Financial Statement Analysis & Security Valuation (Fifth Edition)

Financial Statement Analysis & Security Valuation (Fifth Edition)
Stephen Penman (2012)
Roadmap to Developing Your Own Financial Statement Analysis and Valuation Product
Introduction
This roadmap leads you through the steps to create a valuation tool. With this tool you will be a
in a spreadsheet program, analyze the financial statements using the techniques in the book, fo
and value firms from those pro forma financial statements. In the end you will have a valuable
professional life and to use for your own personal investing.
Use the tool for:
Reformulating financial statements (as in Chapters 8-11)
Analyzing financial statements (as in Chapters 12-13)
Forecasting and valuation (as in Chapters 14-16)
Reverse Engineering (Chapter 7, 19)
You will find that building your own analysis product is very satisfying. It will help you grasp the
concepts come to life as you make them work for you in practice. And you will discover the poin
Off-the-shelf spreadsheet programs that you can use at the press of a button are available but
not sure about what is going on inside the program. Better to develop your own model, followin
of the integrity of the product.
Once you have followed the roadmap here, think of adding your own bells and whistles. You ca
industries. You can add a quality of earnings analysis (as in Chapter 17). You can utilize sprea
and risk analysis (as in Chapter 18). And you can add a credit analysis (as in Chapter 19).
Please note that the numbers presented in this spreadshhet might not be exactly same as thos
rounding difference.
and Valuation Product
With this tool you will be able to reformulate financial statements

techniques in the book, forecast pro forma financial statements,
you will have a valuable tool to carry with you into your
It will help you grasp the concepts behind the analysis, for the
d you will discover the points where your understanding is weak.
a button are available but pressing buttons is dangerous if you are
p your own model, following sound principles, and so be assured
bells and whistles. You can customize the tool for particular
17). You can utilize spreadsheets features for scenario planning
is (as in Chapter 19).
t be exactly same as those on the textbook mainly because of
Financial Statement Analysis & Security Valuation Fifth Edition)

Stephen Penman 2012
The roadmap: steps for building the product

Chapter 8 gives the form of the financial statements you should work with and the accounting relations that tie the various parts of
the statements together. So read this chapter before beginning.
Start with reformulation of the financial statements within a spreadsheet, following the design in the book. Then carry out the
financial statement analysis to identify the relevant drivers for forecasting. Next forecast future financial statements and develop a
valuation from the forecasts.
Work with the textbook beside you. The most relevant part of the text is Chapter 7 to Chapter 16, where financial statement analysis
and valuation are covered in detail. Nike Inc. serves as an example of the application techniques described in the chapters. This
case utilizes Nike's financials for 2000-2010.
The steps:
1. Download financial statements
2. Reformulate financial statements
Statements of shareholders' equity
Income statements
Balance sheets
Financial Statement Analysis and Security Valuation: Roadmap
Stephen H. Penman 2003
Statements of cash flows

3. Financial statement analysis
Ratios based on reformulated financial statements
Analysis of profitability
Analysis of growth
Common size and trend analysis
4. Forecasting and valuation
Valuation essentials
Simple forecasting and valuation
Full-information forecasts and valuation
5. Bells and whistles
The sections in this primer cover these steps in order.
the various parts of
n carry out the

ments and develop a
cial statement analysis

the chapters. This

Stephen Penman 2012
Step 1: Download Financial Statements
The US Securities and Exchange Commission's Electronic Data Gathering, Analysis and Retrieval (SEC EDGAR) system provides
electronic access to companies' financial reports. Access a company through EDGAR at
http://www.sec.gov/edgar/searchedgar/companysearch.html Several more intelligent interfaces to the EDGAR database have been
developed, which enable the downloading of the individual financial statements directly to a spreadsheet program like Microsoft Excel.
Three of these are:
1. EDGARscan developed by PricewaterhouseCoopers at http://edgarscan.pwcglobal.com;
2. 10k Wizard at http://www.10kwizard.com;
3. Edgar Online at http://www.sec.gov/edgar/searchedgar/companysearch.html
These sites require subscriptions, however.

All these websites allow searches for companies using either company name or its ticker. You can then select the reports you need. Mos
of the time, you need the annual 10K reports that contain annual financial statements. You can find the financial statements within the
annual 10K reports and will see instructions on how to extract them into Excel files. As each annual report contains financial statements
for the year and one or two years before, you will need to go back to another annual reports of the company to get financial statements fo
a longer period. Individual spreadsheet files can then be merged into the format you like.
(SEC EDGAR) system provides
the EDGAR database have been

dsheet program like Microsoft Excel.
then select the reports you need. Most
d the financial statements within the
al report contains financial statements
company to get financial statements for

Stephen Penman 2012
Step 2: Reformulation
Analysis begins with the reformulation of financial statements. Reformulation readies the statements for analysis within a spreadsheet.
The aim is to:
Separate operating and financing items in the statements
Bring additional information into the statements from footnotes and elsewhere. The financial statements aggregate a lot of
information (particularly the income statements). Break down the aggregation to give more detail.
Allocate taxes in the income statement to operating and financing activities
Distinguish different components of income such as core operating income from sales, other core operating income, and unusual
items
Before beginning, make sure you understand the reformulation template in Chapter 8 of the book. Chapters 8-11 cover the rules and
principles for reformulation.
Spreadsheet programs like Excel allows you to use either the simple copy-and-paste method or the formula method to manipulate the
financial statements when doing the reformulation.
In the next section, the reformulated statements of shareholders' equity, balance sheets, income statements, and cash flow statements fo
Nike Inc. for 2000-2010 are given next to the original statements. Note the following points on the reformulation:
(a) Unearned stock compensation that arose from issuing shares to employees in fiscal year 2004 is an operating asset, so is moved from
the statement of shareholders' equity to the balance sheet. This is like prepaid wages and is amortized to the income statement over a
service period.
(b) Cash and cash equivalents in the balance sheets are split between a portion for operating needs and investment of excess cash in
financial assets
(c) Some additional expense items have been added to the income statements from the footnotes.
(d) Core and unusual operating items have been distinguished in the income statements.
(e) The tax allocation in the income statements involves not only allocating taxes between operating and financing activities but also
between core operating income and the restructuring charges. Note that foreign currency translation gains and losses are already after
tax.
or analysis within a spreadsheet.
atements aggregate a lot of

ail.
re operating income, and unusual
apters 8-11 cover the rules and
rmula method to manipulate the
ments, and cash flow statements for

rmulation:
n operating asset, so is moved from

d to the income statement over a
nd investment of excess cash in
nd financing activities but also

gains and losses are already after

Stephen Penman 2012
Summary of reformulation steps
1. Statement of Shareholders' Equity
1) Restate beginning and ending balances for items incorrectly included in or excluded from common equity
-Preferred stock (take out from SE and include in "financial liabilities" in B/S).
+Dividends payable (take out from "accrued liabilities" in B/S and include in SE)
- Noncontrolling interest
2) Calculate net transactions with shareholders

