Element 010

Finance for decision making

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Table of Contents
1. Introduction.........................................................................................................................3
Company Overview...............................................................................................................3
2. Evaluation of financial performance......................................................................................3
Ratio analysis.........................................................................................................................3
Issues and limitations of financial ratios as a tool of financial analysis................................8
3. Budgeting and performance management..............................................................................8
Advantages and disadvantages of making a budget...............................................................8
Explain two different approaches to drawing up a financial plan for the business................9
Evaluation of performance management used for decision making....................................10
4. Investment appraisal.............................................................................................................10
 Net Present Value (NPV)..............................................................................................12
 Internal Rate of Return (IRR).......................................................................................13
5. Conclusion............................................................................................................................13
References................................................................................................................................15
Appendix..................................................................................................................................17
Financial Ratios of Adidas...................................................................................................17
Financial Ratios of Nike.......................................................................................................17

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 1. Introduction

This report offers a financial analysis focusing on financial estimates made over the last five
years, from 2016 to 2020. Furthermore, the pandemic's impact shifted much of the industry's
consumer trend. The devastating effects of a pandemic, including the sudden closure of all
vital services and the reduced use of supplies and stocks after a pandemic, have changed
society's behaviour. This research aims to examine market development while also examining
negative trends in 2019. The financial ratio analysis of sports and footwear by Adidas and its
competitor Nike is included in this report.

Company Overview
Adidas Ag is German-based multinational cooperation established and headquartered in
Herzogenaurach, which designs and manufactures clothing, accessories and shoes. It is one
of the largest sportswear manufacturers in Europe, and After Nike, it is the second-largest
manufacturer in the world. The company mainly focuses on manufacturing innovative
products that are designed to meet consumer requirements. other than investing in product
validations, the company efforts to determines its value by developing a high-performance
product line on the basis of the specific requirements of consumers and athletes(Pandey et
al.2021). The company has employee strength of 62 thousand people worldwide in 2020.
The Adidas group‘s annual net sales amounted to around 19.9 billion euros in the year 2020.
It has noticed a significant reduction compared to the previous year due to the widespread
coronavirus (COVID-19) pandemic. Adidas was the third –largest footwear company in
2020, with a brand valuation of $ 16.5 billion (Dadrasmoghadam et al.2021). The brand
outstood on the list of the customer loyalty ratings and dominated Nike and the rest of the
significant sports attire companies in the view of American customers over the years. Adidas
has obtained a score of 777 out of 100, laying behind Nike in customer loyalty.

2. Evaluation of financial performance

Ratio analysis
Profitability ratio analysis

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 60

50 51.85 52
45.39 48.62 50.44 49.65
43.8 44.1545.09
42.31
40

2016
30 2017
2018
20 2019
2020

10

Nike
Adidas

When it comes to documenting the map above, Adidas produces superior financial results
every five years. In comparison to previous years, Nike's operating profit percentage fell
dramatically in 2020 (Kim et al., 2020). Sheth (2020) plainly stated that businesses with a
lower profit margin do not make money and have greater value to shareholders. On the basis
of the above diagram, it can be deduced that 2020 will be a tough year for 2020 in
comparison to other financial years for all other firms. Adidas' gross profit margin in 2020
was lower than in previous years, resulting in increased revenue and a Covid-19 pandemic in
2020, causing Adidas' normal growth potential to decrease (Guderian et al., 2021).

Adidas' gross profit margin had risen by 2020, indicating the company's pandemic
performance. A company's net margin ratio is high as compared to other sectors, indicating
how Adidas is financially unable to deliver adequate services. Adidas was unable to retain
operating costs due to the pandemic. In contrast to 2019, the company's operating margin in
2020 is very low. According to the findings, the 15–20 % ratio is the highest (Kadim et al.,
2020). The corporation achieved 16.60 % in 2019 and actively used client capital. However,
by 2020, it had a 14.50% market share.

