Financial Statement Analysis

The company Adidas has the following Financial Statements for a 3 year period.

Income Statement 2016 2017 2018 Revenues 18,48 21,22 21,92 Total Revenues 18,48 21,22 21,92 % Change YoY 9,3 % 14,8 % 3,3 % Cost of Goods Sold -9,38 -10,51 -10,55 Gross Profit 9,1 10,7 11,36 % Change YoY 11,4 % 17,6 % 6,2 % % Gross Margins 49,2 % 50,4 % 51,9 % Selling General & Admin Expenses -7,21 -8,6 -9,03 Provision for Bad Debts -0,04 R&D Expenses -0,15 Other Operating Expenses -0,25 0 0,07 Other Operating Expenses -7,61 -8,64 -8,96 Operating Income 1,49 2,07 2,41 % Change YoY 34,1 % 38,8 % 16,6 % % Operating Margins 8,1 % 9,7 % 11,0 % Interest Expense -0,07 -0,06 -0,04 Interest And Investment Income 0,02 0,03 Currency Exchange Gains (Loss) 0,01 0,02 Other Non Operating Income (Expenses) 0 -0,03 0,05 EBT Excl. Unusual Items 1,45 2,02 2,42 Impairment of Goodwill Gain (Loss) On Sale Of Investments -0,01 Gain (Loss) On Sale Of Assets 0,04 0 Asset Writedown -0,02 -0,04 Other Unusual Items 0,07 0 EBT Incl. Unusual Items 1,54 2,02 2,38 Income Tax Expense -0,45 -0,67 -0,67 Earnings From Continuing Operations 1,08 1,35 1,71 Earnings Of Discontinued Operations -0,06 -0,25 -0,01 Net Income 1,02 1,1 1,7

Balance Sheet 2016 2017 2018 Cash And Equivalents 1,51 1,6 2,63 Short Term Investments Trading Asset Securities 0,01 0,01 0,01 Total Cash And Short Term Investments 1,52 1,6 2,64 Accounts Receivable 2,2 2,32 2,43 Other Receivables 0,27 0,48 0,32 Notes Receivable 0,02 0,03 0,03

Total Receivables 2,49 2,82 2,78 Inventory 3,76 3,69 3,45 Prepaid Expenses 0,31 0,24 Other Current Assets 0,81 0,53 0,71 Total Current Assets 8,89 8,65 9,81 Gross Property Plant And Equipment 3,65 3,63 4,06 Accumulated Depreciation -1,73 -1,63 -1,82 Net Property Plant And Equipment 1,92 2 2,24 Long-term Investments 0,18 0,24 0,28 Goodwill 1,41 1,22 1,25 Other Intangibles 1,85 0,96 1,04 Loans Receivable Long-Term 0,03 0,12 0,12 Deferred Tax Assets Long-Term 0,73 0,63 0,65 Other Long-Term Assets 0,17 0,21 0,23 Total Assets 15,18 14,02 15,61 Accounts Payable 2,5 1,98 2,3 Accrued Expenses 2,24 1,69 1,69 Current Portion of Long-Term Debt 0,64 0,14 0,07 Current Portion of Capital Lease Obligations 0 0,01 Current Income Taxes Payable 0,4 0,42 0,27 Unearned Revenue Current 0,04 0 Other Current Liabilities 0,94 2,07 2,5 Total Current Liabilities 6,77 6,29 6,83 Long-Term Debt 0,98 0,98 1,61 Capital Leases 0 0 0,08 Unearned Revenue Non Current 0,04 Pension & Other Post Retirement Benefits 0,36 0,3 0,25 Deferred Tax Liability Non Current 0,39 0,19 0,24 Other Non Current Liabilities 0,19 0,24 0,24 Total Liabilities 8,72 8 9,25 Common Stock 0,2 0,2 0,2 Retained Earnings 5,52 5,86 6,05 Comprehensive Income and Other 0,75 -0,03 0,12 Total Common Equity 6,47 6,03 6,38 Minority Interest -0,02 -0,02 -0,01 Total Equity 6,46 6,02 6,36 Total Liabilities And Equity 15,18 14,02 15,61

Cash Flow Statement 2016 2017 2018 Net Income 1,02 1,1 1,7 Depreciation & Amortization 0,29 0,37 Amortization of Goodwill and Intangible Assets 0 0,49

Total Depreciation & Amortization 0,29 0,37 0,49 Amortization of Deferred Charges 0,07 0,06

(Gain) Loss From Sale Of Asset -0,02 0,02 0,01 (Gain) Loss on Sale of Investments Asset Writedown & Restructuring Costs 0,02 0,05 0 Net Cash From Discontinued Operations 0,04 0,01 -0,02 Other Operating Activities 0,09 0,32 -0,2 Change In Accounts Receivable -0,46 -0,48 -0,21 Change In Inventories -0,66 -0,22 0,18 Change In Accounts Payable 0,97 0,42 0,74 Cash from Operations 1,35 1,65 2,69 Cash from Investing -0,61 -0,68 -0,64 Cash from Financing -0,55 -0,77 -0,99

You are asked to analyse the company financial statements from different perspectives to assess how the company is positioned vs its main competitor. They provide you with some key indicators.

• 1- Analyse the profitability of the company. o To do that calculate:

§ The gross margin percentage (4 points) § The return on total assets (4 points) § The return on equity (4 points) § The return on sales (4 points)

o They provide you with some key indicators of the company main competitor. How is the Company Adidas compared to their main competitor in terms of profitability? (4 points)

§ Gross Profit margin=46.2%,44.6 and 43.8% § ROE= 30.1%, 34.4% and 17.4%.

• 2- Assess the liquidity and asset management of the company

o To do that calculate: § Working capital. (4 points) § The current ratio. (4 points) § The acid-test ratio. (4 points) § The average collection period. (4 points) § The average sale period. (4 points) § The operating cycle (4 points)

o Use the calculations above to asses how the company is positioned in terms of liquidity and asset management. They provide you with some key indicators of the company main competitor. How is the Company Adidas compared to their main competitor? (4 points)

§ Current ratio= 2.8, 2.93 and 2.51 § Average collection days= 37,37 and 36 § Average inventory days= 96,95 and 92

• 3- Assess the company solvency:

o In order to do that, calculate: § The debt-to-equity ratio. (4 points) § The times interest earned ratio (4 points) § The Debt to Assets ratio (4 points)

o They provide you with the key indicator below of the company main competitor. How is the Company Adidas position compared to it? (4 points)

§ Debt to Assets = 43%, 47% and 56%

• 4.-How is the company growing in sales during this three years?, show the % growth year over

year. The growth for the competition is 6%, compare the growth level. (4 points)

• 5- Summarize which are the strengths and weaknesses of Asics corporation vs its main competitor based on the analysis and comparison performed. Which recommendations would you give to the company management to improve its competitive position? Support your answer on your calculations. (12 points)

• 6.-Explain why a difference between Net income and operating Cash Flow is there, explain the reasons using the actual data of Company Adidas. (10 points)

• 7.- How much is the PE ratio of the company in the year 2018 considering that the share price is 192 ? The PE ratio of the competition is 38. What does that mean to you? (10 points)