Nike Vs Callaway Golf
Begin with the Balance Sheet: Respond to each question in the order listed
1. Start with the Capital Accounts. How do they differ? How are they the same? Are they realistically presented? What are the Book Values, and what are the present Ratios of the stock Prices to Book Value.
Between Nike and Callaway golf, there is a significant difference in the amounts shown. From the start, it is easy to see that both balance sheets are approximately 6 months apart from one another. While the Nike information is several months old, the Callaway Golf is nearly a year old, and is less likely to reflect the current state of affairs within the company. Regardless of this fact, the main point that is readily significant is the differences between the two companies due to their specific markets, and their size relative to one another. Retained earnings for both companies has fallen over the last three years, however while Nike has fallen only 13% in its retained earnings, Callaway has fallen 89%. Treasury stock for both companies is drastically different as well, with Nike showing none over the three-year period and Callaway reporting a negative balance. I would gather that both appear realistically presented, as I bear in mind the relative breadth of the two companies. Nike diversifies among the entire spectrum of athletic sports, while Callaway is …show more content…
focusing solely on Golf. One has to keep in mind that the size of these two companies, and their ages, are significantly different.
The current book value of Callaway Golf is 7.51 as of 19 September 2014, with a ratio of 1.663. This is significantly higher than the company’s lowest ratio in 2010.
Nike is currently 81.81 with a ratio of 6.563. In addition, Nike is showing steady improvement in this ratio since 2010. Though there is some expected variation, the overall trend is positive.
2. Now look at the Fixed Assets (the Property Account). When you read Chapter Five of the little Graham book you will realize that assets are not always what they appear to be. Do either of your companies show as Assets items that need explanation? What are they? How are they explained? You might have to go into the footnotes to the Financial Statement to find the answers.
The first question I have regards Nike’s Short Term Investments. While Callaway has none, Nike is showing a steady increase over the last two years, and now sits at nearly three million, which is double its 2012 rate. What are these investments? Are they reliable? Who is handling the investing for the company? Many questions arise and there is no readily available information to say what it is Nike is investing in. Neither company is showing Long Term Investments, so it would appear to me that Nike is looking for a quick return, but to what end and by what means?
In actuality, nothing on the assets provides a clear picture of what those assets are, with perhaps the exception of Property Plant and Equipment and Cash, which is rather self-explanatory. You would expect a smaller company to have a lesser amount than a larger company, but the ratios in the assets category just do not make sense when you look at them carefully, without a detailed explanation. I can understand now why Graham and Meredith state that the Balance Sheet is given only cursory notice when buyers and investors are looking at companies.
3. Are the Non Current Assets material and how are they explained? Are there material Intangible Assets? (Chapter 8 in Graham) What would be material for companies as large as the ones you are working with?
As noted previously, there is little explanation given as to the nature of any assets, other than Plant and Property or cash. While Goodwill is considered an intangible asset, both companies list it separate. The section of “Other Assets” leads me to question what qualifies as such for each company, and whether their methods of considering what is qualifying are similar. As most companies should have, both Callaway and Nike have a mix of intangible and material assets. I would consider the material assets to be the manufacturing materials used in their goods, as well as the machinery and property involved, and even the office equipment and supplies that keep the office professionals running.
4. Do your companies have Deferred Tax Accounts? How are they treating taxes?
Neither company is showing a Deferred Tax Account; taxes are calculated in the Income Statement as an expense under the Operating Income or Loss section.
5. Now let’s look at the Current Assets. Are the companies maintaining adequate liquidity? Mr. Moovon is going to want to see the relevant ratios, so you had better calculate them and have them ready. (You will find most of them in Chapter 3 of the text.)
Callaway’s current liquidity ratio is 421603 / 319244. Basic visual cues tell me that it is maintaining adequate liquidity, but the ratio is 1.32.
Nike is doing similarly well, though the amounts utilized are significantly larger: 13696000 / 7770000 totaling 1.76. I personally would like to see a higher ratio with Nike, but when I see that they eliminated some of their current liabilities in the May 2014 period, I am slightly more confident.
6. Liabilities. As Mr. Moovon always says, “You can’t be sure about the Assets but the Liabilities are always real.” Does either company have too much debt? If so, CB&M won’t touch them. Can either company carry significantly more debt? How much more? CB&M always loads the companies it acquires with as much debt as they can carry. That’s how they finance the deal.
The Debt to Total assets percentage is telling.
