FIN 534 Assignment 1 Financial Research Report
Financial Management
Imagine that you are a financial manager researching investments for your client. Think of a friend or a family member as a client. Define her or his characteristics and goals such as an employee or employer, relatively young (less than 40 years) or close to retirement, having some savings/property, a risk taker or risk averter, etc. Next, use Nexis Uni at the Strayer University library, located at Nexis Uni, click on "Company Dossier" to research the stock of any U.S. publicly traded company that you may consider as an investment opportunity for your client. Your investment should align with your client's investment goals. (Note: Please ensure that you are able to find enough information about this company in order to complete this assignment. You will create an appendix, in which you will insert related information.)-
As the child of a recent retiree on a fixed income, I understand how much my mom worked for money. With that in mind, she would not be willing to work so hard for so long to frivolously squander it away in her twilight years casing risky investments. At the same time, due to her health needs, I know that I would want to make sure her money worked for her on a level to ensure she can get the care she needs without wondering how she will pay for medication or deductibles. With that in mind, I would want to find the optimum stock for her to invest in.
Since she does not have the disposable income, or time to recover from a gigantic loss, I would suggest she invest in a mid-cap or large-cap company, and try to avoid small-cap names altogether. The reason startups give such high returns is because they are indeed risky investments. She has a great of chance of bottoming out as she would striking it big. Even though there are some great small companies that would fit into an older individual’s investing framework, most of her picks should conform to this advice. Like many of the tips provided here, it is from the Benjamin Graham and Buffett school of thought. Furthermore, if you are investing in "best of breed" companies and preeminent brands, following this rule shouldn't be a problem.
The next criteria I would use to help her pick a stock would be to find a stock that is a strong past performer. It may not give double digit returns every year, and it can even be subject to an occasional bad quarter. The overall thought process is the long-term chart has to be compelling. I would want her to invest in a business that has made shareholders rich, while avoiding a stock that has destroyed shareholder value over the long-term. She should invest in stocks that fit the above metrics and that have performed well over a substantial period of time [ CITATION Ben20 \l 1033 ].
Once we weed out the type of stocks to focus on, it’s now time to zero in on a particular company. I would advise her to invest in a stock that offers an easy-to-understand, fairly straightforward company business model. These companies usually provide a good or service that is easily understood and extremely recognizable. Since she is not an industry expert, she should avoid companies that other investors might find complicated. That company should also be considered "best in breed." This includes companies that have tremendously-established brands or that have extremely strong emerging brands [ CITATION Ben20 \l 1033 ].
These companies are among the best in their industry. The general rule of thumb is it is best to stick with preeminent, ubiquitous, and highly-admired brands. Furthermore, if you look at many of the best performing stocks in history, all have one thing in common - a tremendous brand. If you are screening for tremendously-established brands as well as rapidly-emerging brands, it should not be hard to find one that has a history of strong performance. Most companies that fit this profile have a great long-term track record of creating shareholder value.
Based on the rationale for picking a stock that meets all of these requirements, I would suggest that she invest in Nike, Inc. Nike designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. Through its parent company and several subsidiaries- Jumpman, Converse, Chuck Taylor, All Star, One Star, Star Chevron, Jack Purcell and Hurley trademark- they offer products in multiple categories, including running, basketball, the Jordan brand, football, training, and sportswear [ CITATION Yah20 \l 1033 ]. It markets products for all genders and age groups across multiple professional and recreational athletic uses. They also sell apparel with licensed college and professional team and league logos, as well as sells sports apparel and accessories.
Select any five financial ratios that you have learned about in the text. Analyze the past 3 years of the selected financial ratios for the company; you may obtain this information from the company's financial statements. Determine the company's financial health. (Note: Suggested ratios include, but are not limited to, current ratio, quick ratio, earnings per share, and price earnings ratio.)
Nike has been one of the most consistent performers over the past 3 years. Based on analysis of financial statements over the past 3 years, Nike has remained one of the top performers in its field. I would use 2 sets of ratios to determine the financial health of Nike. I would first look at a set of liquidity ratios, primarily the current ratio, quick ratio, and cash ratio. Liquidity ratios are an important class of financial metrics that are used to determine a debtor's ability to pay off current debt obligations without the need to raise external capital [ CITATION CNN17 \l 1033 ]. Liquidity ratios measure a company's ability to pay debt obligations and its margin of safety.
The first ratio I analyze is the current ratio. The current ratio, sometimes referred to as the “working capital” ratio, measures a company's ability to pay short-term obligations or those due within one year. This ratio helps investors understand more about a company’s ability to cover its short-term debt with its current assets. Nike has maintained a current ratio over 2 for the last 3 years [ CITATION Yah20 \l 1033 ]. This means they have almost 3 times the capital needed on hand to meet its short term obligations.
The next ratio analyzed is the quick ratio. This ratio, also known as the acid-test ratio, measures a company's ability to meet its short-term obligations with its most liquid assets. This ratio excludes inventories from its current assets. Nike has consistently maintained a quick ratio over 1. This points to adequate liquidity even after excluding inventories, with over $1 in assets that can be converted rapidly to cash for every dollar of current liabilities.
