Nike Stock: Capital Structure Analysis

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

As of August of 2021, the company had a trailing 12-month revenue of $46.19 billion and a market cap of $275 billion. Nike's capital structure has high equity capital relative to debt, with a debt-to-equity ratio of 0.66, though this figure rose sharply in 2020 due to store closures. The company's enterprise value grew rapidly in the five years leading up to 2021, driven almost entirely by the appreciating value of its equity.

Key Takeaways

  • Nike is one of the world's largest apparel and footwear suppliers, with a market cap above a quarter of a trillion dollars.
  • In 2021, Nike's equity capital was worth $12.8 billion, a sharp increase from previous years.
  • Nike has comparatively high equity capital, with a debt-to-equity ratio of 0.66
  • In order to maintain liquidity during the COVID-19 pandemic, Nike suspended share repurchases and issued $5.9 billion in corporate bonds near the end of 2020.
  • Nike's enterprise value was around $280 million as of November 2021.

Equity Capital

Equity capital is a measurement of capital contributed by equity holders and retained earnings, including common stock at par value, preferred stock, and minority interest. In the fiscal year ending in May 2021, Nike had total shareholder equity of $12.8 billion, with $9.97 billion of capital in excess of par, and $3.1 billion in retained earnings.

Nike's equity capital of $12.8 billion represents a sharp increase over previous years. The company's equity capital was worth $9.0 billion in the fiscal year of 2019, before falling 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 on dividends and $608 million on the repurchase of common stock, so buybacks were a less significant contributor to falling 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 typically includes all short- and long-term debt, such as bonds, term loans, and unsecured notes, though a wider set of liabilities is occasionally used by some investors. Debt financing is generally senior to equity financing in the event of liquidation, though it is often acquired at a lower cost by firms with sufficient creditworthiness.

As of May 2021, Nike's total debt averaged 12.9 billion over the preceding five quarters, mostly consisting of $9.4 billion in total long-term debts. Other obligations included $2.9 billion in operating lease liabilities and $2.96 billion in deferred income taxes.

The company's rising debt load was driven primarily by a $5.9 billion bond issuance 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, representing high or upper-medium grade creditworthiness.

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

Financial Leverage

Financial leverage measures the amount to which a company's capital structure uses debt financing relative to equity financing. The debt-to-total-capital ratio is a useful metric when tracking trends in leverage over time, or when comparing firms. This figure is calculated by dividing total debt by the sum of total debt plus shareholder capital.

As of May 2021, Nike's debt-to-total-capital ratio was 42%, which was down from 55% at the end of fiscal 2020. For comparison, Adidas' debt-to-total-capital ratio around the same time period was 27%.

Enterprise Value

Enterprise value (EV) measures a firm's total value based on the market values of common stock, preferred stock, debt, and minority interest, less cash, and investments.

As of November 2021, Nike's enterprise value was $280 billion, up from 215 billion a year earlier. Strong financial results, a charging U.S. equity market, and increasing debt caused Nike's enterprise value to rise sharply over the three years ending in 2021.

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