The price earnings ratio is a market expectation ratio, which measures the market value of a stock relative to its earnings by comparing the market price per share by the earnings per share. The price earnings ratio illustrates the willingness of market to pay particular amount for a stock depending on its current earnings. It is useful to use P/E ratio in the case of Nike because all companies analysed belong to the same industry. However, it is also worth nothing that P/E ratio is based on the calculation of earnings per share, thus, management can easily negotiate it by using specific accounting techniques.
Starting with Adidas as the main competitor to Nike in footwear industry the company has a relatively high P/E ratio. This demonstrates that investors are willing to pay more in order to obtain its shares. The investors’ keenness can be triggered by the fact that they expect positive and higher future performance of the given company. Another company with the closest to Nike’s P/E ratio is Skechers. Investors are ready to pay 18.58 euro for every euro of earnings, meaning that this stock is trading at a multiple of 18.58. Other companies such as Puma, Asics and K Swiss have relatively low P/E ratios which can be explained as poor current and future performance of these companies and predict poor investment injected in their budget.
EV/EBITDA
With P/E ratio, it only takes market capitalization into account as firm’s value estimation, but in fact we should also consider the debt and cash of the firm when evaluating the firm. Enterprise Value = Market Capitalization + Debt + Minority Interest + Preferred Shares - Cash and Cash Equivalents. When acquiring the firm, buyer would consider the debt of the target firm. Also, the cash held by the target company will reduce the cost to purchase the company. It would reduce the Enterprise value. Thus, when making comparisons among companies, both debt and cash levels should be considered. In the denominator, we use EBITDA. Different accounting methods such as depreciation affect the reported earnings on the income statement. Sometimes firms in the same industries also calculate their earnings differently. With EBITDA, it is easier to compare firms with different accounting methods such as high depreciation and different tax rates. And it is not affected by the capital structure of the firms. EV/EBITDA is also an important multiple because it withdraws the effect of non-cash items such as depreciation and amortization, which are of little importance to the investors that are mainly interested in cash flows.
As seen from the exhibit 2, Nike has higher EV/EBITDA ratio than all of its competitors. However, Adidas and Asics have similar pattern of ratio such as 8.91 and 8.77 respectively. This indicates that these companies are valued at the right price and this could be triggered by the companies’ growth prospects. On the other hand Puma and Skechers have relatively low EV/EBITDA ratios illustrating that these companies are undervalued.
EV/FCF
EV/FCF
Adidas
18.77
Puma
22.7
Asics
6.86
Skechers
X(FCF is negative)
K Swiss
8.72
Nike
32.03
It means years to generate enough money to pay back the cost of acquisition of the entire company or to reinvest the company. EV/FCF is a similar type of measure to the
