Under Armour (NYSE:UAA) Takes On Some Risk With Its Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Under Armour, Inc. (NYSE:UAA) makes use of debt. But the more important question is: how much risk is that debt creating?

We check all companies for important risks. See what we found for Under Armour in our free report.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Under Armour Carry?

You can click the graphic below for the historical numbers, but it shows that Under Armour had US$595.2m of debt in December 2024, down from US$676.0m, one year before. However, it does have US$726.9m in cash offsetting this, leading to net cash of US$131.7m.

How Strong Is Under Armour's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Under Armour had liabilities of US$1.34b due within 12 months and liabilities of US$1.31b due beyond that. Offsetting this, it had US$726.9m in cash and US$615.5m in receivables that were due within 12 months. So its liabilities total US$1.30b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Under Armour is worth US$2.19b, and thus could probably raise enough capital to shore up 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. Despite its noteworthy liabilities, Under Armour boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Under Armour

But the other side of the story is that Under Armour saw its EBIT decline by 5.6% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Under Armour can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Under Armour has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Under Armour saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While Under Armour does have more liabilities than liquid assets, it also has net cash of US$131.7m. So although we see some areas for improvement, we're not too worried about Under Armour's balance sheet. Even though Under Armour lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.