Liquidity ratio analysis

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 3.5
3.06
3
2.66
2.46
2.5
2.14
1.98
2 2016
2017
1.5 2018
1.31 1.37 1.44
1.25 1.38 2019
1 2020

0.5

Nike
Adidas

Adidas' liquidity efficiency was lower than that of the majority of other companies and Nike
over the course of the five years. In the aftermath of the pandemic, Adidas, on the other hand,
had impressive success in terms of paying existing property creditors. However, due to the
pandemic, Adidas' capacity to meet its debt obligations by 2020 has been limited, as seen on
the diagram. The company's net assets are sufficient to last one or two years
(Anagnostopoulos, 2020). The graph shows a good 2019 Adidas ratio for the industry, but the
current Adidas ratio was less than one in 2019. In comparison to the normal market, both
companies reached a lower percentage by 2020 than the desired sector.

Singh et al., (2020) discovered that the rapid 1 ratio indicates that a firm's rapid investment
relates to its cash. Furthermore, an organisation can repay existing obligations without selling
long-term investments. Short-term liabilities outnumber short-term obligations as more than
one agency has a rapid ratio. Due to an emergency pandemic in 2020, the company and its
rivals plummeted at a rapid pace, with Adidas staying at a rapid ratio of 2019 to 2020 until
2021. However, the speed ratio is low as compared to industry standards.

Efficiency ratio analysis

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 1.8

1.6 1.46 1.62 1.65

1.4 1.51
1.48
1.4 1.27

1.2 1.14
1.19
1 0.94 2016
2017
0.8
2018
0.6 2019
2020
0.4

0.2

Adidas
Nike

As per the observation of Ruben (2020), the expense projection aids in selling the company's
productivity. The highest share indicates that the company's products have been sold and that
profits have risen (Jabarzare and Rasti-Barzoki, 2020). According to the graph above, Adidas
and Nike saw disappointing performances in 2020 as compared to 2019. It shows that Adidas
did not take any steps to raise sales since the Covid 19 pandemic. Thanks to the pandemic,
when they opened up the market for oil and gas, they were wrongly sold. The graph reveals
that Adidas has very little cash on hand. The graph showed modest increase in asset sales
over the past five years as compared to Adidas.

Financial Gearing Ratios Analysis

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 2.5

2 2.15
1.93

1.5
1.35 1.45 2016
1.2 1.26 2017
1 2018
2019
2020
0.5 0.31 0.39 0.38
0.17

Nike
Adidas

As per the findings of McCosker (2021), the financial gearing ratio is the mode of debt
ownership or the reason can be found in the company's investment borrowings. The gearing
ratio also shows a company's equity-to-debt funding level for operations. In the table above,
Adidas has a very high gear ratio as compared to Nike. Since the last five years, Adidas has
maintained a gritty gear ratio level. Thanks to the pandemic's high impact, the debt-to-equity
ratio is examined here, with an overall low debt-to-equity ratio in 2020. The exposure to
equities is high in the case of Adidas, indicating that the risk is high and that an organisation
with aggressive investment increases with debt.

Investment ratio analysis

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 115.94
120

100

76.66
80
2016
56.09 2017
60 2018
2019
2020
40 30.68 32.6 32.32
27.59 25.22
21.73 20.98
20

0
Adidas Nike

As determined by Susanto et al. (2021), the value to stock ratio compares the real share price
to per share earnings (EPS). The multiple price or advantage is often used to describe the
cost-to-benefit ratio. As compared to the two firms over the last five years, Nike's PE is
incredibly low. By 115.94 in 2020, the company had reached its peak point. Putri et al.
(2020) discovered that in face-to-face partnerships, investors and analysts use P/E ratios to
draw on the perceived value of their shares in a business.