= Cash dividends +share repurchases - share issues
(Cash dividends = dividends declared - change in dividends payable)
3) Calculate comprehensive income
= Net income +"other comprehensive income"
-Earnings from accounting changes
-Preferred dividends
-Hidden dirty-surplus losses
2. Balance Sheet
1) Classify GAAP assets and liabilities accounts into 4 categories: OA, FA, OL, FL
2) Regroup accounts under NOA (OA, OL) and NFA (FA, FL)
3) Refer to comments in the NIKE example to make adjustments for specific accounts
3. Income Statement
1) Reclassify GAAP income and expense items into core operating, non-core operating, and financial activities
2) Read footnotes carefully for income and expense items to find any non-core activities incorrectly classified under core activities
3) Account for tax effects in reclassifying incomes and expense items to make them after-tax basis
4) Bring "other comprehensive income" from the Statement of Shareholders' Equity. Most of them go under non-core operating
activities. No need to account for tax for these since they are after-tax basis
4. Statement of Cash Flows
No need to make major adjustments. Derive Free Cash Flow under two different methods.
5. Reformulation Checks
Link accounts from four statements to ensure that numbers are reconciled according to the equations in Chapter 7.
Chapter 8.
Notes:
Pre-2006, for Shareholder's Equity, we need to adjust for equity from stock compensation ("unearned stock compensation"), which
is take out from SE and include in prepaid expenses.
mmon equity
ancial activities
ctly classified under core activities
asis
m go under non-core operating
ations in Chapter 7.
arned stock compensation"), which
Financial Statement Analysis and Security Valuation (Fifth Edition)

Stephen Penman 2012
2.1. Reformulation of the Statement of Shareholders' Equity
NIKE INC. STATEMENT OF SHAREHOLDERS' EQUITY
(in millions)
COMMON
CLASS A
in millions
BALANCE AT MAY 31, 1999
Stock options exercised
Conversion to Class B Common Stock
Repurchase of Class B Common
Dividends on Common Stock
Issuance of shares to employees
Amortization of unearned compensation
Comprehensive Income:
Net income
Foreign currency translation
Comprehensive Income
Forfeiture of shares from employees
Net income
Net income
Cumulative effect of change in accounting principle
Adjustment for fair value of hedge derivatives
SHARES
100.7
AMOUNT
0.2
(1.5)
STOCK
CLASS B
SHARES
181.6
1.3
1.5
(14.5)
CAPITAL IN
ACCUMULATED OTHER
EXCESS OF UNEARNED STOCK
COMPREHENSIVE
AMOUNT STATED VALUE
COMPENSATION
INCOME
2.7
334.1
38.7
(0.1)
(17.3)
0.5
99.2
0.2
(0.1)
170.4
2.9
0.1
(4.0)
13.5
2.6
369.0
91.0
(68.9)
(11.7)
(42.2)
(42.2)
(111.1)
6.7
(2.5)
3,334.6
38.7
(627.1)
(131.5)
(644.5)
(131.5)
1.8
579.1
579.1
(42.2)
536.9
3,136.0
91.0
(157.0)
(129.6)
###
(1.9)
579.1
2,887.0
(152.2)
(129.6)
(6.7)
7.3
1.2
(0.6)
589.7
99.1
0.2
(1.0)
169.5
1.7
1.0
(4.3)
2.6
459.4
72.9
(9.9)
(41.0)
(41.0)
(152.1)
(5.2)
0.2
13.2
(0.1)
(1.6)
589.7
3,194.3
(232.5)
(128.6)
(1.9)
6.5
0.2
(1.5)
663.3
98.1
0.2
168.0
2.6
538.7
(5.1)
(1.5)
56.8
(95.6)
(40.3)
(192.4)
TOTAL
3,066.5
(13.5)
1.8
(4.8)
0.1
RETAINED
EARNINGS
663.3
3,495.0
589.7
(41.0)
548.7
3,494.5
72.9
(237.7)
(128.6)
11.3
###
(2.9)
663.3
(1.5)
56.8
(95.6)
623.0
3,839.0

Net income
Net income
(0.3)
1.3
0.3
(4.0)
48.2
0.3
9.6
(0.1)
(2.7)
48.2
(4.8)
(186.2)
(142.7)
(0.2)
3.7
1.0
(0.9)
474.0
97.8
0.2
(20.2)
(0.1)
165.8
5.5
20.2
(6.4)
2.6
589.0
284.9
(0.6)
127.4
(174.7)
(47.3)
(239.7)
474.0
3,639.2
(7.6)
23.2
(406.7)
(194.9)
(7.5)
2.6
(1.7)
(0.3)
945.6
0.1
185.5
4.4
474.0
127.4
(174.7)
426.7
3,990.7
284.9
0.1
0.4
77.6
(191.0)
(142.7)
9.4
###
(2.6)
2.7
887.8
273.2
(5.5)
27.5
125.9
153.4
(86.3)
945.6
3,982.9
(414.3)
(194.9)
15.7
###
(2.0)
945.6
27.5
125.9
1,099.0
4,781.7
273.2
Balance at May 31, 1999

Transactions with Shareholders
Stock issues for stock options
Stock issued to employee
Stock repurchases
Common dividends
Comprehensive income
Net income reported
Net translation gain (loss)
Loss on option exercise
Tax benefit
Stock repurchases
Common dividends
Net income reported
Tax benefit

Stock repurchases
Common dividends
Net income reported
3,334.6
63.7
13.5
(644.5)
(131.5)
(698.8)
579.1
(42.2)
(39.9)
14.9
(25.0)
511.9
3,147.7
145.2
3.6
(157.0)
(129.6)
(137.8)
589.7
(41.0)
(86.6)
32.4
(54.2)
494.5
3,504.4
96.4
10.1
(237.7)
(128.6)
(259.8)
663.3

Net hedging gain (loss)
Adjustment for Accounting Changes
Tax benefit
(1.5)
(95.6)
56.8
(37.4)
13.9
(23.5)
599.5
3,844.1

Stephen Penman 2012
2.2. Reformulation of Balance Sheets
NIKE INC. BALANCE SHEETS

