Individual Assignment

Student ID Number(s): 2371571 – Jieyu Yi

Programme: MSc IB

Module: MSc International Accounting and Finance (Dubai)

Name of Tutor: Julie McDonald – Alessio Faccia

Assignment Title: Analysis of Adidas on Scenario 3 – Sources of Finance and Debt Structure

Date and Time of Submission: 22/04/2022

Actual Word Count: 1276

 Analysis of Adidas on Scenario 3
- Sources of Finance and Debt Structure

A. Benefits for Managers to Have Financial Skills

According to Robert Half’s annual FTSE 100 CEO Tracker (Robert Half, 2019), there are 52% of
CEO with a financial background. Obviously, managers with financial skills are easier to gain
promotions in their management careers.

Adidas’s managers can be divided into three levels: lower managers, middle managers, and
top managers (Figure. 1).

Figure 1. Adidas management Structure (Adidas, 2021)

For lower managers, financial terms and skills will help them deepen their understanding of
company’s daily operations and various economic actions, which in turn will help them
manage costs effectively, and ultimately improve individual and even team performance.

For middle managers, financial analysis and skills will assist them to see the essence of the
business, identify risks and opportunities in company in a timely manner, and give advice to
the management team in making investments, financing, or other decision.
For top managers, extensive financial experience and skills will give them a better
understanding of the company's situation reflected in the financial statements, and thus they
will have an overall grasp of company's business conditions, and appropriate capital means
can be introduced to help companies achieve sustainable growth and make strategic layouts
for sustainable development in advance.

All in all, the more financial skills they have, the more likely they are to establish a higher
authority and form a unique charisma, and get promoted faster.

B. Identify Adidas’s SDG

The Sustainable Development Goal (SDG) of Adidas is “End Plastic Waste” (Adidas, 2021), in
2021, sustainability was defined as one of the three main focuses of the Adidas 2025 Growth
Strategy “Own the Game” (Own the Game, 2021). Meanwhile, it can also find in the Adidas
Annual Report (Adidas, 2021) with details to continue realizing the SDGs, Adidas further
expands and innovates the “Three Loop Strategy” (Adidas Sustainability, 2021), which are
included below:
- Recycled Loop: Manufactured from recycled materials.
- Circular Loop: Reach product recyclability.
- Regenerative Loop: Manufactured from natural and renewable materials

Currently, 60% of products are made from sustainable materials and plan to increase to 90%
by 2025. According to S&P ESG global evaluation, Adidas ranks world No.6 and scored 85 (S&P
Global Ratings, 2021). It shows that Adidas attaches great importance to innovation, mainly
in products and disruptive innovation. It uses Three Loop Strategy to recycle and innovate
products, and gradually achieve SDG goals. Adidas is pursuing organic growth and expanding
its direct-to-consumer (DTC) business model while making sustainability one of the prominent
features of its long-term strategy. We believe the company is well-positioned to navigate
disruption and capitalize on opportunities beyond the 2021-2025 strategy.
C. Sources of Finance and Debt Structure of Adidas

1. Capital Structure and Ratios Analysis

According to the Adidas annual report data (Adidas, 2021), the capital structure and financial
ratios are calculated as below (Figure. 2):

Capital Structure 2021 2020

Total Assets 22,137,000 21,053,000

Total Liabilities 14,300,000 14,362,000

- Long-term Debt 4,729,000 4,641,000

Total Equity 7,837,000 6,691,000

EBIT 2,029,000 739,000

Interest Expense 177,000 164,000

Debt to Assets Ratio 0.65 0.68

Long-Term Debt to Assets Ratio 0.21 0.22

Debt to Equity Ratio 1.82 2.15

Long-Term Debt to Equity Ratio 0.60 0.69

Interests Coverage Ratio 11.46 4.51

Figure 2. Adidas’ Capital Structure and Financial Ratios (Calculated by myself)

Based on the above financial ratios, we can find that Adidas' debt is constantly decreasing,
and its debt-to-equity ratio is comparatively low. Adidas relies more on equity financing or
Adidas uses more shareholder financing to promote the company's development. On the
other hand, Adidas' revenue levels are relatively stable, indicating that the company Can
create better interests for shareholders. However, it can be easily found that both the Debt to
Equity Ratio and the Interests Coverage Ratio have changed significantly compared with 2020.
So we will start from these two ratios to further analyze Adidas' long-term debt position in
detail.
- Debt to Equity Ratio: Compared with 2020, the ratio decreased by 0.33, the optimal debt-
to-equity ratio tends to vary by industry, but the general consensus is that it should not
be higher than 2. And Adidas' ratio dropped to 1.82 in 2021, indicating that investors’
investment has increased, the stability of finance sources has gradually improved, and the
long-term solvency of enterprises has become stronger.
- Interests Coverage Ratio: Compared with 2020, the ratio is greatly improved, which is as
much as 2.5 times before. Long-term debt solvency is closely related to its profitability,
only when the company is profitable, its net cash flow will continue to increase, and
sufficient cash is the basis for the long-term debts. The ratio shows that the EBIT is
equivalent to 11.46 times the interest expense, meaning that the possibility of the
enterprise paying the long-term loan are getting bigger.

