RISK AND RETURN

Meet the Presenter

MD Tanzim Rahman

Student of Ahsanullah University of Science and

Technology

Lazina Azrin

Student of Ahsanullah University of Science and

TEAM Technology

Tawfiq Ahmed Bhuiyan

MEMBER Student of Ahsanullah University of Science and
Technology

Jarin Tasnim Anika

Student of Ahsanullah University of Science and

Technology

Atikul Islam

Student of Ahsanullah University of Science and

Technology
INTRODUCTION

This begins with an overview of the Adidas company,a sportswear company that involve in manufacturing industry. This
is followed with the discussion of the problem statement, the research objectives, scope of the study and lastly the
organization of the study.

This chapter consists of three sections.

1. It will define the definition and concept of a financial risks.
2. It is meant to provide an insight into the liquidity risk formation.
3. Its determinants consist of firm specific factors and macroeconomic factors.
AIMS, OBJECTIVES AND SCOPE

Overall, this study aims to determine the risk in Adidas and the effects by internal and external factor in
manufacturing industry. Objectives of this study are:
1. To investigate the specific factors towards risk.
2. To investigate the macro-economic factors towards risk.
3. To investigate the specific factors and macro-economic factors towards risk.
FINANCIAL RISK

Rapid changes in the economy due to globalization caused an increase in the number of risk that must be bear by firms.
The risk faced by firms is more complex than before due to the introduction of new technology such as the introduction
of financial technology by financial institutions that will create an even more complex financial instrument. According to
Woods and Dowd, financial risk is one of the risks that must be bear by a company and this type of risk is very crucial as
the risk connect to the firm’s financial operation According to Solomon and Muntean, financial risk can be further
breakdown into four main categories that can affect the firm’s performance. Those risk are known as market risk, credit
risk, liquidity risk and interest rate form cash flow. While according to Jorion, market risk, credit risk, settlement risk and
operational risk are the type of risk fall under the financial risk.
OPERATIONAL RISK

The proper management of operational risk is really essential in a firm in order for firm to run properly. The
common definition of operational risk is defined as the risk of loss resulting from inadequate or failed internal
processes, people and sytems, or from external events. However it is better viewed as the risk arising from the
execution of an institution business function. Operational risk exist in every organisation regardless of size and
nature of business. Examples of operational risk include risk arising from catastrophic events, computer hacking,
internal and external fraud, and also the failure to adhere internal policies.
MARKET RISK

Market risk is defined as the probability of experiencing losses among investors due to several factors affecting
financial market performance , which the investors are involved. Market risk is also known as systematic risk.
Systematic risk cannot be eliminated through diversification yet it can be hedged against. Market risk sources include
recessions, political turmoil, interest rates uncertainty, natural disasters and also terrorist attacks.
LIQUIDITY RISK

The common understanding when it comes to liquidity risk is the failure of business or financial institutions to meet
their short term debt obligations. It means that their assets is not convertible quickly into cash. A study by Ahmed
Mohammed Dahir defined liquidity risk as uncertainty in the bank’s inability to meet its payment obligation. He also
mentioned how liquidity risk act as driving risk factor which gives threat to financial system and that threats coming
from different sources. Besides he differentiated market liquidity and funding liquidity. According to him, market
liquidity is about the cost of selling assets whereas in funding liquidity it tells the ability to raise cash in short time.
OPERATIONAL RISK
Operational risk is defined as human risk, according to Investopedia. Average Operational Ratio
It is the risk of business operations failing due to human error. 0.8
Operational risk indeed is the risk resulting from breakdowns in
0.7
internal procedures, people and system. The ratio for operational 0.68
risk is calculated using average operating ratio, where net sales 0.6
divided by operating expenses of the firm. The main purpose of this
0.5
ratio is to measure company’s effieciency in its operational 0.45
0.432 0.438
management. Meaning to say, the lower the ratio, the more efficient 0.4
the company. From 2016 to 2019, Adidas mean ratio is 0.4245 or 0.3
42.45%. This indicates that Adidas can take the average of 42.45%
operational risk for its company. Figure depicts the movement of 0.2

