COMPREHENSIVE PROBLEM 4

adidas AG
adidas AG
An analysis of the annual report of a publicly owned corporation. Actually three comprehensive
problems in one, with the three parts independent of one another. All parts build communication skills
and make excellent group assignments.
Part I:

Form and Content of an Annual Report

Student is asked a variety of questions that can be answered directly
from various elements of the annual report. An excellent
introduction.

60 Easy

Part II:

Evaluating Liquidity
Evaluate the liquidity of the company from the perspective of a
supplier. Involves ratios, judgment, and explanation of conclusions.

50 Medium

Part III: Evaluating the Trend in Profitability

Includes evaluation of the companys level of profitability and a
discussion of the implications for stock price.

The McGraw-Hill Companies, Inc., 2010

CP4-Desc.

40 Strong

60 Minutes, Easy

a.

COMPREHENSIVE PROBLEM 4
adidas AG
PART I

Consolidated balance sheets are presented for two years: 2009 (year ending December
2009) and 2008 (year ending December 2008). Two years of consolidated income
statements, consolidated statement of comprehensive income and expense, consolidated
statement of changes in equity and consolidated statement of cash flows are presented for
the same two years.
These financial statements were audited by the independent auditors, KPMG AG. The
auditor concludes that the financial statements comply with IFRSs, as adopted by the EU,
the additional requirements of German commercial law and gives a true and fair view of
the net assets, financial position and profit or loss.

b.

From the statement of cash flows, it can be seen that the company's cash from operating
activities were 1,198 million for 2009 and 497 million for 2008 respectively. The cash
used in investing activities were 162 million in 2009 and 444 million in 2008. Finally,
cash used in financing activities were 512 million in 2009 and 106 million in 2007. The
company's cash balance increased in 2009 and 2008 by 775 million and 244 million,
respectively.

The McGraw-Hill Companies, Inc., 2010

CP4-Part I

COMPREHENSIVE PROBLEM 4
adidas AG
PART II

50 Minutes, Medium

(Euro Dollars in Thousands)

For the Years Ended
31-Dec-09
a. (1) Current ratio:
4,485 2,836
4,934 3,645

1.6 to 1

(2) Quick ratio:

(775 + 75 + 1,429 + 160 + 126) 2,836
(244 + 141 + 1,624 + 287 + 31) $3,645
(3) Working Capital:
4,485 - 2,836
4,934 - 3,645
(4) Percentage change in working capital:
Current year balance
Previous year balance
Change
Percentage change
359 1,289
(232) 1,522
(5) Percentage change in cash and cash equivalents:
Current year balance
Previous year balance
Change
Percentage change
531 244
(51) 295

.90 to 1

1,649

1,649
1,290
359
27.8%

775
244
531
217.6%

Note to instructor: Students may get slightly different answers due to rounding differences.

The McGraw-Hill Companies, Inc., 2010

CP4-Part II(p.1)

HENSIVE PROBLEM 4
adidas AG
PART II
(Euro Dollars in Thousands)
For the Years Ended
31-Dec-08

1.4 to 1

.64 to 1

1,289

1,290
1,522
(232)
-15.2%

244
295
(51)
-17.3%

rounding differences.

The McGraw-Hill Companies, Inc., 2010

CP4-Part II(p.1)

COMPREHENSIVE PROBLEM 4
adidas AG
PART II (continued)
b.

Liquidity has increased between 2008 and 2009, as evidenced by a higher current ratio (1.6
compared with 1.4), higher working capital, and a percentage increase in working capital (27.9%).
In addition, cash and cash equivalents decreased in 2008 from 295 million to 244 million and
increased in 2009 from 244 million to 775 million.

c.

In the consolidated statement of cash flows, adidas has continuously repaid the debt and
repurchased its shares. The fact that the company is still able to maintain liquid and it also
indicates that the company is well positioned for the future. However, adidas' sales and profit have
been dropped and it provided some reservations on its profitability in future. The ten-year review
also indicates a dropping gross margin, operating margin and profit as a percentage of sales.

d.