Issues and limitations of financial ratios as a tool of financial analysis

In the opinion of Markovitch et al. (2020), one of the main considerations of the proportion
study is the contrast with market benchmark firms. Since it offers valuable insight of
financial reporting, this methodology will help both domestic and international business
observers. According to Pelekh et al. (2020), the ratio survey was based on data from the
company's financial statements. This will be used to announce a promising outcome rather
than the actual conclusions from the organization's administration. Furthermore, a ratio
analysis cannot accurately reflect a company's true meaning, and incorrect data presentation
is difficult to detect using analytical methods.

3. Budgeting and performance management

Advantages and disadvantages of making a budget

An integrated strategic timeline lays out how the company can achieve its financial and
organisational objectives. Budgeting, on the other hand, is found to be a critical phase in

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effective financial preparation. Smaller businesses also prepare a succinct written plan for
planned activities. There are, however, certain benefits and drawbacks to remember.
According to Rios et al. (2021), the budget process frees administrators from day-to-day
corporate management and forces them to concentrate on the long term. The budget's main
aim is to reflect, at the very least, the competitiveness and financial position of the industry,
as well as how to improve if management fails to achieve its budgeted targets. For Adidas, an
annual revaluation is often needed, and it is critical to understand current sport demand
trends, since it is one of the most rapidly changing industries. To determine the amount of
funds spent or available for activities, a well-organized budget is necessary. Adidas will use
this data to forecast its funding requirements. To invest in fixed and working capitals, only a
small amount of cash is available, and expenditure mechanism administration decides the
funds are most deserving of saving (Smith and Phillips, 2021).

Explain two different approaches to drawing up a financial plan for the business
Budgets, as described by the United Nations, are a tool for strategy and management (Rios et
al., 2021). The budget is a timeline or norm at the start of the year, and it can act as a
reporting mechanism at the end of the year to help management measure the company's
success against their agenda for improving future performance.

In the case of Adidas, the output-input method measures inputs and costs based on expected
unit operations. This strategy can be applied to other projects, merchandising, processing, and
delivery that have a clear link between work and achievement (Jamaluddin et al., 2018). The
expected inputs, on the other hand, are contingent on the projected outputs. The output/input
consequences approach begins with the planned outcomes and then reverses the input
budgeting. The disadvantage is that this method can't be used for prices that don't have fixed
unit cost driver shifts.

The business-led approach is similar to the output-input approach, but it avoids transient
distortions by focusing on scheduled operations for an operation, plant, commodity, or other
cost goal (Warren and Jack, 2018). Furthermore, overhead costs are measured based on
estimated consumption phase spending targets, rather than large-scale drivers including direct
work cycles or system hours. Event-based budgeting estimates the expense of budget
priorities by incorporating all expenditure considerations into the operation to purchase
specific products or services. When analysing the budget, management will focus on the best
operation selection rather than the output/input ratio.

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Evaluation of performance management used for decision making
In a tight relationship between rewards and success, performance management is used to
concentrate and drive excellent and high results (Brown et al., 2019). It is used to make
choices if the situation is unusual or if a person is given rewards. When managers and staff
collaborate together, they can achieve the most results if they can think rationally and control
the company's finances.

As per the findings of Persdotter Isaksson et al. (2019), Adidas' corporate performance
growth strategy, #MYBEST, is a critical enabler of a high-performance community. The four
elements of #MYBEST promote frequent, high-quality conversations between employees and
their line managers, offer a framework for regular upward and peer engagement sharing, and
ensure quarterly priorities are set and checked. Every monthly ‘Touch Base' discussion
revolves around growth, and a formal performance assessment occurs twice a year. In the
evolution of #MYBEST, employee feedback is crucial. For the second year in a row, the
#MYBEST global survey was conducted.

