European Journal of Business and Management www.iiste.org
ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online)
Vol.8, No.11, 2016
79
days is a far long time, it can be seen when compared with Nike which took just 24 days to pay off their bills in
2013 financial year (Appendix.2). There is several risk associated with taking more time than their agreement
with the supplier such as loss of supplier goodwill and potential for late-payment charge and threat of legal
actions (Bernstein & Wild, 1993 ). However, in 2014 Adidas was able to reduce the payment days for 79 day it
was 14.38% reduction when it compare to 2013. This could be good news for suppliers and lenders of the Adidas
Company.
Return on capital employed (ROCE) is a profitability ratio which indicates how efficiently an
organisation can generate profits from its capital employed by comparing profit before interest and tax to capital
employed (Keown et al., 2008). This ratio calculation illustrates how much profit each Euros of employed capital
generate; a higher number of ratio mean more Euros of profits generated by each Euros of capital employed.
Adidas generated € 0.16 for € 1 investment in 2013 and was reduced to € 0.10 by 37.5% in 2014. These
numbers indicate that company assets’ performance is struggling and the company long term financial problem.
In 2013 and 2014 Nike had € 0.24 ($.026) and €0.22 ($0.22) ratio amounts respectively (appendix.2). According
to the return on capital employed calculation, Adidas is below in long term financial performance than Nike by
33.33% in 2013 and 54.54% in 2014. This mean Adidas’ amounts of assets are hindering them to achieve a high
return. Adidas Company is declining the money return on every euro invested in the business and burns up more
capital to generate profits. Decline in ROCE could signal the loss of competitive advantage and bad news for
stakeholders and investor.
The current ratio is a liquidity ratio which shows the proportion of current assets of a company in
relation to its current liabilities (Bernstein & Wild, 1993). The calculation shows a company’s ability to repay
short-term liabilities. The ratio of 2:1 consider as the benchmark, however it could vary across industries (Atrill
& McLaney, 2002).
In 2013, Adidas 1.4:1 ratio which indicate the sufficient money to meet current liabilities. However,
that amount is far below to the benchmark. It indicates the risk of unable to pay off its obligations. End of 2014
Adidas came to good financial health which indicates 1.7:1 amount in current ratio. This ratio reflects using the
current ratio in different ways as high current ratio may suggest company is not managing its working capital
well (Keown et al., 2008). But it could not be easily liquidated all current assets in a company as current ratio
assumed; this is one of error in using this ratio (Australian shareholders’ association, 2010).
The interest cover ratio is calculated as the ability of a company to pay the interest on its outstanding
debt (Bernstein & Wild, 1993). It helps to calculate how many times a company could pay its current interest
payment with its available earnings. A company’s capacity to meet its interest obligations is an aspect of a
company’s solvency as it is an important factor in the return for stakeholders (Brigham & Houston, 2004).
Therefore, the ratio is used to determine the risk of lending funds to a company by creditors, lenders, and
investors (Bernstein & Wild, 1993 ).
Adidas had 15.20 and 13.50 interest cover ratios in 2013 and 2014 respectively. In general, interest
cover ratio warning sign margin is 2.5, that the company should be careful about their future financial situation
(Keown et al., 2008). In this situation, Adidas is in good financial health with confidence to pay their interest for
lenders. But they have to consider about 11.84% reduction of their ability in 2014.
The earning per share ratio indicates the amount of company’s profit allocated each outstanding share
of common stock (Australian shareholders’ association, 2010). Indicating high amount of earning per share ratio
signals potential of generating a significant dividend for investors (Bernstein & Wild, 1993). Adidas had € 3.78
earnings per share in 2013 and it reduced to € 2.43 in 2014. Reduced net income in 2014 directly effected on this
sudden decline. Somehow, Adidas shareholders can satisfy the earning per share in Adidas when compared to
Nike as they generated € 3.09 ($3.35) per share in 2014.
In summary, Adidas had some financial difficulties in 2014 when compared to 2013 financial year.
Especially company has trouble on capital efficiency as employed capital is not generating sufficient income.
However, identifying a company’s financial situation is more difficult and it is important not to rely on few
financial measurements (Brigham & Houston, 2004).
3. Conclusion
The company is performing well and it will continue to make profit and revenues for next financial years.
However Adidas could be affected with considerable risks according to high operating expenses which hinder
the overall performance and net income. The company had € 0.1 ROCE that means less efficiency in capital
employed in the company. Therefore capital should be invested on a productive manner and unproductivity
assets such as vacation properties and personal use vehicles should be sold as soon as possible. Capital should
invest on most productive assets which will help to increase the revenue such as equipment for factory, vehicles
for sales and showrooms. Adidas had €14,534 net sales in 2014 while their main competitor Nike had €25531
($27799). Next financial year, Sale of the products should be increased along with their prices in order to acquire
more working capital which will help to fund further competitors. Increasing operating cost is the main reason of