Students may upgrade adidas because of improvements in some of the traditional measure of
liquidity (e.g., current ratio), and the company appears to be in a strong financial situation that
warrants an "A. Outstanding" classification. As stated above, the increase in traditional liquidity
measures are caused primarily by its profit, which is favorable to the management to strengthen
the company's future financial position. Alternatively, students may argue that adidas warrants
an "B. Good" as there is a risk of continuously dropped of sales and profit.

The McGraw-Hill Companies, Inc., 2010

CP4-Part II(p.2)

REHENSIVE PROBLEM 4
adidas AG
PART II (continued)

ed by a higher current ratio (1.6

age increase in working capital (27.9%).
rom 295 million to 244 million and

tinuously repaid the debt and

ble to maintain liquid and it also
. However, adidas' sales and profit have
itability in future. The ten-year review
nd profit as a percentage of sales.

some of the traditional measure of

be in a strong financial situation that
ve, the increase in traditional liquidity
able to the management to strengthen
dents may argue that adidas warrants
sales and profit.

The McGraw-Hill Companies, Inc., 2010

CP4-Part II(p.2)

COMPREHENSIVE PROBLEM 4
adidas AG
PART III

40 Minutes, Strong

(Dollars in millions)
For the Years Ended
31 Dec. 2009
31 Dec. 2008
a. (1) Percentage change in sales:
Sales in current year
Sales in previous year
Increase (decrease)
Percentage change
(418) 10,799
500 $10,299
(2) Percentage change in profit:
Profit in current year
Profit in previous year
Increase (decrease)
Percentage change
(399) 644
89 555

4.9%

245
644
(399)

644
555
89

-62.0%
16.0%

45.4%
48.7%

(4) Profit as percentage of sales:

245 10,381
644 10,799

Average total assets:

(8,875 + 9,533) 2
(9,533 + 8,325) 2

10,799
10,299
500

-3.9%

(3) Gross profit rate:

[(sales - cost of sales) sales)]
4,712 10,381
5,256 10,799

(5) Return on average total assets:

Profit

10,381
10,799
(418)

2.4%
6.0%

244

9,204

Return on average assets:

244 9,204
644 9,680
Source of 31 December 2007 total assets ($8,325):
"Ten-Year Overview"

The McGraw-Hill Companies, Inc., 2010

CP4-Part III

644

9,680

2.7%
6.7%

COMPREHENSIVE PROBLEM 4
adidas AG
PART III (concluded)
Millions of Dollars
For the Years Ended
31-Dec-09
(6) Return on average total equity:
Profit
Average shareholders' equity
(3,771 + 3,386) 2
(3,386 + 3,023) 2

245

3,579

Return on average equity:

244 3,579
644 3,205

6.8%

Source of 31 Dec. 2007 shareholders' equity (3,023):

"Ten-Year Review"

b.

adidas' profitability has dropped in 2009 in both absolute dollar terms and in terms of
percentages. In 2008, sales actually increased over 2007, profit also increased. In 2009, both
sales and profit decreased. Changes in various percentages that were computed in part (a) above
were mixed, except the gross profit rate (percentage) which was constant. While the company is
still profitable and is experiencing positive cash flows from operations, its decline in profitability
and negative growth rate bears watching in the future.

The McGraw-Hill Companies, Inc., 2010

CP4-Part III(p.2)

REHENSIVE PROBLEM 4
adidas AG
PART III (concluded)
Millions of Dollars
For the Years Ended
31-Dec-08

644

3,205

20.1%

dollar terms and in terms of

rofit also increased. In 2009, both
s that were computed in part (a) above
h was constant. While the company is
operations, its decline in profitability

The McGraw-Hill Companies, Inc., 2010

CP4-Part III(p.2)