The findings reinforced the positive effects of the previous year's improvements and were
also used to guide decisions on measures that will help the #MYBEST solution be fully used.
When managing the rapidly evolving world in 2020, we ensured that the organisation has
consistency about substantive success discussions. We also introduced a series of global
virtual gatherings to provide all staff with realistic advice and business best practises on
effective input and growth conversations (Adidas, 2021).Adidas offered tools and
recommendations for all line managers to use when planning for their routine Performance
Standard discussions to reduce the chance of potential bias in performance assessments.

4. Investment appraisal
Investment appraisal is defined as the way in which the business will evaluate the possible
investments or projects on the basis of the conclusions of various different financial
techniques and capital budgeting (Fokkema et al., 2017). The goal of the investment appraisal
involves the assessment of the viability of obtaining the objectives, and it supports the
production of business. As per the findings of Li et al.(2017), the investment is focused on
the initial phases of the project and operates parallel with the early work on delivery plans.
Most of the investment appraisal is based on the cash flows but need to consider legal
considerations, environmental impact, social impact, operational benefits and risks.

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 According to Pawlak and Zarzecki (2020), one of the risks is granting equity is reduced
control over the organisation, allowing the present stakeholders to deny the appeal. By
investing in retained profits, interest rates, lower pressures, instant liquidity etc., gains profits.
It is observed that one of the biggest issues with the investment appraisal is the overpredicted
estimation of the value of profits.

The initial investment is defined as the amount needs to begin a project or business. It is also
said as the initial investment outlay or initial outlay. The initial investment of this project is
50 million euro. As per the finding of Skourtos et al.(2021), cash flow is defined as the
amount of cash or equivalent cash which delivers or receives out by the payment to the
creditors. The first cash flow of the project is € 8,000,000.00. The cash flow is incremented
every year. The total number of years for cash flow is considered 10 years. According to the
observation of Olaniyi and Prause (2020). the discount rate is the interest rate utilised to
define the present value of the forthcoming cash flows in a discounted cash flow analysis.
The present project has a discounted rate of 10 percentages.

Payback Period: 5.532 years

Discounted Payback Period: 8.151 years

Cash Flow Return Rate: 13.92% per year

Discounted Cash Net Discounted Cash

  Cash Flow Net Cash Flow
Flow Flow
$- $-
Year 0 $-50,000,000.00 $-50,000,000.00
50,000,000.00 50,000,000.00
$-
Year 1 $8,000,000.00 $7,272,727.27 $-42,727,272.73
42,000,000.00
$-
Year 2 $8,400,000.00 $6,942,148.76 $-35,785,123.97
33,600,000.00
$-
Year 3 $8,820,000.00 $6,626,596.54 $-29,158,527.42
24,780,000.00
$-
Year 4 $9,261,000.00 $6,325,387.61 $-22,833,139.81
15,519,000.00
Year 5 $9,724,050.00 $-5,794,950.00 $6,037,869.99 $-16,795,269.82
Year 6 $10,210,252.50 $4,415,302.50 $5,763,421.36 $-11,031,848.47
Year 7 $10,720,765.13 $15,136,067.63 $5,501,447.66 $-5,530,400.81

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Year 8 $11,256,803.38 $26,392,871.01 $5,251,381.85 $-279,018.95
Year 9 $11,819,643.55 $38,212,514.56 $5,012,682.68 $4,733,663.73
Year
$12,410,625.73 $50,623,140.28 $4,784,833.47 $9,518,497.19
10

 Net Present Value (NPV)

The net present value (NPV) is a term that refers to the assembly of cash flows that prevails
at different periods. The time interval between now and the balance of cash determines the
current value of cash flows. According to Marchioni and Magni (2018), the NPV is
influenced by the discount rate. Along with this, the NPV is calculated by adding the costs
that are negative cash flow and the positive cash flow that of gain over the process. The
present value of each year is calculated by discounting its potential value at the return of
quarterly rate after determining cash flow for each period. The NPV can be determined as the
sum of all discounted potential cash flow.

