Financial Analysis of Nike and Gap

Nike and Gap Financial Performance

Nike and Gap are two companies that operate worldwide. Each company had a reason it was founded by the owners. The co-founder of Nike, Bill Bowerman, defines his view of endless possibilities for human potential in sports (Bowerman, 2007). The co-founder of Gap, Don Fisher, created Gap with only one simple idea in mind which is “to make it easier to find a pair of jeans” (Fisher, 2007). Each company continues to strive to achieve goals that the co-founder set for it. One way each company tries to achieve these goals are by looking at different ratios. By looking at ratios, management can use these figures to weigh and operate performance of each company. The following ratios will be discussed: current ratio, quick (acid-test) ratio, and total asset turnover, debt to assets ratio, debt to equity ratio, interest coverage ratio, and gross margin on sales, and net profit margin.

The first ratio is current ratio. “The current ratio is a model for measuring the liquidity of a company by calculating the ratio between current assets and all current liabilities” (Kennon, 2007). Nike current ratio for 2006 is 2.81 percent and for 2007 the current ratio is 3.13 percent. Gap current ratio for 2006 is 2.70 and for 2007 the current ratio is 2.21. Many industries average approximately 1.0 to 1.2 percent. The lower ratio means the company is unable to pay bill in a timely manner. The higher ratio signals the company probability has money in investments, extra cash, prepaid expenses, and inventory. The formula for calculating the current ratio is

The next ratio is the quick (acid-test) ratio. “The quick ratio is a more reliable indicator of a company’s ability to meet its short-term financial obligations” (Investopedia, 2007) because this ratio deducts inventory form the company’s assets before the computing the ratio. Nike quick ratio for 2006 is 2.02 percent and for 2007 the quick ratio is 2.30 percent. Gap quick ratio for 2006 id 1.82...