Running Head: INVESTMENT ANALYSIS

Investment Analysis

Student’s Name

Institution
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Introduction

In the last 3 years’ fashion retail industry has attracted all types of investors and provided

the best returns in the industry. This has become possible due to the potential creativity and the

commercial value these fashion retail brands have earned in such a small span of time making it

a lucrative investment arena for investors to invest in (Dlabay & Burrow, 2008). The company

selected is Nordstrom Inc. Nordstrom Inc. is an American company which deals in fashion. The

company is function is the retail industry. It was founded in 1901 by Mr. John W Nordstrom and

Carl F Wallin. The headquarters of the company is located in Seattle, Washington, U.S.A.

Nordstrom Inc.

The Nordstrom Inc. is a public company and is publically traded on NYSE: JWNS & P

500 Component. The company is expanding very fast and has a lot of potential to expand and

explore in new markets of the world. There is a lot of opportunity to earn huge returns and

profits if this company is included in the portfolio of the client. In the year 2014 the company has

announced to open 6 new stores in Canada. The company has been listed in Fortune magazine at

a rank of 61 in 2012.

Last year Nordstrom Inc. earned revenue of $ 13506 million which was 7 % higher than

previous year’s revenue. Though the profits of the company reduced around 1 % as compared to

last year yet the Market value of the company as of March 2016 was $ 15293 million more than

its sales of the same year. The Nordstrom Inc. has also distributed profit to its equity stockholder

of around 29 % which leaves a scope to earn higher returns on equity if investment is made in

Nordstrom Inc.
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There has also been a big change in the Earning per share of Nordstrom Inc. the last 10

years’ annual rate was 10 % which changed to 13 % in the last 5 years. The latest earning per

share of Nordstrom Inc. is $ 3 per share, which leaves a lot of earning rate for investors. It has

stores which have best return policies. As per fortune 500 the company is listed at a rank of 93

and the company is at a rank of no. 14 in world’s most admired company.

It is always advisable to first have a good idea of what the financial returns are being

expected from the portfolio. Second thing to look up is that how long does investor want to stay

with the portfolio?

The Client’s Profile

The profile which will best suit this industry will be a profile which will have the following –

 Short term trading which will be suitable to earn profits on liquid ratios. It will generate

return in short span of time leaving investor with profits which will be generated in a time

period of 3 months or less.

 The profile should be risk averse. In other words, we can say that the investor must be a

person who is not into taking risks with his investments or the one who believes to reduce

the risk chances from his portfolio

 Profile should be defensive or cyclical in terms of investment in stocks and shares for any

good and sound investor.

 Market capitalization plays a vital role and appropriate selection plays a very important

role. The mix of large capital investment and small capital investment should be followed

and changed from time to time. This ensure best mix for the portfolio.
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 Choice of selection in investment in derivatives is also crucial as derivatives provide a

high chance of earnings with higher rate of risk.

 All these above will make a good profile for investment in fashion retail industry for

example Nordstrom Inc. etc.

Financial Ratios

Financial ratios are the ratios which provide information about the relationship of the

financial information of company and present a crystal clear view which is easy to understand

for the users of information. Financial ratios are also helpful in making comparisons with

previous years’ information. They are indicators of the performance of the company and its

financial analysis is also provided by these ratios (Burns, 2014).

The current ratio of Nordstrom Inc. for the year 2016 was 1.86 times whereas it was

around 2.06 times in 2015 and 2.03 times in 2014. This shows that the company is constantly

reducing its current assets. The current ratio of the company still holds good for short term

investors and they will generate returns for sure for the company.

Quick ratio - Quick ratio is quick asset divided by current liabilities, quick assets include

all the current assets excluding inventory, this ratio is also known as acid test ratio (Burns, 2014).

