Financial Ratio Analysis

Case Analysis
Reebok International, Ltd. (1995): The Nike Challenge
Case Authored By:
Thomas L. Wheelen, Moustafa H. Abdelsamad,
Shirley E. Fieber, and Judith D. Smith
Analysis By:
Tim Sacks
Financial Ratio Analysis
Liquidity Analysis
The current ratio, one of the most currently cited of all financial ratios, indicates that
Reebok had $2.84 and $2.65, in 1993 and 1994, in short term resources to service every
dollar of current debt. These numbers are higher than the industry average, showing
strong liquidity.
The inventory to net working capital ratio for Reebok was .70 and .75 and it shows that
inventory is a substantial portion of the net working capital. Reebok’s financial position
is based primarily on the sale of its inventory.
The quick ratio reveals that the company can easily pay off its current short-term debt
through the sale of its liquid assets.
Profitability Analysis
The net profit margin shows Reebok experienced profit stability over the evaluated twoyear period.
The gross profit margin indicates the total margin available to cover other expenses
beyond cost of goods sold. Reebok consumed 32.9% (1993) and 32.3% (1994) of its
gross profit in selling and other operating expenses.
Reebok has a high Return on Investment (ROI or ROA). The change in ROI from 93
to 94 was -0.7%. ROI shows strengths or weaknesses in management’s ability to manage
assets. ROI also reveals what is driving Reebok’s profits. ROI equals the net profit
margin times the total asset turnover.
Net Profit Margin Asset Turnover
According to the table, Reebok was less efficient managing their assets in 1994, which
led to a decrease in ROA. However, an increase in the profit margin compensated for a
lower asset turnover figure.
The return on equity (ROE) is a critical measure of performance to stockholders
because it shows company growth and earnings. ROE shows how the use of debt in
Reebok’s capital structure magnifies returns.
ROE equals ROA times an equity
multiplier. The equity multiplier is the total assets divided by the total stockholders
total assets total stockholders ROA
1,391,711 846,617
1,649,461 990,505
The chart illustrates that through the use of debt, Reebok magnified its returns to 26.5%
and 25.6%, respectively. In comparison to the industry ROE averages of 16% and 17%,
Reebok has a strong capital structure and uses debt efficiently.
Activity Measures Analysis
Reebok has average asset turnover equal to the industry standard. Their fixed asset
turnover was 70% and 40% higher than the industry average meaning Reebok is
utilizing their facilities and machinery better than competitors, however Reebok
experienced a sharp decline in fixed asset turnover from 1993 to 1994. Additionally, the
total income and fixed assets increased in 1994. This reveals that the increase in fixed
assets contributed less to the total income than in the previous year. The accounts
receivable turnover decreased in 1994 2.7%. The ratio for 1994 is 7% higher than the
industry standard, but the industry has been volatile, falling 13.5% in one year. Reebok
can increase profits by collecting its accounts receivable sooner.
Leverage Position Analysis
Approximately 40% of Reebok’s assets are financed through the use of debt according to
their debt to asset ratio. Reebok increased the use of debt to owners’ equity 3.3% in
1994. This was a smart decision by management, because the cost of capital for funds
provided by creditors is much less than the cost of capital provided by the owners. For
example, the owners’ equity currently earns 15 – 16% ROI, which is much more costly
than most debt.
Company Strengths
Reebok is an international market leader in shoes and apparel. Reebok is the hot brand in
Europe. They organized their company into a Specialty Business Group, International
Division, and The Reebok Division. Their corporate organization tailors to the dynamic
needs of the market it represents.
Reebok has 40% of total shares generated by
international sales. Their Freestyle line, a fashion-oriented aerobic shoe is a new market
niche, developed through Reebok’s active growth strategy that includes continuous
product development.
To achieve product differentiation, Reebok developed
performance enhancers for their athletic shoes.
provides a customized fit, comfort and support.
The Instapump Chamber System
A major weakness of Reebok is located in their top management.
They lack top
management depth and face high management turnover. This is attributed to the CEO,
Paul Fireman’s inability to delegate efficiently. Key employees and top management
were sometimes left out of the “loop”. Additionally, the board of directors felt Fireman’s
salary was too high.
In advertising, Reebok had difficulty positioning itself. Reebok changed advertising
agencies eight times and they earned a reputation as a difficult client. Reebok aimed to
differentiate its shoe and apparel lines and hired Shaquille O’Neal as a superstar endorser.
Then Reebok changed advertising agencies and Shaq’s new role was contradictory to the
Reebok largest customer is Footlocker, yet they established poor relations with them,
when they ignored their request to manufacture a specialty line exclusively for
Footlocker. Reebok was a poor listener to Footlocker, which has a good ear to consumer
wants and needs.
In 1996 Reebok will sponsor many National Olympic Committees. About 3000 athletes
are to wear Reebok shoes and apparel at the 1996 Summer Olympics along with being
the official athletic footwear sponsor of the NBC telecast of the games.
Reebok used the World Wide Web to research their products through a forum to ask
questions about products and interviews with major Reebok endorsers. Reebok uses
marketing promotions in high school and extreme sports to develop a niche towards
differentiation focused athletic shoes. These focused athletic shoes include Preseason
shoes and shoes made for extreme athletes.
Nike, the world’s top marketer of high quality footwear and sports apparel, has greater
market share with increasing sales.
They are always a threat to Reebok.
manufactures most of its shoes in China and Indonesia, where socio-cultural and political
legal controversies commonly arise. Recently, a socio-cultural change in preference to
brand apparel instead of team logo wear has cut into Reebok’s apparel sales. Lastly, the
athletic shoe industry has had a few new entrants taking market share. Ryka a women’s
shoe manufacturer is competing with Reebok on their original core competency,
producing women’s athletic shoes.
The Future of Reebok
Reebok has the opportunity to continue its increase in international sales. Financially,
Reebok has the strength to sustain further growth. However, Reebok must be more
sensitive to their global reputation. There are few goals for Reebok and might have
trouble internationally if their main goal is to increase sales to just 50%. They need to
develop a more detailed plan on how they will accomplish this. By changing advertising
agencies frequently, Reebok has dug themselves a marketing hole. To accomplish their
current goals they need to produce better marketing campaigns.
Immediately, Reebok should drastically improve its relation with its largest distributor
Footlocker. Then evaluate its manufacturing situation in the Far East, to see if the
benefits outweigh the costs of a lowered reputation. The firm’s ROI has decreased and
they need to manage their new assets better. I would recommend a brief turnaround
strategy. Contraction would include increasing their accounts receivable turnover to
increase profits by collecting their accounts sooner and divesting in unprofitable divisions
that don’t follow their marketing strategy like the health and fitness clubs. Then in the
Consolidation phase they can measure their success by aiming for increases in their fixed
asset turnover and ROI ratios.
Lastly, and most importantly, Reebok needs to improve their top management
environment and utilize the skill that they are paying for. Ignoring delegation duties in
the top management will not reduce the management turnover and will limit
management’s progress.