(in millions)
CLASSIFICATION
ASSETS
Current Assets:
Cash and equivalents
Short-term investments
Accounts receivable, net
Inventories
Deferred income taxes
Income taxes receivable
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Identifiable intangible assets
Deferred income taxes and other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt
Notes payable
Accounts payable
Accrued liabilities
Income taxes payable
Total current liabilities
Long-term debt
Deferred income taxes and other liabilities
Redeemable Preferred Stock
Shareholders' Equity:
Common Stock at stated value:
Class A convertible
Class B
Capital in excess of stated value
Unearned stock compensation
Accumulated other comprehensive income
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity
OA & FA
FA
OA
OA
OA
OA
OA
OA
OA
OA
OA
FL
FL
OL
OL
OL
FL
OL
FL
2010/05/31
2009/05/31
2008/05/31
2007/05/31
2005/05/31
$3,079.1
2,066.8
2,649.8
2,040.8
248.8
$2,291.1
1,164.0
2,883.9
2,357.0
272.4
$2,133.9
642.2
2,795.3
2,438.4
227.2
$1,856.7
990.3
2,494.7
2,121.9
219.7
$954.2
1,348.8
2,395.9
2,076.7
203.3
$1,388.1
436.6
2,262.1
1,811.1
110.2
873.9
10,959.2
1,931.9
187.6
467.0
873.6
14,419.3
765.6
9,734.0
1,957.7
193.5
467.4
897.0
13,249.6
602.3
8,839.3
1,891.1
448.8
743.1
520.4
12,442.7
393.2
8,076.5
1,678.3
130.8
409.9
392.8
10,688.3
380.1
7,359.0
1,657.7
130.8
405.5
316.6
9,869.6
7.4
138.6
1,254.5
1,904.4
59.3
3,364.2
445.8
855.3
0.3
32.0
342.9
1,031.9
1,783.9
86.3
3,277.0
437.2
842.0
0.3
6.3
177.7
1,287.6
1,761.9
88.0
3,321.5
441.1
854.5
0.3
30.5
100.8
1,040.3
1,303.4
109.0
2,584.0
409.9
668.7
0.3
0.1
2.7
3,440.6
0.1
2.7
2,871.4
0.1
2.7
2,497.8
0.1
2.7
1,960.0
214.8
6,095.5
9,753.7
14,419.3
367.5
5,451.4
8,693.1
13,249.6
251.4
5,073.3
7,825.3
12,442.7
177.4
4,885.2
7,025.4
10,688.3
OA
CSE
2006/05/31
2004/05/31
2003/05/31
2002/05/31
2001/05/31
2000/05/31
343.0
6,351.1
1,605.8
135.4
406.1
295.2
8,793.6
$828.0
400.8
2,120.2
1,650.2
165.0
364.4
5,528.6
1,611.8
135.4
366.3
266.6
7,908.7
$634.0
2,083.9
1,514.9
221.8
332.5
4,787.1
1,620.8
65.6
118.2
229.4
6,821.1
$575.5
1,804.1
1,373.8
140.8
260.5
4,154.7
1,614.5
232.7
206.0
232.1
6,440.0
$304.0
1,621.4
1,424.1
113.3
162.5
3,625.3
1,618.8
178.7
218.6
178.2
5,819.6
$254.3
1,567.2
1,446.0
111.5
2.2
215.2
3,596.4
1,583.4
195.7
215.2
266.2
5,856.9
255.3
43.4
952.2
1,286.9
85.5
2,623.3
410.7
550.1
0.3
6.2
69.8
843.9
984.3
95.0
1,999.2
687.3
462.6
0.3
6.6
146.0
780.4
979.3
118.2
2,030.5
682.4
413.8
0.3
205.7
75.4
572.7
1,036.2
130.6
2,020.6
551.6
257.9
0.3
55.3
425.2
504.4
765.3
83.0
1,833.2
625.9
141.6
0.3
5.4
855.3
432.0
472.1
21.9
1,786.7
435.9
102.2
0.3
50.1
924.2
543.8
621.9
2,140.0
470.3
110.3
0.3
0.1
2.7
1,451.4
(4.1)
121.7
4,713.4
6,285.2
9,869.6
0.1
2.7
1,182.9
(11.4)
73.4
4,396.5
5,644.2
8,793.6
0.1
2.7
887.8
(5.5)
(86.3)
3,982.9
4,781.7
7,908.7
0.2
2.6
589.0
(0.6)
(239.7)
3,639.2
3,990.7
6,821.1
0.2
2.6
538.7
(5.1)
(192.4)
3,495.0
3,839.0
6,440.0
0.2
2.6
459.4
(9.9)
(152.1)
3,194.3
3,494.5
5,819.6
0.2
2.6
369.0
(11.7)
(111.1)
2,887.0
3,136.0
5,856.9
Financial Statement Analysis and Valuation: Roadmap
NIKE INC. REFORMULATED BALANCE SHEETS

(in millions)
2010/05/31
Net operating assets (NOA):
Operating assets
Accounts receivable, less allowance for doubtful accounts
Inventories
Goodwill
Total operating assets
Operating liabilities
Accounts payable - non-interest bearing
Accrued liabilities
Total operating liabilities
Net financial assets (obligations) (NFA/NFO):
Financial assets
Cash equivalent
Total financial assets
Financial liabilities
Notes payable
Accounts payable - interest bearing
Long-term debt
Total financial liabilities
Net financial assets (obligations) (NFA/NFO)
Common Shareholders' Equity (CSE)
2009/05/31
2008/05/31
2007/05/31
2006/05/31
2005/05/31
2004/05/31
$95.1
2,649.8
2,040.8
873.9
1,931.9
187.6
467.0
1,122.4
9,368.5
$95.9
2,883.9
2,357.0
765.6
1,957.7
193.5
467.4
1,169.4
9,890.4
$93.1
2,795.3
2,438.4
602.3
1,891.1
448.8
743.1
747.6
9,759.7
$81.6
2,494.7
2,121.9
393.2
1,678.3
130.8
409.9
612.5
7,922.9
$74.8
2,395.9
2,076.7
384.2
1,657.7
130.8
405.5
519.9
7,645.5
$68.7
2,262.1
1,811.1
354.4
1,605.8
135.4
406.1
405.4
7,049.0
$61.3
2,120.2
1,650.2
369.9
1,611.8
135.4
366.3
431.6
6,746.7
1,166.3
1,773.7
59.3
855.3
3,854.6
5,513.9
953.4
1,662.5
86.3
842.0
3,544.2
6,346.2
1,221.7
1,649.0
88.0
854.5
3,813.2
5,946.5
995.7
1,210.5
109.0
668.7
2,983.9
4,939.0
882.5
1,207.5
85.5
550.1
2,725.6
4,919.9
790.8
919.0
95.0
462.6
2,267.4
4,781.6
736.5
926.7
118.2
413.8
2,195.2
4,551.5
2,984.0
2,066.8
5,050.8
2,195.2
1,164.0
3,359.2
2,040.8
642.2
2,683.0
1,775.1
990.3
2,765.4
879.4
1,348.8
2,228.2
1,319.4
436.6
1,756.0
766.7
400.8
1,167.5
7.4
138.6
88.2
445.8
0.3
680.3
4,370.5
32.0
342.9
78.5
437.2
0.3
890.9
2,468.3
6.3
177.7
65.9
441.1
0.3
691.3
1,991.7
30.5
100.8
44.6
409.9
0.3
586.1
2,179.3
255.3
43.4
69.7
410.7
0.3
779.4
1,448.8
6.2
69.8
53.1
687.3
0.3
816.7
939.3
6.6
146.0
43.9
682.4
0.3
879.2
288.3
9,884.4
8,814.5
7,938.2
7,118.3
6,368.7
5,720.9
4,839.8
for the year ended

