Nike Shoe Company



Nike Shoe Company

Introduction

Nike is the largest manufacturer of athletic shoes, apparel, and equipment in the world with annual revenues of $18.6 billion. Nike employs 30,000 people around the world, and has roughly 800,000 workers in contract factories. Nike is located in Beaverton, Oregon and was formed in 1962 when the University of Oregon's track coach, Bill Bowerman, and one of his track runners, Phil Knight, paired up and bought a shipment of shoes from Japan. At the time they called the company Blue Ribbon Sports, which they renamed to Nike in 1980. Nike now has 6,000 employees at its Nike World Headquarters.

Operating Leverage

Operating leverage assess how the sales are impacted by incurring greater level of fixed costs. In any manufacturing firm, cost can be classified into variable and fixed cost. Degree of operating leverage is a ratio to determine the effect of operating leverage on the net income of the company. It is calculated by

DOL =

One of the advantages of higher operating leverage is that company can magnify its revenue tremendously. However, higher returns come with higher risk which becomes the downside of higher operating leverage. In case of Nike, Dol is given in the table below:

2011

2010

% ?

EBIT

2,815 2,474

12%

Sales 20,862 19,014

9%

Degree of Operating Leverage

1.36751

Nike DOL is higher which means that it incurs higher fixed cost so operating profits increases quickly with sales.

Return on Investment

ROI is one of the important tools to measure the performance of company's investments. Moreover, it can also be used to compare different investments. This is important because investors based their investment decision based on this when given a choice between different companies. It is calculated as

ROI =

For Nike, it is calculated in the table given below:

2011

2010

Operating Income

2,848

2,532

Invested Capital

10,426

9,925

Return on Investment

27.32%

25.51%

The company has witnessed a growth of 7% in its ROI which has moved from 25.51% in 2010 to 27.32% in 2011. During the year, the company operating income has increased by 11% while invested capital has increased by 5% from 9,925 to 10,426.

The downside of ROI is that it is too simple to incorporate all the risk factors. Therefore, financial analyst and economists often sued advanced techniques to determine and contrast return on different capital projects and investments.

Economic Value Added

The cash flows from the investment substracted by the cost of capital that represents the opportunity cost of the invested capital It gives the same ...