The last liquidity ratio I would analyze would be the cash ratio. This ratio is more conservative than other liquidity ratios because it only considers a company's most liquid resources. It tells creditors and analysts the value of current assets that could quickly be turned into cash, and what percentage of the company’s current liabilities these cash and near-cash assets could cover. It is considered an indicator of a firm’s value under the worst-case scenario, such as if the company was about to go out of business. Nike had a cash ratio of over 1 in 2017, almost .9 in 2018, and over .5 in 2019. Even though Nike does not maintain $1 in cash for each dollar of liabilities, taken into account with the other ratios, the company remains extremely liquid in order to cover any short term liabilities without the need to raise capital.
The next set of ratios I would use to determine the financial health of Nike are profitability ratios. Profitability ratios consist of a group of metrics show how well companies use their existing assets to generate profit and value for shareholders over time [ CITATION Bon20 \l 1033 ]. The profitability ratios I will concentrate on are operating margin, profit margin. And return on equity (ROE). Higher ratio results are often more favorable, but ratios provide much more information when compared to results from other, similar companies, the company's own historical performance, or the industry average.
The operating margin measures how much profit a company makes per each dollar of sales, after paying for variable costs of production [ CITATION Bon20 \l 1033 ]. Nike has maintained an operating margin over 10% for the last 3 years. This margin is most beneficial when used to compare to other companies in the same industry to determine how efficient the company is operating.
The net profit margin measures a company's ability to generate earnings after taxes. The profit margin indicates how many cents of profit has been generated per each dollar of sale. It is used by creditors, investors, and businesses themselves as indicators of a company's financial health, management's skill, and growth potential. Nike averaged about 9% profit margin over the last 3 years. This would also need to be compared to other companies in the industry, but shows that the company has made money every year.
The final ratio, ROE, is a ratio that is most important to company shareholders since it measures their ability to earn a return on their equity investments. ROE is able to increase without any equity addition when it can benefit from a higher return that is helped by a larger asset base. Since Nike is such a large company, it can increase its asset size. This in turn generates a better return with higher margins. Nike has averaged a 33% ROE, which means equity holders can retain much of the return growth when additional assets are the result of efficient debt use.
Based on your financial review, determine the risk level of the stock from your investor's point of view. Indicate key strategies that you may use in order to minimize these perceived risks.
Since Nike has maintained profits over the last three years, and has more than enough assets to cover its obligations, I believe the company is positioned itself to remain viable for years. Since the company enjoys licensing deals with multiple professional leagues, numerous academic athletic institutions, and provides good that are essential for large amounts of the general public, the company is relatively low risk to buy.
To manage the risks that could come with purchasing any stock, an investor could look to diversify by purchasing shares in other industry leaders such as Reebok, Adidas, or Under Armour. But as long as sports remain viable in public institutions, and professional leagues remain viable as a source of industry throughout the world, Nike is positioned to reap the benefits of these activities.
Provide your recommendations of this stock as an investment opportunity. Support your rationale with resources, such as peer-reviewed articles, material from the Strayer
University Library, and reviews by market analysts
Nike currently has a market cap of over $139 Billion, yet is trading for under $100 a share. That means that it is a very large company, but there is no large barrier to entry for new investors. And since the company has been around for almost 40 years, it has a long proven track record for how it has performed for investors.
Since Nike is a large-cap company that offers an easy-to-understand, fairly straightforward company business model, it is an easy investment choice. This company has a tremendously-established brands that is also "best in breed." It has shown that it has been a strong past performer, with more than enough cash and assets to facilitate growth or survive a downturn. Nike also currently pays out dividends. It is currently paying out a 1.11% dividend quarterly to investors. It is in a viable field, serves multiple swaths of the country, and has numerous subsidiaries to provide a viable product to large numbers of the population. It would be foolish not to buy this stock.
Bibliography
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Bond, E., & Auerbach, A. (2020, March 15). How to Analyze Profitability. Retrieved from www.edwardlowe.org: https://edwardlowe.org/how-to-analyze-profitability-2/
CNN Money. (2017, March 24). Stocks: Investing in stocks . Retrieved from money.cnn.com: https://money.cnn.com/pf/money-essentials-stocks/
Gardner, T., & Gardner, D. (2018, March 28). 13 Steps to Investing Foolishly. Retrieved from The Motley Fool: https://www.fool.com/how-to-invest/thirteen-steps/index.aspx
Hayes, A. (2019, October 14). Value Investing. Retrieved from Investopedia:
https://www.investopedia.com/terms/v/valueinvesting.asp
Ponzio, J. (2007, August 16). The Graham And Dodd Method For Valuing Stocks. Retrieved from Seeking Alpha: https://seekingalpha.com/article/44626-the-graham-and-doddmethod-for-valuing-stocks
Van Knapp, D. (2015, August 21). Get Your Smart Beta Here! Dividend Growth Stocks As 'Strategic Beta' Investments. Retrieved from Seeking Alpha: https://seekingalpha.com/article/3457406-get-your-smart-beta-dividend-growth-stocksstrategic-beta-investments
Yahoo! Finance. (2020, March 1). NIKE, Inc. (NKE). Retrieved from Yahoo! Finance:
https://finance.yahoo.com/quote/NKE?p=NKE
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