Operating revenue
Cost of sales
Gross margin
Operating expenses
Administrative expenses
Advertising
Amortization of identifiable intangibles
Other expense, net
Total operating expenses
Core operating income (before tax)
Tax on operating income
Tax as reported
Tax on other operating income
Tax benefit from net interest expenses
Total tax on operating income
Core operating income (after tax)
2010/05/29
$19,014.0
10,213.6
8,800.4
2009/05/30
$19,176.1
10,571.7
8,604.4
2008/05/31
$18,627.0
10,239.6
8,387.4
2007/05/31
$16,325.9
9,165.4
7,160.5
2006/05/31
$14,954.9
8,367.9
6,587.0
2005/05/31
$13,739.7
7,624.3
6,115.4
2004/05/31
$12,253.1
7,001.4
5,251.7
2003/05/31
$10,697.0
6,313.6
4,383.4
2002/05/31
$9,893.0
6,004.7
3,888.3
3,956.5
2,356.4
13.5
(49.2)
6,277.2
2,523.2
3,786.4
2,351.3
11.9
(88.5)
6,061.1
2,543.3
3,636.2
2,308.3
9.2
68.5
6,022.2
2,365.2
3,106.4
1,912.4
9.9
(0.9)
5,027.8
2,132.7
2,727.8
1,740.2
9.8
4.4
4,482.2
2,104.8
2,611.7
1,600.7
9.3
29.1
4,250.8
1,864.6
2,312.1
1,377.9
12.0
74.7
3,776.7
1,475.0
1,967.2
1,166.8
3.6
79.9
3,217.5
1,165.9
1,789.9
1,027.9
2.6
3.0
2,823.4
1,064.9
610.2
-
469.8
215.9
619.5
(22.1)
708.4
-
749.6
-
648.2
-
504.4
-
382.9
-
349.0
-
2.3
(3.4)
(28.1)
(24.6)
(13.4)
1.7
9.3
16.1
17.7
612.5
1,910.7
682.2
1,861.1
569.4
1,795.8
683.8
1,448.9
736.2
1,368.6
649.9
1,214.7
513.7
961.3
399.0
766.9
366.7
698.2
84.6
(16.7)
(12.2)
51.0
106.7
1,555.6
87.1
(38.8)
70.1
89.6
27.5
125.9
(94.3)
(46.0)
1,322.6
(110.3)
49.4
1,264.1
(80.0)
73.4
1,034.7
127.4
(174.7)
(266.1)
(20.8)
(334.2)
432.7
(1.5)
(95.6)
51.8
(23.5)
(68.8)
629.4
Other operating income (expense) (before tax)

Gains on divestitures
Impairment
Restructuring charge, net
Other operating income (expense) (after tax)
Currency translation gains (loss)
Effect of stock option exercise
Total other operating income (expense)
Operating income after tax
Financial income (NFE)
Interest expense
Interest income
Net interest Income (expense) before tax
Tax benefit of debt
Net financial income (expense)
Comprehensive income (available to common)
60.6
(401.3)
(195.0)
215.9
(380.4)
(22.1)
38.5
(159.2)
6.5
(335.3)
451.4
56.3
(96.4)
1,814.4
126.4
(138.0)
1,723.1
165.6
(91.6)
(25.7)
30.9
117.8
1,913.6
(36.4)
30.1
(6.3)
2.3
(4.0)
(40.2)
49.7
9.5
(3.4)
6.1
(38.7)
115.8
77.1
(28.1)
49.0
(49.7)
116.9
67.2
(24.6)
42.6
(50.5)
87.3
36.8
(13.4)
23.4
(39.7)
34.9
(4.8)
1.7
(3.1)
(40.3)
15.3
(25.0)
9.3
(15.7)
(57.0)
14.1
(42.9)
16.1
(26.8)
(61.2)
13.6
(47.6)
17.7
(29.9)
1,810.3
1,729.2
1,962.6
1,598.2
1,346.0
1,261.0
1,019.0
405.9
599.5

Stephen Penman 2012
2.4. Reformulation of the Statement of Cash Flows
NIKE INC. STATEMENT OF CASH FLOWS

in millions
year ended
Cash provided (used) by operations:
Net income
Income charges (credits) not affecting cash:
Cumulative effect of accounting change
Depreciation
Stock-based compensation
Impairment of goodwill, intangibles and other assets
Non-cash portion of restructuring charge
Deferred income taxes
Amortization and other
Income tax benefit from exercise of stock options
Changes in certain working capital components:
Increase in inventories
Decrease (increase) in accounts receivable
Decrease (increase) in other current assets and income taxes
receivable
(Decrease) increase in accounts payable, accrued liabilities and
income taxes payable
Cash provided by operations
Cash provided (used) by investing activities:
Purchases of short-term investments
Maturities of short-term investments
Additions to property, plant and equipment
Disposals of property, plant and equipment
Increase in other assets
Increase (decrease) in other liabilities
Settlement of net investment hedges
Acquisition of subsidiary, net of cash acquired
Proceeds from divesture

