Nike stock: capital structure analysis

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Nike Inc. (NYSE: NKE) is one of the world’s largest apparel and footwear suppliers. With a market capitalization of over a quarter of a trillion dollars, it is also one of the most recognized consumer brands.

As of August 2021, the company had 12-month revenue of $46.19 billion and a market capitalization of $275 billion. Nike’s capital structure has a high equity to debt ratio, with a debt-to-equity ratio of 0.66, although this figure rose sharply in 2020 due to store closures. The company’s enterprise value has grown rapidly in the five years to 2021, driven almost entirely by appreciation in the value of its equity.

Key points to remember

  • Nike is one of the largest apparel and footwear suppliers in the world, with a market cap of over a quarter of a trillion dollars.
  • In 2021, Nike’s equity was worth $12.8 billion, a big increase from previous years.
  • Nike has relatively high equity, with a gearing ratio of 0.66
  • To maintain liquidity during the COVID-19 pandemic, Nike suspended share buybacks and issued $5.9 billion in corporate bonds towards the end of 2020.
  • Nike’s enterprise value was approximately $280 million in November 2021.

Equity

Equity is a measure of capital contributed by shareholders and retained earnings, including common shares at par value, preferred shares and minority interests. In the fiscal year ending May 2021, Nike had total shareholders’ equity of $12.8 billion, with $9.97 billion in above-par capital and $3.1 billion in retained earnings.

Nike’s registered capital of $12.8 billion represents a sharp increase from previous years. The company’s equity stood at $9.0 billion in fiscal 2019, before dropping to $8.0 billion the following year. Nike had retained earnings of $1.6 billion in fiscal 2019, declining to a deficit of $191 million the following year.

In 2021, Nike’s cash outflows were $1.7 billion from dividends and $608 million from common stock repurchases, so repurchases contributed less to the decline in retained earnings. Other comprehensive income fell from a deficit of $56 million in fiscal 2020 to a loss of $380 million in 2021.

Debt capital

Debt capital generally includes all short-term and long-term debt, such as bonds, term loans, and unsecured notes, although a broader set of liabilities is sometimes used by some investors. Debt financing is generally given priority over equity financing in the event of liquidation, although it is often acquired more cheaply by companies with sufficient creditworthiness.

As of May 2021, Nike’s total debt averaged $12.9 billion over the previous five quarters, primarily comprised of $9.4 billion in total long-term debt. Other obligations included $2.9 billion in operating lease liabilities and $2.96 billion in deferred income taxes.

The company’s growing indebtedness is primarily due to a $5.9 billion bond issue that took place in the last quarter of 2020. Nike’s bonds are rated AA- by Standard and Poor’s and A1 by Moody’s, which represents high or upper average creditworthiness.

Nike’s debt is rated AA- by Standard & Poors and A1 by Moody’s. These ratings represent high or upper-medium credit quality, respectively.

Financial leverage

Leverage measures the amount at which a company’s capital structure uses debt financing compared to equity financing. The debt-to-total capital ratio is a useful measure for tracking debt trends over time or for comparing companies. This figure is calculated by dividing total debt by the sum of total debt plus share capital.

As of May 2021, Nike’s total debt-to-equity ratio was 42%, down from 55% at the end of fiscal 2020. For comparison, Adidas’ debt ratio over the same period was 27%.

Enterprise value

Enterprise Value (EV) measures the total value of a business based on the market values ​​of common stock, preferred stock, debt, and minority interests, less cash and investments.

In November 2021, Nike’s enterprise value was $280 billion, up from $215 billion a year earlier. Strong financial results, a loaded U.S. stock market and growing debt have driven Nike’s enterprise value up sharply in the three years to 2021.

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