Is Under Armor (NYSE:UAA) a risky investment?

Warren Buffett famously said, “Volatility is not synonymous with risk.” When we think about a company’s risk, we always look at its use of debt. Because too much debt can lead to ruin. Points to keep in mind are: Under Armor Co., Ltd. (NYSE:UAA) has debt on its balance sheet. But the more important question is how much risk that debt creates.

What risks does debt pose?

Debt supports a company until the company has difficulty paying it back with new capital or free cash flow. If the situation gets too bad, lenders may take control of your business. Although this is less common, we often see debt-laden companies permanently diluting shareholders as lenders force them to raise capital at distressed prices. Of course, many companies use debt to fund growth, and there are no negative consequences. The first thing to do when considering how much debt a company uses is to look at its cash and debt together.

Check out our latest analysis for Under Armor.

How much debt does Under Armor have?

As you can see below, Under Armor had debt of US$675.6m as of September 2023, which is about the same as a year ago. Click on the graph to see details. On the other hand, the company has his cash of US$655.9m, with net debt of around US$19.7m.

A look at Under Armor’s debt

The most recent balance sheet shows that Under Armor had debt of US$1.28b falling due within a year, and debt of US$1.37b falling due beyond that. Offsetting this, it had cash of US$655.9m and receivables of US$805.0m due within 12 months. So its liabilities outweigh the sum of its cash and (short-term) receivables by US$1.2b.

This deficit is not too severe since Under Armor is valued at $3.24 billion, so it could potentially raise enough capital to shore up its balance sheet if needed. However, it’s still worth carefully considering the company’s ability to repay its debt. But either way, we can safely say that Under Armor doesn’t have a lot of debt, as it has virtually no net debt.

To determine how much debt a company has relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA), and its earnings before interest, tax, and amortization (EBIT) divided by its interest expense. (its interest cover). This way, we consider both the absolute amount of debt and the interest rate paid on it.

With debt to EBITDA of just 0.045x and interest covering EBIT of a whopping 56.7x, Under Armor is clearly not a hopeless borrower. Indeed, the debt burden seems feather-light when compared to earnings. It’s also good to see that Under Armor grew its EBIT by 13% in the last year, further improving its ability to manage its debt. There’s no question that we learn most about debt from the balance sheet. But more than anything else, future earnings will determine Under Armor’s ability to maintain a healthy balance sheet going forward. So if you want to see what the experts think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while tax preparers may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of his EBIT that is matched by actual free cash flow. Looking at the most recent three years, Under Armor’s free cash flow was 41% of its EBIT, which was lower than expected. It’s not great when it comes to paying off debt.

our view

Fortunately, Under Armor’s impressive interest expense suggests that it has a good debt advantage. And the good news doesn’t end there. Its net debt to EBITDA also supports that impression. When you put all of the aforementioned factors together, we see that Under Armor can handle its debt fairly comfortably. Of course, this leverage can improve return on equity, but it also brings more risk, so it’s worth noting this. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet, far from it. We’ve identified 1 warning sign Understanding these should be part of your investment process.

At the end of the day, it’s often better to focus on companies with no net debt. You can access a special list of such companies (all with a track record of profit growth). It’s free.

Have feedback on this article? Curious about its content? contact Please contact us directly. Alternatively, email our editorial team at Simplywallst.com.

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