Cash used by investing activities
Cash provided (used) by financing activities:
Additions to long-term debt
Reductions in long-term debt including current portion
(Decrease) increase in notes payable
Proceeds from exercise of options and other stock issuances
Excess tax benefits from share-based payment arrangements
Repurchase of stock
Dividends--common and preferred
Cash (used) provided by financing activities
Effect of exchange rate changes on cash
Net (decrease) increase in cash and equivalents
Cash and equivalents, beginning of year
Cash and equivalents, end of year
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized)
Income taxes
Non-cash investing and financing activity:
Assumption of long-term debt to acquire property, plant, and equipment
2010/05/31
2009/05/31
2008/05/31
2007/05/31
2006/05/31
2005/05/31
2004/05/31
2003/05/31
2002/05/31
2001/05/31
2000/05/31
$1,906.7
$1,486.7
$1,883.4
$1,491.5
$1,392.0
$1,211.6
$945.6
$474.0
$663.3
$589.7
$579.1
323.7
159.0
335.0
170.6
401.3
303.6
141.0
269.7
147.7
282.0
11.8
257.2
###
255.2
266.1
239.3
5.0
223.5
197.4
188.0
8.3
71.8
-
(294.1)
48.3
-
(60.6)
(300.6)
17.9
-
34.1
0.5
-
(26.0)
(2.9)
54.2
21.3
30.5
63.1
19.0
58.3
47.2
50.4
23.2
12.5
###
15.2
48.1
13.9
79.8
16.7
32.4
36.8
35.6
14.9
284.6
181.7
32.2
(238.0)
(249.8)
(118.3)
(49.5)
(39.6)
(200.3)
(85.1)
(103.3)
(93.5)
(55.9)
97.1
(136.3)
(102.8)
55.4
(135.2)
(16.7)
(141.4)
311.8
(82.6)
(69.6)
14.1
(11.2)
(60.8)
(37.2)
71.4
(103.6)
60.9
16.9
78.0
61.2
298.0
3,164.2
(220.0)
1,736.1
330.9
1,936.3
85.1
1,878.7
279.4
1,667.9
112.4
1,570.7
255.6
1,518.5
30.1
917.4
175.4
1,081.5
(179.4)
656.5
178.4
699.6
(3,724.4)
2,787.6
(335.1)
10.1
(11.2)
(2,908.7)
2,390.0
(455.7)
32.0
(47.0)
(1,865.6)
2,246.0
(449.2)
1.9
(21.8)
(2,133.8)
2,516.2
(313.5)
28.3
(4.3)
-
(2,619.7)
1,709.8
(333.7)
1.6
(34.6)
(1,527.2)
1,491.9
(257.1)
7.2
(39.1)
11.1
(400.8)
5.5
191.3
(76.0)
(571.1)
(47.2)
(289.1)
(214.8)
11.6
(53.4)
(4.1)
(185.9)
14.8
(46.3)
1.8
-
###
(282.8)
15.6
(39.1)
3.5
###
(317.6)
12.7
(42.5)
5.1
-
(419.9)
25.3
(51.3)
5.9
-
(1,267.5)
(798.1)
246.0
(489.8)
92.9
(1,276.6)
(360.4)
(950.6)
(215.6)
(302.8)
(342.3)
(440.0)
(32.2)
(205.4)
(6.8)
177.1
(35.2)
63.7
41.8
(255.7)
52.6
(6.0)
(18.2)
(9.2)
(81.7)
153.8
(206.6)
(0.3)
90.4
(55.9)
(349.8)
329.9
(80.3)
(431.5)
(50.3)
(68.9)
(1.7)
505.1
364.5
186.6
343.3
322.9
225.3
226.8
253.6
44.2
59.5
56.0
23.9
58.5
(741.2)
(505.4)
(1,061.2)
(47.5)
788.0
2,291.1
3,079.1
25.1
(649.2)
(466.7)
(733.9)
(46.9)
157.2
2,133.9
2,291.1
63.0
(1,248.0)
(412.9)
(1,226.1)
56.8
277.2
1,856.7
2,133.9
55.8
(985.2)
(343.7)
(1,111.5)
42.4
902.5
954.2
1,856.7
(761.1)
(290.9)
(850.9)
25.7
(433.9)
1,388.1
954.2
(556.2)
(236.7)
(657.0)
6.8
560.1
828.0
1,388.1
(419.8)
(179.2)
(398.5)
24.6
194.0
634.0
828.0
(196.3)
(137.8)
(605.2)
(38.1)
58.5
575.5
$634.0
(226.9)
(128.9)
(478.2)
(29.0)
271.5
304.0
$575.5
(157.0)
(129.7)
(349.9)
85.4
49.7
254.3
$304.0
(646.3)
(133.1)
(252.1)
48.7
56.2
198.1
$254.3
$48.4
537.2
$46.7
765.2
$44.1
717.5
$60.0
601.1
$54.2
752.6
$33.9
585.3
$37.8
418.6
$38.9
330.2
$54.2
262.0
$68.5
173.1
$45.0
221.1
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$0.0
$108.9
Nike: Calculation of Free Cash Flow Using Reformulated Statements

Year ended May 31, 2010
Method 1:
C - I = OI - change in NOA
Operating income, 2010
NOA, 2010
1,814.4
5,513.9
NOA, 2009
6,346.2
Free cash flow
(832.3)
2,646.7
Method 2:
C - I = NFE + Change in NFA + d
NFE, 2010
NFA, 2010
NFA, 2009
Net dividend, 2010
Free cash flow
4.0
4,370.5
2,468.3
1,902.2
740.4
2,646.7

Stephen Penman 2012
2.5. Reformulation Check
FYE
2010/5/31
2009/5/31
2008/5/31
2007/5/31
2006/5/31
2005/5/31
2004/5/31
2003/5/31
2002/5/31
2001/5/31
2000/5/31
Ref stmt of shareholders equity
Income statement
Difference
1,810.3
1,810.3
0.0
1,729.2
1,729.2
0.0
1,962.6
1,962.6
0.0
1,598.2
1,598.2
0.0
1,346.0
1,346.0
0.0
1,261.0
1,261.0
0.0
1,019.0
1,019.0
0.0
405.9
405.9
0.0
599.5
599.5
0.0
494.5
494.5
0.0
511.9
511.9
0.0
GAAP net income
Dirty-surplus items
Adjusted GAAP Net Income
Income Statement
Difference
1,906.7
(96.4)
1,810.3
1,810.3
0.0
1,486.7
242.5
1,729.2
1,729.2
0.0
1,883.4
79.2
1,962.6
1,962.6
0.0
1,491.5
106.7
1,598.2
1,598.2
0.0
1,392.0
(46.0)
1,346.0
1,346.0
0.0
1,211.6
49.4
1,261.0
1,261.0
0.0
945.6
73.4
1,019.0
1,019.0
0.0
474.0
(68.1)
405.9
405.9
0.0
663.3
(63.8)
599.5
599.5
0.0
589.7
(95.2)
494.5
494.5
0.0
579.1
(67.2)
511.9
511.9
0.0
Ending CSE
Ref stmt of shareholders equity
Balance sheet
Difference
9,884.4
9,884.4
0.0
8,814.5
8,814.5
0.0
7,938.2
7,938.2
0.0
7,118.3
7,118.3
0.0
6,368.7
6,368.7
0.0
5,720.9
5,720.9
0.0
4,839.8
4,839.8
0.0
4,028.2
4,028.2
0.0
3,844.1
3,844.1
0.0
3,504.4
3,504.4
0.0
3,147.7
3,147.7
0.0

Stephen Penman 2012
Step 3: Financial Statement Analysis

3.1 Analysis of Profitability and Growth
NIKE, year ended May 31, 2010
A systematic analysis of profitability
Summary measure
First level breakdown
Second level breakdown
ROCE
19.36%
RNOA
30.60%
RNOA+[FLEV*(RNOA-NBC)]
19.36%
RNOA = PM*ATO
30.60%
PM = OI / Sales
9.54%
ATO = Sales / NOA

3.21
Third level breakdown

individual revenue and expense ratios - seen from common size analysis
A systematic analysis of growth

NIKE Inc. Summary information from balance sheets and income statements
2010
Average NOA
Average NFA
Average CSE
Sales
Core operating income
Unusual items
Operating income
Net financial income (expense)
ROCE
RNOA
NBC
PM
Core sales PM
ATO
FLEV
SPREAD
* Balance sheet numbers are averages for the year.
2009
2008
2007
2006
2005
2004
2003
2002
5,930.0
3,419.4
9,349.5
6,146.4
2,230.0
8,376.4
5,442.8
2,085.5
7,528.3
4,929.5
1,814.0
6,743.5
4,850.7
1,194.1
6,044.8
4,666.5
613.8
5,280.4
4,440.9
(6.9)
4,434.0
4,395.7
(459.5)
3,936.2
4,518.1
(843.9)
3,674.3
19,014.0
1,910.7
(96.4)
1,814.4
1,810.3
(4.0)
19.36%
30.60%
-0.12%
9.54%
10.05%
3.21
-36.57%
30.71%
19,176.1
1,861.1
(138.0)
1,723.1
1,729.2
6.1
20.64%
28.03%
0.27%
8.99%
9.71%
3.12
-26.62%
27.76%
18,627.0
1,795.8
117.8
1,913.6
1,962.6
49.0
26.07%
35.16%
2.35%
10.27%
9.64%
3.42
-27.70%
32.81%
16,325.9
1,448.9
106.7
1,555.6
1,598.2
42.6
23.70%
31.56%
2.35%
9.53%
8.87%
3.31
-26.90%
29.21%
14,954.9
1,368.6
(46.0)
1,322.6
1,346.0
23.4
22.27%
27.27%
1.96%
8.84%
9.15%
3.08
-19.75%
25.31%
13,739.7
1,214.7
49.4
1,264.1
1,261.0
(3.1)
23.88%
27.09%
-0.50%
9.20%
8.84%
2.94
-11.62%
27.59%
12,253.1
961.3
73.4
1,034.7
1,019.0
(15.7)
22.98%
23.30%
228.72%
8.44%
7.85%
2.76
0.16%
-205.42%
10,697.0
766.9
(334.2)
432.7
405.9
(26.8)
10.31%
9.84%
5.83%
4.04%
7.17%
2.43
11.67%
4.01%
9,893.0
698.2
(68.8)
629.4
599.5
(29.9)
16.32%
13.93%
3.54%
6.36%
7.06%
2.19
22.97%
10.39%
Nike Residual Earnings Growth: 2002-2010