Nike sits at 41.7% while Callaway is 57.1%. Both companies seem to be higher than average, but Callaway is significantly more so. This in addition to the overall company growth trends tells me that Nike is more able to deal with its debt, and may be able to acquire more in the future, but Callaway (which appears to be operating at a loss for the last three years) will not. I would say prudence would call for zero additional debt for either company until their percentage reaches closer to 30%. However, Nike has shown consistent growth while Callaway has been playing catch
up.
7. Are there any hidden assets? This calls for very careful analysis.
The concept of hidden assets is subjective; however, the sections listed throughout the balance sheets of both companies labeled “other” are red flags to me. Without a detailed explanation of what other means, I have to assume that it is a direct attempt to create an illusion of value.
Nike has listed, as I mentioned earlier, a significant portion of its assets as Short Term Investments. The exact value of the Property Plant and Equipment for both companies is not known. However, in all I have the most question about Nike, and what exactly it is doing with these short term investments.
On both companies, inventory is nebulous. Yes, it is a reflection of the value of goods that the company has yet to sale, but are those goods left over from two years ago? The relative levels are similar throughout the years, but if you look closely, it can be seen that Nike is building up inventory at a larger rate than Callaway. Unsold inventory is actually a loss, or sells at a lower point of profit than current products.
Considering the number of patents, new products, trademarks and marketing in the form of product placements in movies and so forth, it is inconceivable to imagine that all assets are listed on the balance sheet of either company.
One other point of note is that Nike rounds dollar amounts, showing only zeroes for amounts less than 1000, while Callaway is showing whole numbers without rounding (as best as can be discerned). While it makes sense for Callaway to show greater levels of accuracy and detail due to its size, the lack of similar effort by Nike leads me to conclude that I am not seeing accurate figures.
Now move on to the Income Statement: Respond to each question in the order listed 1. Are the companies as profitable as they should be? What ratios would tell us that? OK! Now calculate them. Let’s see those Efficiency Ratios.
Other than the DuPont analysis, which will be completed below, I have no idea what this is referring to, as it does not appear in the text nor any of the assignments we have completed previously. The Classification System on page 58 of the text is the closest thing that seems to provide the information requested.
Over the past three years, Nike has had a relatively stable Return on Assets between 15.04 and its current 14.89 while Callaway is in the negative but improving from -19.26 to -1.94.
Return on Equity shows a similar trend with Nike on a slight upward trend of 21.98 to its current TTM of 24.50. Callaway has ranged from the opposite side of the spectrum: -30.31 but climbing to -1.46.
Are they as profitable as they should be? It is difficult to argue with Nike’s results, and say that it could do better. Looking at the increase in stock price over multiple years, Nike is showing sustained growth, while Callaway is floundering at best. Nike may not be able to do more to become more profitable, but Callaway has some definite room for improvement.
2. Now that you have calculated the ratios, what can CB&M do to make them more profitable? What do you suggest?
Examining the income statement, Nike’s expenditures on Operating Expenses is roughly 70% of its gross income, while Callaway spends more than 90% on General and Administrative, and then surpasses 100% through Research Development. I would suggest that Callaway start by investing less in Research and focusing on the products it already has, and then slashing staff to a ratio equivalent to Nike.
3. As a double check provide a DuPont Analysis on both companies.
The Profit margin for Callaway’s most recent performance is 1.45% while Nike is 9.31%.
The Asset turnover for Callaway is .30 while Nike is 1.50
The Return on Assets for Callaway is -3.42 for the period ending in December 2013 and 14.89 for Nike in May of 2014.
The Debt to Asset ratio for Callaway is 0.4798 while Nike is 0.1268.
Callaway has a Return on Equity Percentage of -7.37, which is higher than its low of -31.70. Nike is at 24.50, which is its highest yet (since 2005).
Works Cited
"ELY Balance Sheet | Callaway Golf Company Common St Stock - Yahoo! Finance." ELY Balance Sheet | Callaway Golf Company Common St Stock - Yahoo! Finance. Yahoo.com, 12 Dec. 2013. Web. 21 Sept. 2014. <https://finance.yahoo.com/q/bs?s=ELY+Balance+Sheet&annual>. Three year balance sheet covering the period from May 31,2012 to May 31, 2014.
"NKE Balance Sheet | Nike, Inc. Common Stock Stock - Yahoo! Finance."NKE Balance Sheet | Nike, Inc. Common Stock Stock - Yahoo! Finance. Yahoo.com, 05 May 2014. Web. 21 Sept. 2014. <http://finance.yahoo.com/q/bs?s=NKE&annual>. Three year balance sheet covering the period from May 31,2012 to May 31, 2014.
