toward utilizing IRR as a proportion of capital planning, it accompanies issues since it doesn't consider

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 changing variables, for example, extraordinary rebate rates. In these cases, utilizing the net present
worth would be more gainful.

Investment Appraisal
The company is considering making investment in online supermarket through having their own website
for which relevant cashflows include initial outflows and inflows in the next 10 years and assuming the
project will have residual value of £ 5million at the end of 10 years of its life and as discounted at 10% in
appendix 1 NPV of the project is positive 2.89 million which suggests the project is good to go.

IRR of the project is 6.30% as calculated in appendix 2 which suggests that the company can have
breakeven at lesser discount rate than its cost of capital and based upon this project is not viable as IRR
should be higher than cost of capital to increase the cash flows.

Sources of Finance
Overdrafts are valuable sources of source of finance due for reimbursement in under a year. Interest is
possibly charged when the office is utilized, and the interest installments are charge deductible. They
can be masterminded at short notification and are adaptable in the sum acquired whenever.

One of the interest free source of finance the company can use is retained earnings that can be utilized
to invest in this project. There will be no or less risks associated with this method finance which will
pivotal role for the success of the project without impacting the gearing and dilution of control.

Debt can be used which is another cheaper way to finance the project as it attracts tax benefits on the
interest so it can reduce the cost of finance and NPV and IRR will be better enhanced but after taking
into account of the risks involved in this as gearing will be increased so may pose threat to the wealth of
shareholders.[ CITATION Ekp17 \l 1033 ]

Risk & Uncertainty

Management of risks implied in project requires proficiency and adequacy in the activities of the
business. The compromise implies adjusting risks and openings because of the way that overseeing risk
and opportunity relies upon how the decision is settled on during the time spent decision making.
Sparrow (2012) proposed that a clear, orderly way to deal with overseeing risks is more compelling and
effective than a casual interaction of risk management. The cycle of risk management featured the
accompanying risk factors that are inborn in investment decision. Because most of the time there are
many estimates and forecasts and judgements are made which may not be practical thus to cope up
with them risk and uncertainty analysis is done to adjust for the risk and ensure the best decision is
being taken which will enhance the viability of the decision [ CITATION Bal14 \l 1033 ].

Sensitivity of initial investment is (2.89/50)* 100) =6% which means there’s only 6% of change required
in the investment and the NPV will be zero or negative thus its more sensitive which means there’s need
to reduce the cost of capital and more increased cash flows the project needs to create.

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 Conclusion
Adidas have the financial performance being negatively impacted by COVID-19 as discussed, the
profitability, liquidity and other appropriate ratios calculated are failing to suggest the good financial
health of Adidas. Making annual budgets can provide more meaning to management to measure
performance and set up a formal way of punishment and reward system which can positively enhance
the overall performance evaluation and enable the long-term organizational success. NPV of the project
is positive which is better approach then IRR so after taking into risk and uncertainty project doesn’t
seems to be viable although it has positive NPV.

Appendix 1
Year 0 £m 1 £m 2 £m 3 £m 4 £m 5 £m 6 £m 7 £m 8 £m 9 £m 10 £m
Cash Flows -50 4 5 7 12 9 12 12 11 8 12
Discount Factor 0.90 0.82 0.68 0.62 0.56 0.46 0.42
@10% 1.000 9 6 0.751 3 1 4 0.513 7 4 0.386
Present Value -50.00 3.64 4.13 5.26 8.20 5.59 6.77 6.16 5.13 3.39 4.63
Net Present Value 2.89

Appendix 2
IRR Calculation
Year 0 £m 1 £m 2 £m 3 £m 4 £m 5 £m 6 £m 7 £m 8 £m 9 £m 10 £m
Cash Flows -50 4 5 7 12 9 12 12 11 8 12
0.87 0.75 0.57 0.49 0.43 0.32 0.28
Discount Factor @15% 1.000 0 6 0.658 2 7 2 0.376 7 4 0.247
Present Value -50.00 3.48 3.78 4.60 6.86 4.47 5.19 4.51 3.60 2.27 2.97
Net Present Value -8.27
IRR 6.30

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