Residual earnings
[ROCEt - Cost of Equity Capitalt]*CSEt

2006
Revenue growth rate

Growth in CSE
Growth in comprehensive income
Residual earnings (at cost of equity of
8.50%)
2007
2008
2007
-0.85%
11.62%
2.95%
11.27%
14.09%
11.64%
4.69%
-11.90%
22.80%
1015.64
1017.17
1322.72
2006
8.84%
14.48%
12.13%
19.09%
2004
14.55%
12.65%
2003
8.13%
7.13%
2002
4.26%
10.47%
18.74%
6.74%
23.76%
151.06%
-32.30%
21.25%
1025.04
832.20
812.22
642.09
71.29
287.22
9.17%
11.56%
2005
A systematic analysis of the change in ROCE
Analysis of change in RNOA

Level 1: Distinguish core and unusual components of RNOA
RNOA =
30.60%
Level 2:
Core OI / NOA +
UI / NOA
32.22%
-1.62%
Change in core sales PM at

Change due to change in
previous asset turnover
asset turnover +
level +
Change in RNOA =
1.07%
2.56%
0.87%
check
30.60%

other core income +

unusual items
0.62%
Analysis of changes in ROCE

spread at previous level of
financial leverage
+

financial leverage
2.56%
-0.79%
-3.06%
Change in CSE =
1069.9
Change in NOA +
-832.3
Change in NFA
1902.2
NOA =
5,930.0
Sales / ATO
5,930.0
Change in CSE =

sales at previous level of
asset turnover +

asset turnover
+
Change in financial assets
973.1
(52.0)
-164.4
1189.4
Change in RNOA
+
Change in ROCE =
-1.28%
A systematic analysis of the change in investment (CSE)

Stephen Penman 2012
Step 3: Financial Statement Analysis

3.2 Common size and trend analysis
Common size and trend analysis helps understand the business and how it changes over time. It is a useful step in financial statement analysis in preparation for full-information forecasting and valuation.
Nike Inc.
Common size analysis of income statements
for the year ended
Operating revenue
Cost of sales
Gross margin
Operating expenses
Advertising
Other expense, net
Tax as reported
Impairment
2010/05/29
100%
54%
46%
2009/05/30
100%
55%
45%
2008/05/31
100%
55%
45%
2007/05/31
100%
56%
44%
2006/05/31
100%
56%
44%
2005/05/31
100%
55%
45%
2004/05/31
100%
57%
43%
2003/05/31
100%
59%
41%
2002/05/31
100%
61%
39%
2001/05/31
100%
61%
39%
2000/05/31
100%
60%
40%
21%
12%
0.1%
-0.3%
33%
13%
20%
12%
0.1%
-0.5%
32%
13%
20%
12%
0.0%
0.4%
32%
13%
19%
12%
0.1%
0.0%
31%
13%
18%
12%
0.1%
0.0%
30%
14%
19%
12%
0.1%
0.2%
31%
14%
19%
11%
0.1%
0.6%
31%
12%
18%
11%
0.0%
0.7%
30%
11%
18%
10%
0.0%
0.0%
29%
11%
18%
11%
0.0%
0.4%
29%
10%
18%
11%
0.2%
0.3%
29%
11%
3.2%
0.0%
0.0%
3.2%
10%
2.4%
1.1%
0.0%
3.6%
10%
3.3%
-0.1%
-0.2%
3.1%
10%
4.3%
0.0%
-0.2%
4.2%
9%
5.0%
0.0%
-0.1%
4.9%
9%
4.7%
0.0%
0.0%
4.7%
9%
4.1%
0.0%
0.1%
4.2%
8%
3.6%
0.0%
0.2%
3.7%
7%
3.5%
0.0%
0.2%
3.7%
7%
3.5%
0.0%
0.2%
3.7%
7%
3.8%
0.0%
0.2%
4.0%
7%
0.3%
-0.8%
0.0%
0.0%
0.3%
-0.5%
9.5%
-2.1%
-1.0%
1.1%
-2.0%
-0.1%
0.2%
-1.7%
2.4%
0.0%
0.7%
1.3%
11.0%
0.9%
-0.5%
-0.1%
0.2%
0.4%
10.1%
0.0%
0.0%
0.0%
0.5%
-0.1%
-0.1%
0.3%
0.7%
9.5%
0.6%
-0.3%
0.0%
-0.6%
-0.3%
8.8%
0.5%
0.7%
0.0%
-0.8%
0.4%
9.2%
0.2%
1.0%
0.0%
-0.7%
0.6%
8.4%
1.2%
-1.6%
-2.5%
-0.2%
-3.1%
4.0%
0.0%
-1.0%
0.5%
-0.2%
-0.7%
6.4%
-0.4%
0.0%
0.0%
-0.6%
-1.0%
5.6%
-0.5%
0.0%
0.0%
-0.3%
-0.7%
6.0%
Nike Inc.
Trend analysis of income statements
for the year ended
Operating revenue
Cost of sales
Gross margin
Operating expenses
Advertising
Other expense, net
Tax as reported
Impairment
2010/05/29
211%
189%
245%
2009/05/30
213%
196%
240%
2008/05/31
207%
189%
234%
2007/05/31
181%
170%
199%
2006/05/31
166%
155%
183%
2005/05/31
153%
141%
170%
2004/05/31
136%
130%
146%
2003/05/31
119%
117%
122%
246%
241%
73%
-212%
239%
262%
235%
240%
64%
-381%
230%
264%
226%
236%
50%
295%
229%
246%
193%
196%
54%
-4%
191%
222%
169%
178%
53%
19%
170%
219%
162%
164%
50%
125%
162%
194%
144%
141%
65%
322%
144%
153%
122%
119%
19%
344%
122%
121%
172%
315%
192%
307%
160%
296%
192%
239%
207%
226%
183%
201%
144%
159%
112%
127%
147%
336%
210%
319%
-179%
354%
-163%
288%
70%
245%
-75%
234%
-112%
192%
509%
80%

