Under Armour Financial Statement Analysis
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Financial Statement Analysis
Financial statement analysis entails analyzing the financial statements of a given company to facilitate decision-making. The analysis is critical to both external and internal stakeholders because they reflect the overall health of the company and helps to determine financial performance and the value of the organization. Internal stakeholders use the analysis to monitor and manage finances. Government use financial statement analysis for taxation purposes and to monitor where the organization is complying with accounting laws. Organizations use the balance sheet, income statement, and the cash flow statement to manage their operations and make a transparent report to their shareholders. These statements have a connection, and they reflect different perspectives of an organization’s activities and performance. The balance sheet reports the financial worth of a company as book value. It reflects the assets, liabilities, and equity of a company that shows its operational efficiency. The income statement shows the revenue earned in the financial period and the expenses incurred to generate the revenue. The statement also reflects the net profit earned after deducting interest and tax. The cash flow statement presents an overview of cash flow generated from various business activities such as operating, investing, and financing activities. Analysts use horizontal analysis, vertical analysis, and ratio analysis to analyze financial statements. The paper analyzes Under Armour’sbalance sheet, income statement, cash flow statement, and the financial ratios for FY 2018-FY 2019. The financial statements will be used to determine the company’s operating efficiency, liquidity, capital structure, and profitability. Financial statement analysis is critical because it helps to reflect the financial health of an organization and supports decision-making.
Under Armour
Under Armour is an American organization that specializes in footwear, sports gear, and casual apparel. Its main headquarters are in Baltimore, Maryland but it has additional headquarters in Amsterdam, Panama City, Shanghai, and Toronto. The company develops, markets, and distributes branded performance accessories and footwear across the globe. It was founded in 1996, and it has made an impressive growth since Kevin Plank established it and now it is among the most recognizable brands in the world (Under Armour, 2020). It has collaborated with many mega stars such as Dwayne Johnson, college teams, and professional teams such as Tottenham to help in its marketing activities and publicity. The company has scaled height after height since its inception at a basement location to the current organization that is leading by introducing new technology in sportswear and apparel to create stylish designs that appeal to everyone who has an active lifestyle. Apart from utilizing celebrity power to spearhead its marketing and growth strategy, the company also sponsors many sporting events to popularize its products and also makes strategic acquisitions and partnerships to spur its growth. It has a global presence and this has enabled the company to generate consistent profits and achieve overall growth of its total assets. It has over 15,000 employees in its house stores and distribution facilities in the U.S. and across the globe (U.S. Securities and Exchange Commision, 2020). The company generate revenue by selling its products across the globe. It sells most its products in North America but they attract many people who have active lifestyles across the world. Under Armourplans to continue its business growth by increased apparel, branded accessories, and footwear sales, expanding its wholesale distribution, growing consumer sales, and expanding its international market and presence. It has adopted a digital strategy to support its long-term vision, interact closely with its consumers, and support their wellness through MapMyFitness app.