As the current ratio showed a declining trend the same is in the case with quick ratio it is

also showing a declining trend year after year. In 2014 the ratio was 1.67 times which declined to

1.45 times in 2015 and a further decline of 1.25 times in the year 2016. The ratio still is

promising to the investors as it is higher than 1 and there are chances to increase further. The

investor will still earn a good amount of short term return if he invests in this company.
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Earnings per share – earning per share is a part of profit of the company which it

distributes to its common shareholders on per share basis (Daníelsson, 2011). Earnings per share

of Nordstrom Inc. for year 2016 is $ 3.72 the company has increased its distribution of profits in

the form of earnings per share by $ 0.01 since 2015. Its Earnings per share for 2014 was $ 3.71

and its Earnings per share for 2013 were $ 3.56 which was lower than $ 0.15 since 2013. This

seems that the company is earning and distributing higher profit portions with its common

stakeholders (Lins, Strickland, & Zenner, 2005).

Price earnings ratio – price earnings ratio is a measure of value of the company in terms

of its share prices. The price earnings ratio of Nordstrom Inc. in 2016 is 21.65, in 2015 it was

17.18 and in 2014 it was 14.31. We can see that the price earnings ratio of the company is

increasing constantly which is a good sign for any investor. The company is paying good return

to its shareholders.

Return on asset (ROA) – it is a measure to check how profitable a company is in terms of

its assets. It provides its users an idea that how well the management is using its assets to earn

income. Return on asset of Nordstrom Inc. is 8.1 % in 2016 and it was 8.7 % in 2015 and 8.9 %

in 2014. On comparing the 3 years we can see that the most fruitful year was 2014 as the ROA

was highest since 2014 the Return on Asset is declining at an uncertain rate.

Return on invested capital (ROIC) – Return on invested capital is a measure to verify that

how well is the management of the company utilizing its funds to generate more funds for the

benefit of the company. ROIC is showing similar trends as compared to ROA, it was the highest

in 2014 being 13.9 % then it declined to 13.6 % in 2015 and latest figures shows that the ROIC

of 2016 was 12.6 % a clear downfall of one percent is seen this year which indicates that the

company is reducing its return on invested capital.

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Risk Level of the Stock from my Financial Review

Risk is an event which can never be eliminated; it was, is and will be there forever. No

matter how sensible you are in investing or how pin pointing you invest, you can never eliminate

risk out of your profile of portfolio. The risk is present in investing in Nordstrom Inc. too. As per

the trends there is a constant decrease in the liquidity ratios which are making short term

investment riskier with the company. Though the returns provided by short term investments are

still stable but the declining trends of current ratio and quick ratio are making investors think

twice before investing in the company.

The earnings per share of Nordstrom Inc. is showing an incremental trend though the

increase in earnings per share are at a declining rate yet they are increasing. Same is the case

with the cash payout in the form of dividends, Nordstrom Inc. has paid dividend at a high rate to

its investors. The company is still following this trend and the risk in long term earning is less as

compared to short term earnings of Nordstrom Inc. for the investors.

Recommendations

The risk should be assessed in terms of its value and taking of risk. If the value of risk is

higher than the potential of opportunities risk is bringing with itself then the risk should be

avoided. In case of Nordstrom Inc. if the investor is not earning a good return of the risk of

losing funds is higher than the return it earns then the risk should be avoided. Risk appetite of the

investor should be constantly measured so that any change in the risk may be fit as per the needs

of the investor. If the risk is not in favor of the investor he immediately gets out of the risk

exposure. In the given case of Nordstrom Inc., the investor can check his risk appetite and

change it as per his needs in the ratio of risk and return.

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References

Burns, P. (2014). Business Finance. Elsevier Science.

Daníelsson, J. (2011). Financial risk forecasting: The theory and practice of forecasting market

risk, with implementation in R and Matlab. Chichester: John Wiley.

Dlabay, L. R., & Burrow, J. (2008). Business finance. Mason, OH: South Western.

Lins, K. V., Strickland, D., & Zenner, M. (2005). Do Non-U.S. Firms Issue Equity on U.S.

Stock Exchanges to Relax Capital Constraints? Journal of Financial and Quantitative

Analysis, 40(01), 109. doi:10.1017/s0022109000001769

Pástor, L., & Stambaugh, R. F. (2002). Liquidity risk and expected stock returns. London:

Centre for Economic Polocy Research.