Interest expense
Interest income
NIKE Inc.
Common size analysis of balance sheets
2010/05/31
Operating assets
Inventories
Goodwill
Accrued liabilities
Financial assets
Cash equivalent
Notes payable
Long-term debt
2009/05/31
2008/05/31
2007/05/31
2006/05/31
2005/05/31
2004/05/31
2003/05/31
2002/05/31
2001/05/31
2000/05/31
1%
28%
22%
9%
21%
2%
5%
12%
100%
1%
29%
24%
8%
20%
2%
5%
12%
100%
1%
29%
25%
6%
19%
5%
8%
8%
100%
1%
31%
27%
5%
21%
2%
5%
8%
100%
1%
31%
27%
5%
22%
2%
5%
7%
100%
1%
32%
26%
5%
23%
2%
6%
6%
100%
1%
31%
24%
5%
24%
2%
5%
6%
100%
1%
33%
24%
5%
26%
1%
2%
7%
100%
1%
30%
23%
4%
27%
4%
3%
6%
100%
1%
29%
26%
3%
29%
3%
4%
5%
100%
1%
28%
26%
4%
28%
3%
4%
7%
100%
30%
46%
2%
22%
100%
27%
47%
2%
24%
100%
32%
43%
2%
22%
100%
33%
41%
4%
22%
100%
32%
44%
3%
20%
100%
35%
41%
4%
20%
100%
34%
42%
5%
19%
100%
27%
52%
7%
13%
100%
32%
52%
6%
10%
100%
40%
47%
2%
10%
100%
40%
51%
0%
9%
100%
59%
41%
100%
65%
35%
100%
76%
24%
100%
64%
36%
100%
39%
61%
100%
75%
25%
100%
66%
34%
100%
100%
0%
100%
100%
0%
100%
100%
0%
100%
100%
0%
100%
1%
20%
13%
66%
0%
100%
4%
38%
9%
49%
0%
100%
1%
26%
10%
64%
0%
100%
5%
17%
8%
70%
0%
100%
33%
6%
9%
53%
0%
100%
1%
9%
7%
84%
0%
100%
1%
17%
5%
78%
0%
100%
23%
9%
6%
62%
0%
100%
5%
37%
3%
55%
0%
100%
0%
64%
2%
33%
0%
100%
3%
61%
4%
31%
0%
100%
55.8%
44.2%
100.0%
72.0%
28.0%
100.0%
74.9%
25.1%
100.0%
69.4%
30.6%
100.0%
77.3%
22.7%
100.0%
83.6%
16.4%
100.0%
94.0%
6.0%
100.0%
107.5%
-7.5%
100.0%
116.0%
-16.0%
100.0%
130.6%
-30.6%
100.0%
141.2%
-41.2%
100.0%
As percentage of CSE:
Net financial assets (obligations)
Nike Inc.
Trend analysis of balance sheets
2010/05/31
Operating assets
Inventories
Goodwill
Accrued liabilities
Financial assets
Cash equivalent
Notes payable
Long-term debt
2009/05/31
2008/05/31
2007/05/31
2006/05/31
2005/05/31
2004/05/31
2003/05/31
211%
169%
141%
385%
122%
96%
217%
295%
166%
213%
184%
163%
337%
124%
99%
217%
308%
175%
207%
178%
169%
265%
119%
229%
345%
197%
172%
181%
159%
147%
173%
106%
67%
190%
161%
140%
166%
153%
144%
169%
105%
67%
188%
137%
135%
153%
144%
125%
156%
101%
69%
189%
107%
125%
136%
135%
114%
163%
102%
69%
170%
114%
119%
119%
133%
105%
147%
102%
34%
55%
119%
110%
241%
285%
197%
267%
252%
265%
206%
195%
182%
194%
163%
148%
152%
149%
108%
161%
775%
317%
124%
763%
291%
143%
775%
314%
134%
606%
245%
111%
499%
224%
111%
419%
186%
108%
375%
181%
102%
234%
157%
97%
1426%
1049%
975%
848%
420%
630%
366%
277%
2413%
1605%
1282%
1321%
1064%
839%
558%
277%
15%
15%
147%
95%
100%
45%
64%
37%
131%
93%
100%
59%
13%
19%
110%
94%
100%
46%
61%
11%
74%
87%
100%
39%
510%
5%
116%
87%
100%
52%
12%
8%
89%
146%
100%
54%
13%
16%
73%
145%
100%
58%
411%
8%
83%
117%
100%
59%
Common-Size Income Statement
Trend Analysis of Income Statement Items
70%
450%
Cost of sales
400%
60%

Operating revenue
50%
Percent of Revenue
350%
Gross margin
40%
Percent of300%
2000 Value
Net f inancial income (expense)

Core operating income (af ter tax)
250%
30%
200%
20%
150%
10%
100%
50%
0%
2000/01/01
2002/01/01
2004/01/01
2006/01/01
2008/01/01
2010/01/01
0%
2000/01/01
-10%
2002/01/01
2004/01/01
2006/01/01
2008/01/01
2010/01/01
Trend Analysis of Balance Sheet Items

Common-Size Balance Sheet
400%
200.0%
Net financial assets (obligations)
300%
Net financial assets (obligations) (NFA/NFO)

150.0%
200%
Percent of Total CSE
Percent of 2000 Values
100%
100.0%
0%
50.0%
2000/01/01
-100%
0.0%
2000/01/01
2002/01/01
2004/01/01
2006/01/01
2008/01/01
2010/01/01
-200%
-50.0%
-300%
-100.0%
-400%
2002/01/01
2004/01/01
2006/01/01
2008/01/01
2010/01/01
30.0%
4.0
3.5
25.0%
3.0
20.0%
2.5
RNOA
15.0%
2.0
PM
ATO
1.5
10.0%
1.0
5.0%
0.5
0.0%
2010
RNOA
PM
ATO
2009
2010
19.4%
9.5%
3.2
2008
2009
20.6%
9.0%
3.1
2007
2008
26.1%
10.3%
3.4
2006
2007
23.7%
9.5%
3.3
2005
2006
22.3%
8.8%
3.1
2004
2005
23.9%
9.2%
2.9
2004
23.0%
8.4%
2.8
2003
2003
10.3%
4.0%
2.4
2002
2002
16.3%
6.4%
2.2
2001
14.9%
5.6%
2.1

Stephen Penman 2012
Step 4: Projection and Valuation
4.1. Valuation essentials
Net income component
Book value component
Residual earnings components

Residual operating income: OIt - (kF-
Operating income (OI)
Net operating assets (NOA)
Net financial expense (NFE)
Net financial obligations (NFO)
Earnings
Common stockholders' equity (CSE)
Residual earnings: Earnt-(kE-1)*CSEt-1
Value of operations =
Net operating assets +
Present value of expected residual operating

income
Value of common equity =
Book value of common equity +
Present value of expected residual operating

income
Value of operations =
Value of common equity +
Value of net financial obligations
1)*NOAt-1
Residual net financial expense: NFEt - (kD-
1)NFOt-1
Discount rates
Denoted as
kE
Cost of capital for equity

