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Adidas Financial Ratio Analysis

Financial ratios provide valuable insights into Adidas’s financial health and performance. Analyzing these ratios over time and comparing them to industry benchmarks reveals trends and potential areas of concern or strength. Here’s an overview of key financial ratios relevant to Adidas:

Liquidity Ratios

These ratios measure Adidas’s ability to meet its short-term obligations. Key liquidity ratios include:

• Current Ratio: Calculated as Current Assets / Current Liabilities. A higher current ratio suggests greater liquidity. Ideally, it should be above 1.0, indicating the company has more current assets than liabilities. A significant decline might signal potential difficulties in paying short-term debts. Analyzing Adidas’s current ratio reveals its capacity to cover its immediate liabilities with available assets like cash, accounts receivable, and inventory.
• Quick Ratio (Acid-Test Ratio): Calculated as (Current Assets – Inventory) / Current Liabilities. This ratio excludes inventory, as it may not be easily converted to cash. A higher quick ratio is generally preferred. Analyzing this ratio provides a more conservative assessment of Adidas’s immediate liquidity, especially considering the potential illiquidity of some inventory items.

Profitability Ratios

These ratios assess Adidas’s ability to generate profits from its operations. Important profitability ratios include:

• Gross Profit Margin: Calculated as (Revenue – Cost of Goods Sold) / Revenue. This indicates the percentage of revenue remaining after deducting the cost of goods sold. A higher gross profit margin suggests better efficiency in production and sourcing. Tracking this margin reflects Adidas’s ability to manage its production costs and maintain pricing power.
• Operating Profit Margin: Calculated as Operating Income / Revenue. This ratio measures profitability before interest and taxes. It reflects the efficiency of core operations. Changes in operating profit margin indicate the impact of operating expenses on profitability.
• Net Profit Margin: Calculated as Net Income / Revenue. This represents the percentage of revenue that translates into net profit after all expenses, including interest and taxes. A higher net profit margin signifies greater overall profitability.
• Return on Equity (ROE): Calculated as Net Income / Shareholders’ Equity. This indicates how effectively Adidas uses shareholders’ investments to generate profit. A higher ROE suggests better performance in utilizing equity to create returns.
• Return on Assets (ROA): Calculated as Net Income / Total Assets. This measures how efficiently Adidas uses its assets to generate profit. A higher ROA indicates better asset utilization.

Solvency Ratios

These ratios evaluate Adidas’s ability to meet its long-term obligations. Key solvency ratios include:

• Debt-to-Equity Ratio: Calculated as Total Debt / Shareholders’ Equity. This indicates the proportion of debt financing relative to equity financing. A higher ratio suggests higher financial risk. Analyzing this ratio indicates Adidas’s leverage and risk profile, particularly relevant to investors.
• Interest Coverage Ratio: Calculated as Earnings Before Interest and Taxes (EBIT) / Interest Expense. This measures Adidas’s ability to cover its interest expense with its earnings. A higher ratio is generally preferred, indicating a lower risk of default.

Efficiency Ratios

These ratios assess how efficiently Adidas uses its assets and liabilities. Key efficiency ratios include:

• Inventory Turnover Ratio: Calculated as Cost of Goods Sold / Average Inventory. This indicates how quickly Adidas sells its inventory. A higher turnover suggests efficient inventory management.
• Accounts Receivable Turnover Ratio: Calculated as Revenue / Average Accounts Receivable. This measures how quickly Adidas collects payments from its customers. A higher turnover indicates efficient credit and collection policies.

By continuously monitoring these and other relevant financial ratios, stakeholders can gain a deeper understanding of Adidas’s financial performance, stability, and growth potential. Comparing Adidas’s ratios to those of its competitors, like Nike and Puma, provides valuable context for assessing its relative standing in the market.

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