For both balance sheets, links provided to Income Statements and Cash Flows were followed.
1. Start with the Capital Accounts. How do they differ? How are they the same? Are they realistically presented? What are the Book Values, and what are the present Ratios of the stock Prices to Book Value.
Between Nike and Callaway golf, there is a significant difference in the amounts shown. From the start, it is easy to see that both balance sheets are approximately 6 months apart from one another. While the Nike information is several months old, the Callaway Golf is nearly a year old, and is less likely to reflect the current state of affairs within the company. Regardless of this fact, the main point that is readily significant is the differences between the two companies due to their specific markets, and their size relative to one another. Retained earnings for both companies has fallen over the last three years, however while Nike has fallen only 13% in its retained earnings, Callaway has fallen 89%. Treasury stock for both companies is drastically different as well, with Nike showing none over the three-year period and Callaway reporting a negative balance. I would gather that both appear realistically presented, as I bear in mind the relative breadth of the two companies. Nike diversifies among the entire spectrum of athletic sports, while Callaway is …show more content…
focusing solely on Golf. One has to keep in mind that the size of these two companies, and their ages, are significantly different.
The current book value of Callaway Golf is 7.51 as of 19 September 2014, with a ratio of 1.663. This is significantly higher than the company’s lowest ratio in 2010.
Nike is currently 81.81 with a ratio of 6.563. In addition, Nike is showing steady improvement in this ratio since 2010. Though there is some expected variation, the overall trend is positive.
2. Now look at the Fixed Assets (the Property Account). When you read Chapter Five of the little Graham book you will realize that assets are not always what they appear to be. Do either of your companies show as Assets items that need explanation? What are they? How are they explained? You might have to go into the footnotes to the Financial Statement to find the answers.
The first question I have regards Nike’s Short Term Investments. While Callaway has none, Nike is showing a steady increase over the last two years, and now sits at nearly three million, which is double its 2012 rate. What are these investments? Are they reliable? Who is handling the investing for the company? Many questions arise and there is no readily available information to say what it is Nike is investing in. Neither company is showing Long Term Investments, so it would appear to me that Nike is looking for a quick return, but to what end and by what means?
In actuality, nothing on the assets provides a clear picture of what those assets are, with perhaps the exception of Property Plant and Equipment and Cash, which is rather self-explanatory. You would expect a smaller company to have a lesser amount than a larger company, but the ratios in the assets category just do not make sense when you look at them carefully, without a detailed explanation. I can understand now why Graham and Meredith state that the Balance Sheet is given only cursory notice when buyers and investors are looking at companies.
3. Are the Non Current Assets material and how are they explained? Are there material Intangible Assets? (Chapter 8 in Graham) What would be material for companies as large as the ones you are working with?
As noted previously, there is little explanation given as to the nature of any assets, other than Plant and Property or cash. While Goodwill is considered an intangible asset, both companies list it separate. The section of “Other Assets” leads me to question what qualifies as such for each company, and whether their methods of considering what is qualifying are similar. As most companies should have, both Callaway and Nike have a mix of intangible and material assets. I would consider the material assets to be the manufacturing materials used in their goods, as well as the machinery and property involved, and even the office equipment and supplies that keep the office professionals running.
4. Do your companies have Deferred Tax Accounts? How are they treating taxes?
Neither company is showing a Deferred Tax Account; taxes are calculated in the Income Statement as an expense under the Operating Income or Loss section.
5. Now let’s look at the Current Assets. Are the companies maintaining adequate liquidity? Mr. Moovon is going to want to see the relevant ratios, so you had better calculate them and have them ready. (You will find most of them in Chapter 3 of the text.)
Callaway’s current liquidity ratio is 421603 / 319244. Basic visual cues tell me that it is maintaining adequate liquidity, but the ratio is 1.32.
Nike is doing similarly well, though the amounts utilized are significantly larger: 13696000 / 7770000 totaling 1.76. I personally would like to see a higher ratio with Nike, but when I see that they eliminated some of their current liabilities in the May 2014 period, I am slightly more confident.
6. Liabilities. As Mr. Moovon always says, “You can’t be sure about the Assets but the Liabilities are always real.” Does either company have too much debt? If so, CB&M won’t touch them. Can either company carry significantly more debt? How much more? CB&M always loads the companies it acquires with as much debt as they can carry. That’s how they finance the deal.
The Debt to Total assets percentage is telling.
