Evaluation Essay Sample on Under Armour: Explaining Profit Using Financial Ratios

Introduction

Under Armour is an American company that focuses on the production of casual, sports, and footwear apparel. Over the years, Under Armour has succeeded in its operation, and this is evident using its financial data. The financial data of this company can be explained by using different financial rations.

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Profitability Ratios

The first set of ration that explains information about the company is the profitability ratio which is used to show the profit that UA has made over a specific period (Kanapickiene, & Grundiene, 2015). From the profitability ration of Under Armour, it is evident that in future the profit that the company will be making will go high since it has expanded its business to international markets, cutting costs and focusing on several investments. One of the specific trends in data item is the ROA, EWI, PM, and ROE were negative which means that the company was not making profits from its efforts.

Asset Utilization and Efficiency Ratios

The asset utilization, as well as efficiency ratios, is the second set of rations that explains financial information of Under Armour. The purpose of this ratio shows whether the company is productive as well as efficient while using its assets (Kanapickiene, & Grundiene, 2015). In the case of Under Armour, Asset Utilization and Efficiency Ratios have been going down over the past few years. However, the future projection of this ratio is that it is going to increase since the company is currently restructuring its expenses of $300 million hoping that it will bear fruits in 2019. The trend that is important in this case is that an increase in the asset utilization, as well as efficiency ratios, show that that the company is using its assets productively as well as effectively.

Liquidity, Capital Structure, and Solvency Ratios

The liquidity, capital structure, and solvency ratios help to show that a company has a positive working capital hence there should not be an issue that will prevent it from attaining its obligations (Morales-Diaz, & Zamora-Ramirez, 2018). The current ratio for Under Armour is above 1. This figure is an indication that the company has a positive working capital. There is a likely hood that this ration will be maintained at above 1 because the cash flow that the company is experiencing from various activities have increased. The important trend, in this case, is the increase in the cash flow because it will ensure that the liquidity, capital structure as well as the solvency ratios are maintained at 1.

Investor Ratios

Investor ratios is important in this case since it helps to show the ability that a business has to help the owner earn a return from their investment (Arkan, 2016). In the case of Under Armour, the current investor ratio is low because the performance of the company has reduced over the past few years. The reduction in the performance means that the business owners will have a reduced return from their investment. However, there is a likelihood that the investor ratio will increase in the coming years since the company has restructured the activities that will help it to increase the money in the company. The data item that is used in this case is the book-to-market ratio. The book-to-market ratio trend shows that it gradually increases; hence there is a high chance that it will achieve a more excellent value.

Comparing the Ratios

Nike is another company that provides innovative products, services as well as experience to the athletes. This company has been successful in its activities, thus providing stiff competition to Under Armour. This competition can be identified using the financial ration that each of the company has. The comparison of these ratios is as follows;

Profitability Ratio

In terms of profitability ratio, which shows the profit that the company has achieved over a certain period, it is evident that Nike is ahead of Under Armour. Nike has been making a lot of profit while Under Armour has been experiencing reduced earnings in the past two years. One of the reasons that has made Nike surpass Under Armour is the US factors as well as the performance in the market. Many sporting goods, as well as footwear chains in the US, have experienced a bankruptcy and this has affected both companies. Furthermore, the shifting demands of the customers have changed the sales, and hence the profit earned by these two companies. However, Nike has managed to stay ahead of Under Armour because most of its sales come from the international market where there are few challenges. The other reason that has made the profitability of Nike to be ahead that of Under Armour is that Under Armour has been focusing on restructuring its activities. This process takes a lot of funds thus affecting the numbers of the company negatively.

Asset Utilization and Efficiency Ratios

In terms of asset utilization and efficiency ratios, both Nike and Under Armour have common aspects. However, Nike still has an advantage over Under Armour. Over the past years, Under Armour has spent a lot of Money Company to Nike simply because it has been restructuring its process. Nike, being a large company does not have to spend a lot of money on marketing since they have a strong brand and are recognized in the market. Furthermore, Nike has managed to build relationship by forming partnership with other firms hence it has been able to manage its assets effectively and efficiently. On the contrary, Under Armour is a smaller firm compared to Nike thus, there are various barriers that it faces such as low sales. Therefore, the company is forced to spend more so that it can stand out among the large companies. Also, Nike has a lot of money which has contributed to its large economy of scale as well as more leverage compared to Under Armour.

Liquidity, Capital structure, and Solvency Ratios

Comparing the two companies, Nike has emerged more solvent compared to Under Armour. For example, the ratio of Nike in 2018 was 2.51, while that of Under Armour was 1.97. It is clear that from the ratio, Under Armour has been on a decline while Nike has been gradually rising. However, both companies are experiencing a steady increase in the debt-to-equity ratios.

Investor Ratio

Comparing the P/E ratios of Nike and that of Under Armour, it is evident that investors are confident with Nike in terms of the future returns. In the last two years, there has not been the reporting of P/E ratios of Under Armour because the company has been experiencing negative earnings. Compared to Nike, the P/E ratios were higher, which stood at 20.76 in 2017 and 61.93 in 2018. Looking at the difference in this ratio, Nike is a safer investment compared to Under Armour.

References

Arkan, T. (2016). The importance of financial ratios in predicting stock price trends: A casestudy in emerging markets. Finance, Rynki Finansowe, Ubezpieczenia, 79(1), 13-26.Retrieved from: https://www.ceeol.com/search/article-detail?id=623339

Kanapickiene, R., & Grundiene, Z. (2015). The model of fraud detection in financial statementsutilizing financial ratios. Procedia-Social and Behavioral Sciences, 213, 321-327.Retrieved from: https://www.sciencedirect.com/science/article/pii/S1877042815059005

Morales-Diaz, J., & Zamora-Ramirez, C. (2018). The impact of IFRS 16 on key financial ratios:a new methodological approach. Accounting in Europe, 15(1), 105-133. Retrieved from:https://www.tandfonline.com/doi/abs/10.1080/17449480.2018.1433307