Can you explain how to measure a company’s efficiency on the example of two leading companies?
Nike and Adidas are both sportswear companies who tend to rely massively on sponsorship deals to strengthen their brand power to make their products more attractive, with Nike being the strongest when compared to Adidas. Nike is able to capitalize on its unique identity due to our industry-leading financial strength. Nike reaches millions of consumers through large-scale marketing campaigns made possible by significant budgetary appropriations. Few companies have such a recognizable image and the resources to promote it. The diversification strategies adopted by Adidas are more concentric and horizontal diversification strategies which are spreading out into many linked items such as shower gels and deodorant.
- Operational efficiency
For this section, I have worked out the total asset turnover which measures the company’s ability to generate sales given its investment in total assets. For example, a ratio of 3 will mean that for every dollar invested in total assets, the company will generate 3 dollars in revenues. These ratios under Nike and Adidas are both very low (see appendix 1) and so this suggests that they both are similar in terms of generating their income.
- Margin stability
Nike is the global leader in sportswear and is unlikely to change. Under Adidas, they have much higher gross profit margins than Nike and therefore, have no interest in starting advertising or sponsorship battles with the market leader (see appendix 2). It is a measure of the business’s ability to efficiently turn revenue into profit. A low gross profit means that relative to industry peers, you struggle to create profits on sales.
I have also computed the debt to equity ratio for Nike and Adidas (see appendix 3) from this we can see that Nike has a higher debt/equity ratio for the year 2016 and this generally means that a company has been aggressive in financing its growth with debt when compared to Adidas. Aggressive leveraging practices are often associated with high levels of risk.