In the viewpoint of Bogataj and Bogataj (2019), the NPV method can determine whether a
project can outcomes a profit or loss due to its suppleness. A positive NPV is a benefit, and a
negative NPV is of loss. As per the observation of Zheng et al.(2017), the NPV is the key
aspect of discounted cash flow analysis and used widely for calculating the time value of
money for ventures in the long term.

The NPV can be calculated using the equation:

Where,

NPV=net present value

R {t} = net cash flow at time t

i = rate of discount

{t} = time of the cash flow.

In this project the obtained net present value is € 9,518,497.19. And this is positive for the
project

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  Internal Rate of Return (IRR)
The internal rate of return (IRR) is a financial tool for defining the investment return rate.
The ex-ante or ex-post is practicable using this IRR. The internal rate of return is an insight of
an annual rate of return is the ex-ante.

As per the opinion of Mellichamp (2017), the rate of return that would set all cash flows, both
the negative and positive outcomes from the transaction to zero value, is the internal rate of
return on a project. The IRR is equalled to the interest rate that would be viewed in a fixed
income fund in which the money is invested.

As viewing, if the internal return of return is higher, then it will be a more desirable
investment is to take. For investment, the IRR is uniform of changing types, and IRR can be
utilised to rank multiple prospective investments (Mujahed and Elshareif,2017). Generally
speaking, when the investment options are comparing, whose other features are alike, the
investment with a high internal rate of return would be considered the best one. The IRR can
be calculated by the following equation:

Where,

NPV = Net Present Value

N = total number of periods

n = non-negative integer

Cn = cash flow

r = internal rate of return

This project has an IRR of 13.92% per year. This scheme has a positive IRR, which has
maintained the sustainability of initial investment of 50 million Euro.

5. Conclusion
This report detailed various accounting techniques and is applied accordingly for obtaining
quantitative information. At the same time, it is analysing the multiple components of the
financial performance and position of Adidas and Nike critically. It is observed that the
financial performance of Adidas is comparatively high. The report will further discuss the
overview, advantages and disadvantages of the company. Moreover even if the company has

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a high performance, the company needs to focus on financial performance, since of the
scenario of COVID-19.

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Appendix

Financial Ratios of Adidas

Profitability ratios 2016 2017 2018 2019 2020

Gross profit
margin ratio = 48.62% 50.44% 51.85% 52.00% 49.65%
Gross Profit /
Revenue
Liquidity ratios 2016 2017 2018 2019 2020

Current ratio =
Current assets / 1.31 1.37 1.44 1.25 1.38
current liabilities
Efficiency ratios 2016 2017 2018 2019 2020
Asset Turnover =
revenue / net 1.2712 1.4611 1.4037 1.1431 0.9426
assets
Financial 2016 2017 2018 2019 2020
Gearing Ratios
Debt-to-equity
ratio = total debt / 1.35 1.26 1.45 1.93 2.15
total equity
Investment Ratios 2016 2017 2018 2019 2020
Price earnings
ratio = share 30.68 27.59 32.60 21.73 115.94
price / earnings
per share

Financial Ratios of Nike

Profitability ratios 2016 2017 2018 2019 2020

Gross profit
margin ratio = 45.39% 43.80% 44.15% 45.09% 42.31%
Gross Profit /
Revenue
Liquidity ratios 2016 2017 2018 2019 2020

17
 Current ratio =
Current assets / 3.06 2.46 2.14 1.98 2.66
current liabilities
Efficiency ratios 2016 2017 2018 2019 2020
Asset Turnover =
revenue / net 1.5144 1.4768 1.6151 1.6493 1.1934
assets
Financial 2016 2017 2018 2019 2020
Gearing Ratios
Debt-to-equity
ratio = total debt / 0.1663 0.3064 0.3883 0.3848 1.1989
total equity
Investment Ratios 2016 2017 2018 2019 2020
Price earnings
ratio = share 20.98 25.22 56.09 32.32 76.66
price / earnings
per share

18