Cost of capital for debt
kD
Cost of operations
kF
For Nike in 2010

rish-free rate (10-year Treasury rate)
Beta
Market risk premium (rm-rf)
kE
kD
Number of shares
Nike's close price on August 10, 2010
Market value of equity
Net Financial Obligation
Market value of the firm
kF
Formula
rf + beta*(rm-rf)
NBC
kE*VE/VF + kD*VD/VF
3.6%
0.90
5.0%
8.1%
1.2% (Get borrowing rate from debt footnote (1.9%) and convert to after-tax basis (1.2%))
484.4
73.94
35,817
(4,371)
31,446
9.1%

Stephen Penman 2012
4.2. Simple forecasts and simple valuations
No-Growth Valuation: Forecasts from earnings and book values
Page 485
Forecasting earnings and its components by forecasting that earnings will be the same as in the current year, adjusted for changes in the balance
sheet earning at the required return.
No-Growth Forecast is assuming all future residual earnings are the same as in the current year.
No-Growth Forecast Valuations of Nike

Nike, Inc.
in millions except for per share data
Required return for operations
Common shareholders' equity, 2010
Core operating income, 2010
Net operating assets, 2010
Core residual operating income, 2010
9.1%
9,884.4
1,910.7
5,513.9
6,346.2
1,335.8
No-Growth Forecast of ReOI, 2011

No-Growth Forecast of operating income, 2011
1,335.8
1,835.3
Value of common equity

vE = CSE2010 + ReOI2010/kF
# of shares
Value per share
24,630.1
484.4
50.85
Value of operations
vNOA = vE + NFO
20,259.6
vNOA = NOA + ReOI/kF
20,259.6
vNOA = OI2011/kF
20,259.6
Growth Valution: Forecasting from accounting rates of return

Page 487
Forecast of earnings component: Forecast earnings and its components by forecasting that the relevant balance sheet component will earn at the
current profitability
Operating
OI1 = RNOA0*NOA0
Financing
NFE1 = NBC0*NFO0
Earnings
Earn1 = ROCE0*CSE0
Growth Valuations of Nike Inc.

Cost of capital for operations
RNOA, 2010 (on average NOA)
Growth rate for net operating assets (2006-2010)
9.06%
30.60%
4.6%
5,513.9
Growth forecast of operating income, 2011

Growth forecast of ReOI, 2011
1,687.0
1,187.5

vE = CSE+ ReOI1/(kF-g)
Value per share
36,516.6
75.39
Value of operations
vNOA = vE + NFO
32,146.0
vNOA = NOA + ReOI1/(kF-g)
32,146.0
vNOA = NOA*(RNOA-g)/(kF-g)
32,146.0

Stephen Penman 2012
4.3. Full-information forecasting: Nike Inc.
Forecasts of key income statement ratios
Gross margin
SG&A expense ratio
Tax rate
Sales growth
Page 441
2010A
46.3%
33.0%
36.3%
-0.8%
2011E
45.0%
30.0%
35.0%
4.0%
2012E
45.0%
30.0%
35.0%
4.0%
2013E
45.0%
30.0%
35.0%
4.0%
2014E
45.0%
30.0%
35.0%
4.0%
2015E
45.0%
30.0%
35.0%
4.0%
2015E and after

45.0%
30.0%
35.0%
4.0%
2010A
6.87
8.65
9.78
-5.8%
2011E
6.8
8.6
9.7
-6%
2012E
6.8
8.6
9.7
-6%
2013E
6.8
8.6
9.7
-6%
2014E
6.8
8.6
9.7
-6%
2015E
6.8
8.6
9.7
-6%
2015E and after

6.8
8.6
9.7
-6%
Forecasts of turnover
Accounts receivable turnover

Inventory turnover
PPE turnover
Other NOA/Sales
Pro forma financial statements

2010A
2011E
2012E
2013E
2014E
2015E
Income statement
Sales
Cost of sales
Gross margin
Core operating income before tax
Taxes
Core operating income after tax
Other income (expense)
Operating income
19,014.0
10,213.6
8,800.4
6,277.2
2,523.2
612.5
1,910.7
(96.4)
1,814.4
19,774.6
10,876.0
8,898.6
5,932.4
2,966.2
1,038.2
1,928.0
20,565.5
11,311.0
9,254.5
6,169.7
3,084.8
1,079.7
2,005.1
21,388.2
11,763.5
9,624.7
6,416.4
3,208.2
1,122.9
2,085.3
22,243.7
12,234.0
10,009.7
6,673.1
3,336.6
1,167.8
2,168.8
23,133.4
12,723.4
10,410.0
6,940.0
3,470.0
1,214.5
2,255.5
1,928.0
2,005.1
2,085.3
2,168.8
2,255.5
Balance sheet
Account receivable
Inventory
Property, plant and equipment
Other NOA
Net operating assets (NOA)
2,649.8
2,040.8
1,931.9
(1,108.6)
5,513.9
2,908.0
2,299.4
2,038.6
(1,186.5)
6,059.5
3,024.3
2,391.3
2,120.2
(1,233.9)
6,301.9
3,145.3
2,487.0
2,205.0
(1,283.3)
6,554.0
3,271.1
2,586.5
2,293.2
(1,334.6)
6,816.1
3,402.0
2,689.9
2,384.9
(1,388.0)
7,088.8
Operating income
Change in NOA
Free cash flow
1,814.4
(832.3)
2,646.7
1,928.0
545.7
1,382.4
2,005.1
242.4
1,762.8
2,085.3
252.1
1,833.3
2,168.8
262.2
1,906.6
2,255.5
272.6
1,982.9
RNOA
ReOI
Growth in ReOI
30.6%
33.3%
32.4%
32.4%
32.4%
32.4%
32.4%
1,277.2
1,337.6
1,416.9
1,473.6
1,532.5
1,593.8
1,657.6
5.9%
4.0%
4.0%
4.7%
4.0%
9.06%
Cost of operations
Total PV of ReOI to 2010
Continuing value
PV of CV
NOA as of 2010
Value of operations
NFA (NFO)
Number of shares outstanding
Value per share
4.0%
2015E and after
5,670.2
32,764.6
21,237.2
5,513.9
32,421.3
4,370.5
$
36,791.8
484.4
75.95

Stephen Penman 2012
4.4. Reverse engineering: Implied Expected Return and Implied Growth Rate
Reverse engineering to get implied expected return
(Page 665)

Stephen Penman 2012
Step 5: Bells and Whistles
Steps 1-4 set up a basic valuation tool. You can add additional features:
Sensitivity analysis (Chapters 15)
Business Strategy Analysis (Chapter 16)
Economics Value Analysis (Chapter 17) (Please see web page for this chapter with additional tools)
Quality of earnings analysis (Chapters 18)
Risk analysis (Chapters 19 and 20)

Financial Statement Analysis & Security Valuation (Fifth Edition)

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Financial Statement Analysis & Security Valuation (Fifth Edition)

Stephen Penman (2012)

and Valuation Product

With this tool you will be able to reformulate financial statements

d you will discover the points where your understanding is weak.

a button are available but pressing buttons is dangerous if you are

p your own model, following sound principles, and so be assured

17). You can utilize spreadsheets features for scenario planning

is (as in Chapter 19).

t be exactly same as those on the textbook mainly because of