Nike Stock: Capital Structure Analysis (NKE)

Nike Inc. (NYSE: NKE) is one of the world's largest apparel and footwear suppliers. As of April 2016, the company had a trailing 12-month revenue of $31.9 billion and a market cap of $100 billion. Nike's capital structure has high equity capital relative to debt, with a debt-to-total-capital ratio of 0.14, though this figure rose slightly over the 12 months ended February 2016, following a $1 billion bond issuance. The company's enterprise value grew rapidly over the three years leading up to April 2016, driven almost entirely by the appreciating market value of its equity.

Equity capital is a measurement of capital contributed by equity holders and retained earnings, so the value can include common stock at par value, preferred stock and minority interest. As of February 2016, Nike had total shareholder capital of $12.3 billion, comprised of $7.5 billion of additional paid-in capital, $4.1 billion of retained earnings and $645 million of accumulated comprehensive income.

Nike's February 2016 equity capital of $12.3 billion is higher than the $10.8 billion at the fiscal year ended May 2014, but it is slightly lower than the $12.7 billion in May 2015. Nike had retained earnings of $4.9 billion in fiscal 2014 and $4.7 billion in fiscal 2015, contributing to the modest decline in equity capital in early 2016. Through the first three quarters of fiscal 2016, Nike's cash outflows were $752 million on dividends and $2.7 billion on repurchase of common stock, so buybacks were a more significant contributor to falling retained earnings. Accumulated comprehensive income fell through fiscal 2016 from $1.2 billion as of May 2015, pushing equity capital down further. Additional paid-in capital rose from $5.9 billion in fiscal 2014 and $6.8 billion in fiscal 2015, partially offsetting the effects of changes to accumulated comprehensive income and retained earnings.

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 February 2016, Nike's total debt was $2 billion, consisting of only $7 million in short-term debt, $66 million of term loans, and $1.99 billion of bonds and notes. The long-term debt had interest rates ranging from 2% to 6.79%, with maturity dates ranging from 2017 to 2045. Nike's total debt was $1.3 billion at the end of fiscal 2015 and $1.4 billion at the close of fiscal 2014. The company's rising debt load was driven primarily by a $1 billion bond issuance that took place in October 2015. Standard & Poor’s and Moody’s rated the company’s credit high-grade to upper-medium grade.

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. As of February 2016, Nike's debt-to-total-capital ratio was 0.14, which was up from 0.09 at the end of fiscal 2015 and 0.11 in fiscal 2014. This is relatively low financial leverage for a company of Nike's maturity and size. For comparison, Adidas AG (OTC: ADDYY) had a debt-to-total-capital ratio of 0.24 as of December 2015.

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 February 2016, Nike's enterprise value was $97.3 billion, down from the trailing three-year high of $110 billion from December 2015. 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 2015. In January 2013, the company's EV was $43 billion, so the company's three-year compounding annual growth rate was 36.8% over that three-year span.