Roe and Roa Analysis

With my Return on Equity and Return on Assets analysis I compared the two firms, Nike and Adidas. An increasing ROE over time indicates that a firms investments are producing a higher return than their past investments, Nike and Adidas are both showing increasing ROE’s. ROE is computed by multiplying five ratios together, tax burden, interest burden, margin, turnover, and finally leverage. This formula can be simplified down into just Net Profit/Equity, however it is helpful to look at all the ratios better analyze a firms prospects.

Two of the factors in the ROE formula are the factors that make up Return on Assets, these factors are Margin and Turnover. Margin is found by dividing EBIT by Sales and the higher the margin the better. Nike shows a slightly decreasing margin while Adidas shows a slightly increasing margin, but Nike has higher margins than Adidas in 2010 and 2011 which is a factor as to why Nike has a higher ROE and ROA than Adidas. The other factor to ROA is Turnover which is Sales divided by Assets, again the higher the ratio the better, and again both firms have increasing ratios from 2010 to 2011, Nike has the higher ratio factoring into why it has the higher ROE and ROA.

The remaining three ratios factoring into ROE do not factor into ROA, the first of these is Tax Burden which is Net Profit/Pretax Profit. The higher this ratio the better and Nike and Adidas both show increasing ratios for this factor. In 2010 Adidas had the higher ratio by a small amount, but in 2011 Nike surpassed Adidas by a large amount contributing again to why it has the higher ROE. The Interest Burden ratio is Pretax Profit/EBIT, this ratio is dependent on a firm’s capital structure because the more debt a firm has the higher the Interest Burden, so in essence it is a measure of financial leverage. Over the two years Nike’s ratio stayed the same while Adidas actually increased, Adidas had a slightly higher ratio in both years. The final factor is Leverage...