Nike sits at 41.7% while Callaway is 57.1%. Both companies seem to be higher than average, but Callaway is significantly more so. This in addition to the overall company growth trends tells me that Nike is more able to deal with its debt, and may be able to acquire more in the future, but Callaway (which appears to be operating at a loss for the last three years) will not. I would say prudence would call for zero additional debt for either company until their percentage reaches closer to 30%. However, Nike has shown consistent growth while Callaway has been playing catch
up.
7. Are there any hidden assets? This calls for very careful analysis.
The concept of hidden assets is subjective; however, the sections listed throughout the balance sheets of both companies labeled “other” are red flags to me. Without a detailed explanation of what other means, I have to assume that it is a direct attempt to create an illusion of value.
Nike has listed, as I mentioned earlier, a significant portion of its assets as Short Term Investments. The exact value of the Property Plant and Equipment for both companies is not known. However, in all I have the most question about Nike, and what exactly it is doing with these short term investments.
On both companies, inventory is nebulous. Yes, it is a reflection of the value of goods that the company has yet to sale, but are those goods left over from two years ago? The relative levels are similar throughout the years, but if you look closely, it can be seen that Nike is building up inventory at a larger rate than Callaway. Unsold inventory is actually a loss, or sells at a lower point of profit than current products.
Considering the number of patents, new products, trademarks and marketing in the form of product placements in movies and so forth, it is inconceivable to imagine that all assets are listed on the balance sheet of either company.
One other point of note is that Nike rounds dollar amounts, showing only zeroes for amounts less than 1000, while Callaway is showing whole numbers without rounding (as best as can be discerned). While it makes sense for Callaway to show greater levels of accuracy and detail due to its size, the lack of similar effort by Nike leads me to conclude that I am not seeing accurate figures.
Now move on to the Income Statement: Respond to each question in the order listed 1. Are the companies as profitable as they should be? What ratios would tell us that? OK! Now calculate them. Let’s see those Efficiency Ratios.
Other than the DuPont analysis, which will be completed below, I have no idea what this is referring to, as it does not appear in the text nor any of the assignments we have completed previously. The Classification System on page 58 of the text is the closest thing that seems to provide the information requested.
Over the past three years, Nike has had a relatively stable Return on Assets between 15.04 and its current 14.89 while Callaway is in the negative but improving from -19.26 to -1.94.
Return on Equity shows a similar trend with Nike on a slight upward trend of 21.98 to its current TTM of 24.50. Callaway has ranged from the opposite side of the spectrum: -30.31 but climbing to -1.46.
Are they as profitable as they should be? It is difficult to argue with Nike’s results, and say that it could do better. Looking at the increase in stock price over multiple years, Nike is showing sustained growth, while Callaway is floundering at best. Nike may not be able to do more to become more profitable, but Callaway has some definite room for improvement.
2. Now that you have calculated the ratios, what can CB&M do to make them more profitable? What do you suggest?
Examining the income statement, Nike’s expenditures on Operating Expenses is roughly 70% of its gross income, while Callaway spends more than 90% on General and Administrative, and then surpasses 100% through Research Development. I would suggest that Callaway start by investing less in Research and focusing on the products it already has, and then slashing staff to a ratio equivalent to Nike.
3. As a double check provide a DuPont Analysis on both companies.
The Profit margin for Callaway’s most recent performance is 1.45% while Nike is 9.31%.
The Asset turnover for Callaway is .30 while Nike is 1.50
The Return on Assets for Callaway is -3.42 for the period ending in December 2013 and 14.89 for Nike in May of 2014.
The Debt to Asset ratio for Callaway is 0.4798 while Nike is 0.1268.
Callaway has a Return on Equity Percentage of -7.37, which is higher than its low of -31.70. Nike is at 24.50, which is its highest yet (since 2005).
Works Cited
"ELY Balance Sheet | Callaway Golf Company Common St Stock - Yahoo! Finance." ELY Balance Sheet | Callaway Golf Company Common St Stock - Yahoo! Finance. Yahoo.com, 12 Dec. 2013. Web. 21 Sept. 2014. <https://finance.yahoo.com/q/bs?s=ELY+Balance+Sheet&annual>. Three year balance sheet covering the period from May 31,2012 to May 31, 2014.
"NKE Balance Sheet | Nike, Inc. Common Stock Stock - Yahoo! Finance."NKE Balance Sheet | Nike, Inc. Common Stock Stock - Yahoo! Finance. Yahoo.com, 05 May 2014. Web. 21 Sept. 2014. <http://finance.yahoo.com/q/bs?s=NKE&annual>. Three year balance sheet covering the period from May 31,2012 to May 31, 2014.
For both balance sheets, links provided to Income Statements and Cash Flows were followed.