operational risk in Adidas company year by year. In 2015 and 2016, 0.1
Adidas’ operational risk is 41.32% and 42.32% respectively which
0
indicates the company is efficient in term of managing their 2016 2017 2018 2019
operational risk, as the risk ratio is below average ratio. However, Average Operational Ratio
starting from 2017 onwards, the ratio is above average ratio which
determine that the company is less efficient.
 LIQUIDITY RISK
Liquidity ratio is defined as the ability of businesses or firm to meet or pay Average Operational Ratio
for its short term debt obligation. It measures how fast a business can
convert its assets into cash to pay off all the debts. The way liquidity risk is 1.7

computed is by dividing the current assets with current liability, thus 1.65
producing average current ratio. The higher the ratio, the more liquid the 1.6
firm hence the lesser the liquidity risk and vice versa. It is because the firm 1.55
has enough assets to cover its current debt. In this study, 5 years average 1.5
current ratio was computed starting from 2016 to 2019. Based on the graph
1.45
above, the highest current ratio is in 2018 which equivalent to 1.6782 times.
1.4
Meaning to say, in this year Adidas company is in most liquid state thus
experiencing the lowest liquidity risk. It means that Adidas’ current assets 1.35

amounted $1.6782 managed to cover its 1$ current liabilities. 1.3

On the contrary, 2019 charted the lowest liquidity ratio which is only 1.3135 1.25
times. Low liquidity ratio indicates a company is struggling and having hard 2016 2017 2018 2019

time to convert its current assets into cash to pay off the debt. Liquidity Average Operational Ratio

risk in this year is high thus Adidas is suggested to take precautions so that
it will not get into insolvency. The overall performance of liquidity risk
ratio for Adidas for the whole 4 years (2016-2019) can be said as
inconsistent as the trend shows the rising and declining trend of those ratio.
MARKET RETURN
Market Return is a concept that Don Yacktman uses in his investment approach. Yacktman explained the return
concept in detail in his interview with GuruFocus. Yacktman defines return as the normalized free cash flow yield
plus real growth plus inflation. He said in the interview (March 2016, when the S&P 500 was at about 1400):
If the business is stable, this calculation is fairly straightforward. For instance, on the S&P 500 we would normalize
earnings. We would then calculate what percentage of those earnings are not reinvested in the underlying businesses
and are therefore free. Historically, for the S&P 500, this has been just under 50% of earnings. Currently, we expect
the S&P to earn about 70 on a normalized basis, a number which is far below reported earnings due to our adjusting
for record high profit margins. $70 X ½ / 1400 gives you a normalized free cash flow yield of approximately 2.5%.
The historical real growth rate of the S&P 500 (companies) is about 1.5%. Assuming an inflation rate of 2.5%, the
return on an investment in the S&P 500 is about 6.5% today (2.5% free cash flow yield plus 1.5% real growth plus
2.5% inflation).

Market Return = 19.83 %

CAPM
Beta is a measure of the volatility , or systematic risk, of a security of a Beta
portfolio in comparison to the market as a whole. Besides that, beta is also 0.6
known as beta coefficient. Beta actually indicates the tendency of a security’s
return to respond to uncertainty in the financial market. For this study, beta of 0.5

Adidas company for five years duration starting 2016 till 2019 is calculated
0.4
using standard deviation. The way we interprete beta is by indicator wether it is
equal to 1, less than 1 or more than 1. If beta is more than 1, it depicts that the
0.3
security’s price is more volatile than the market. If beta is less than 1, means
security is less volatile and if beta is equal to 1, it indicates that security’s price
0.2
move with the market.
For Adidas company, the beta from the year 2016 till 2019 is all less than 1. 0.1
This indicates that the security’s price of Adidas is has less volatility than the
market. 0
2016 2017 2018 2019
Beta
THANK YOU