Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Under Armour, Inc. (NYSE:UAA) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Under Armour's Debt?
The image below, which you can click on for greater detail, shows that at September 2020 Under Armour had debt of US$997.3m, up from US$592.0m in one year. On the flip side, it has US$865.6m in cash leading to net debt of about US$131.7m.
A Look At Under Armour's Liabilities
Zooming in on the latest balance sheet data, we can see that Under Armour had liabilities of US$1.45b due within 12 months and liabilities of US$1.94b due beyond that. On the other hand, it had cash of US$865.6m and US$815.4m worth of receivables due within a year. So its liabilities total US$1.71b more than the combination of its cash and short-term receivables.
Under Armour has a market capitalization of US$7.65b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Under Armour's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Under Armour made a loss at the EBIT level, and saw its revenue drop to US$4.5b, which is a fall of 14%. We would much prefer see growth.
Not only did Under Armour's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost US$46m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of US$749m. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Under Armour (1 can't be ignored) you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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