The industry for apparel, footwear, and branded accessories is very competitive and attracts competition from new entrants and established manufacturers such as Nike and Adidas who continuously expand and market performance products. Under Armour does not enjoy the monopoly of the technology and fabric used to manufacture its product as they are available to its competitors in the highly competitive industry.Further, its competitors have a global brand recognition and are endowed with more resources that the company. In this respect, the company must carry out financial statement analysis to enable it to compete in the industry and inform its purchasing decisions. The company has succeeded in competing successfully owing to a strong brand image and global recognition and production of high-performance products that meet customer’s expectations. The company also benefits by specializing in gearline accessories and merchandising that sets it apart from the competition. Under Armoursuccess lies in its ability to identify and manufacture product trends that suits their customer preferences. It is able anticipate what they want and create discretionary products that suits their lifestyles, despite working in an industry that is characterized by changing customer preferences. It is to respond to their changing preferences timely and this gives the company an edge over its competitors. It uses technical innovation to design comfortable and attractive gearline that support active lifestyles of its customers (Under Armour, 2020). The company operates in a fragmented industry and the company long-term growth and success will depend on how it will adapt to changes quickly to meet consumer requirements and preferences. It must also take advantage of acquisitions and any opportunity present in the global market. In addition, it must devote adequate resources to marketing and selling its products through advertising, strong media presence, strategic partnerships and endorsing its products in major platforms that will enhance brand power and global image. The growth of the industry relies on political stability, economic stability, and free market mechanisms, protection of intellectual property, and friend laws and regulations (Under Armour, 2020). Any unrest in these factors may negatively affect the company and the industry in general, leading to reduced growth and profitability. Uncertainties brought about by China-U.S. trade wars and diplomatic tiffs as well as the BREXIT referendum affects the industry negatively. However, the globe was experiencing an economic boom prior to the COVID-19 pandemic and the company registered impressive financial results in the FY2018-FY2019. In addition, the North America economy was experiencing an impressive growth that increased the demand for performance accessories and apparel because the majority of its products are sold there. These factors, along with an improved global economy contributed to the success and profitability of the company. Overall the outlook for the future of the company is bright. The demand for performance gear and accessories is rising because people are putting a great emphasis on their health more than ever and are adopting active lifestyles. In addition, technological advancements will allow the company to come up with innovative products that suits customer preferences and this continue to support its growth objectives. The company projects to develop new products and make strategic acquisitions and partnership that will enable it to compete better, increase its market share, and spur its growth at the international arena.
The Balance Sheet
Cash Flow Statement
Statement of Operations
Income Statement
Short Term Liquidity of Under Armour
It is important to examine the company’s short term liquidity to determine it can meet various claims and obligations one they fall due. A stable company should be able to convert its assets into cash quickly to enable it minimize the risk of debt. Assets should be converted into cash in a speedy manner without compromising its book value to meet planned and unexpected cash demands to allow the company reduce its liabilities. The financial position of a company is deemed stable when it possess adequate liquidity. The importance of short-term liquidity cannot be ignored. A liquid company is able to acquire discounts from suppliers and is able to exploit other profitable opportunities because of sufficient liquidity. In addition, liquidity crisis lead to insolvency and bankruptcy and when a company is faced with such circumstances, it is forced to sell its investments, intellectual property, and fixed assets to attain liquidity. The management also finds it had to maintain normal day-to-day operations and insufficient liquidity damages the relationship between the company and its creditors. Current ratio is an important tool that helps in determining short term liquidity and solvency of an organization. It examines the relation between the current assets and current liabilities.
Current ratio= current assets/current liabilities.
In relation to Under Armour, in 2017, the total currents assets were 2,337,679 and current liabilities were 1,060,375 (Under Armour, 2020).
2017 current ratio=2,337,679/1,060,375
= 2.2
In 2018, total current assets were 2,593,628 while current liabilities were 1,315,977
2018 current ratio=2,593,628/1,315,977
= 1.97
The current ratio shows that the short term liquidity of the company is good and the company is in a position of meeting its short term obligations without straining its assets. It can also acquire business finance at ease from short term sources. A ratio of 2.2 and 1.97 is healthy because for every two assets, the company has only one liability and this shows it has a satisfactory liquidity. The comparison between two financial periods provides further evidence that the company has maintained its liquidity position well even though it registered a decline in 2018 due to an increase in current liabilities.
Operating Efficiency of Under Armour
The operating ratio is critical because it reveals the management efficiency by comparing operating expenses to net sales. A small ratio shows that company is more efficient at generating revenues at a smaller costs. Operating expenses includes all expenses incurred in a given financial period, excluding interest and tax. They include all expenses that are involved in day-to-day running of an organization but not related to manufacturing and production costs.
Operating ratio= (operating expenses + cost of goods sold)/ net sales
In 2017, the operating ratio was 0.558 while in 2018, the operating margin was -0.4817 (Macrotrends, 2020).