Regarding the Debt-to-EBITDA Ratio, banks often include it in their credit evaluation system
for business loans to measure a company's capability of paying its debts (Begley Taylor A,
2014). And we can find the Adidas Leverage Consensus Forecast made by Dividend Sensei
(Dividend Sensei, 2022) (Figure. 3), It shows Adidas' debt/EBITDA will gradually decline over
the next five years, which means the company is paying down debt and/or growing earnings.
Since Adidas has had a net cash balance sheet for past decade, we believe that this will
continue in the future.

Figure 3. Adidas Leverage Consensus Forecast (Source: FactSet Research Terminal)

2. Risks Analysis

In 2020, Adidas obtained a 3 billion euros loan to ensure the company's financial flexibility
and enhance cash flow. We can find that Adidas' cash flow is not as bad as imagined, according
to the 2019 annual report, Adidas still had 2.2 billion euros in cash and cash equivalents and
short-term financial assets worth 292 million euros at the end of the fiscal year (Adidas, 2019).
We believe that the purpose of this loan is to ensure that the company is well-positioned for
long-term sustainable growth.

Although Adidas achieved double-digit sales growth in North America, EMES, and Latin
America areas, the sales in the Asia Pacific region were dismal, of which Greater China
increased by only 3% year-on-year (Adidas, 2021), this will strain Adidas' cash flow in the Asia-
Pacific region.

Meanwhile, Standard & Poor's rated Adidas an "A+" with a stable future (S&P Global Ratings,
2021), while Moody's rated an "A2” with a prosperity expectation (Moody’s Credit Rating,
2021). The credit rating makes Adidas one of the highest-rated companies in the global
sporting goods industry. And all these highly valued credits will upgrade the quality of Adidas’s
capital structure. Through the world's Top 2 Rating agencies' estimates, we can conclude that
the risk of losing all your money in Adidas over the next 30 years at 1 in 159 (Figure. 4). It is
obvious that the risk of working together with Adidas is quite low.

Figure 4. Adidas Credit Ratings (Source: S&P, Moody's)

3. Evaluation and Recommendations

Based on the above ratios and risks analysis, Adidas shows a relatively healthy financial
situation, and following are some recommendations based on Adidas' financial performance
in 2021:
- Strengthen financial skills training for management: Train the managers with the
financial skills effectively, they can give full play to their fulfilment from lower to up.
- Optimize capital structure continuously: Follow Adidas 2025 Growth Strategy "Own the
Game" and gain enduring sustainable growth through appropriate long-term investment.
- Increase profitability in potential areas: launch localized marketing that is more suitable
for the Chinese market, such as "telling stories with products", to gain more profit,
meantime lead to an increase in net cash flow, and sufficient cash and cash equivalents
will help Adidas pay long-term debts.
Reference

1) Adidas (2019) Adidas Annual Report 2019 [online]. Available from: https://report.adidas-
group.com/2019/en/ [Accessed 20 April 2022].

2) Adidas (2021) Adidas Annual Report 2021 [online]. Available from: https://report.adidas-
group.com/2021/en/ [Accessed 20 April 2022].

3) Adidas Sustainability (2021) More Sustainable Materials and Circular Services [online].
Available from: https://www.adidas-group.com/en/sustainability/environmental-
impacts/more-sustainable-materials-and-circular-services/ [Accessed 20 April 2022].

4) Begley Taylor A (2015) The Real Costs of Corporate Credit Ratings. Paris December 2014
Finance Meeting EUROFIDAI - AFFI Paper, Available at SSRN:
https://ssrn.com/abstract=2404290 or http://dx.doi.org/10.2139/ssrn.2404290

5) Dividend Sensei (2022) Buy Adidas: One of the World's Best Hyper-Growth Dividend
Blue-Chips. [online]. Available from: https://seekingalpha.com/article/4497702-adidas-
stock-buy-best-hyper-growth-dividend-blue-chip [Accessed 20 April 2022].

6) Moody’s Credit Rating (2021) Adidas AG: Update to Credit Analysis [online]. Available
from: https://www.moodys.com/credit-ratings/Adidas-AG-credit-rating-600048508
[Accessed 20 April 2022].

7) Own the Game (2021) The Adidas Sustainability Story – Leading the Change [online].
Available from: https://www.gameplan-a.com/2021/12/the-adidas-sustainability-story-
leading-the-change/ [Accessed 20 April 2022].

8) Robert Half UK (2019) Robert Half’s annual FTSE 100 CEO Tracker [online]. Available
 from: https://www.roberthalf.co.uk/reports-guides/ftse-100-ceo-tracker [Accessed 20
April 2022].

9) S&P Global Ratings (2021) ESG Evaluation Report: Adidas AG. [online]. Available from:
https://www.spglobal.com/_assets/documents/ratings/research/100674163.pdf
[Accessed 20 April 2022].