The operating margin declined significantly in 2018 compared to 2017. The decrease highlights the management efficiency of Under Armourbecause the operating expenses become significantly smaller as a percentage of the net sales. It shows that the management is generating higher revenues with smaller expenses. The significance of the ratio is to inform the management whether they should implement cost controls while generating revenues. The company registered an improvement in 2018 highlighting the operating efficiency of the company.
Capital Structure of Under Armour
The capital structure of a company reveals its long-term capital in terms of its debt and equity. A strong capital structure is vital to a company because it a permanent type of financing that supports its long-term growth. It comprises of its debt obligations and the total shareholder equity. In 2017, Under Armourlong-term debt/capital was 0.2748 while the debt/equity ratio was 0.4543 (Macrotrends, 2020). In 2018, the company’s long-term debt/capital was 0.3614 while the debt/equity ratio was 0.3614. The debt ratio decreased significantly in 2018 showing that the company reduced its liabilities but increased its equity. Thus, Under Armour is a good investment opportunity because it has adequate capital that will continue to support further growth and is reducing its liabilities. Its value will continue to increase.
Profitability of Under Armour
Profitability ratios are essential because they assess how an organization generate earnings in relation to its revenue, assets, operating expenses, and its equity. The ratios reveal how the generating profits and value for its shareholders efficiently. Profit margin measures the profitability of a business at various cost levels. In 2017, Under Armour’s gross margin was 45.12 and net profit margin was -0.9673 while in 2018, the gross margin was 45.0681 and the net profit margin was -0.8916. Gross margin reflects how much money the company made after deducting the cost of goods sold, and the net profit margin shows the ability of the business to make profits after accounting for all operating expenses and tax. The ratios are high, reflecting a positive picture of the company because they are higher than the industry average, even though the profitability was significantly smaller in 2018. In 2017, return on assets (ROA) was -1.2046 while in 2018, ROE was -1.0907 (Macrotrends, 2020). The high ratios shows that Under Armour is deploying its assets well to generate profits and increase its sales volume. The company has a rich asset base that increases the potential for more sales and profits. In addition, a rich asset base allows the company to enjoy economies of scale that ultimately reduce costs, increase margins, and returns grow faster than the assets. Return on equity (ROE) is another key profitability ratio that informs shareholders how the company is earning from its equity investments. In 2017, ROE was -2.39 and in 2018, ROE was -2.2957. The company has an impressive ROE showing that the company is able to generate earnings without additional equity because it has a large asset base funded through permanent financing.
Conclusion
Financial statement analysis is an important endeavor because it allows a person to get a true picture of the company’s performance. The analysis of Under Armour financial statements presents a positive picture of the company because they show that it has performed strongly in the analyzed metrics. Under Armour has created a niche for itself through developing, distributing, and marketing sportswear apparel, accessories, and footwear that appeal to the global market, as reflected by its strong financial performance. The demand for its products continue to increase as people adopt active lifestyles and this shows that the company has a brighter future. Under Armour has the potential to grow further and appreciate in value, and hence, it is recommended that the company should enter new markets and come up with new, attractive designs. It is also a good investment opportunity.
References
Macrotrends. (2020, July 31). Under Armour Financial Ratios for Analysis 2005-2020 | UA. Retrieved from https://www.macrotrends.net/stocks/charts/UA/under-armour/financial-ratios
Norton, C., & Porter, G. (2014). Using Financial Accounting Information: The Alternative to
Debits and Credits. Chicago: Cengage Learning.
U.S. Securities and Exchange Commision. (2020, July 31). Under Armour, Inc. CIK#. Retrieved from https://www.sec.gov/cgi-bin/browse-edgar?company=under+armour&owner=exclude&action=getcompany
Under Armour. (2020, July 31). About Us. Retrieved from https://about.underarmour.com/about
Under Armour. (2020, July 31). Under Armour 2018 Annual Report. Retrieved from https://about.underarmour.com/sites/default/files/2019-04/Under%20Armour%202018%20Annual%20Report%20%282%29.pdf