U.S. markets closed
  • S&P 500

    3,911.74
    +116.01 (+3.06%)
     
  • Dow 30

    31,500.68
    +823.28 (+2.68%)
     
  • Nasdaq

    11,607.62
    +375.42 (+3.34%)
     
  • Russell 2000

    1,765.74
    +54.07 (+3.16%)
     
  • Crude Oil

    107.06
    -0.56 (-0.52%)
     
  • Gold

    1,828.10
    -2.20 (-0.12%)
     
  • Silver

    21.13
    +0.00 (+0.02%)
     
  • EUR/USD

    1.0562
    +0.0038 (+0.36%)
     
  • 10-Yr Bond

    3.1250
    +0.0570 (+1.86%)
     
  • GBP/USD

    1.2266
    +0.0005 (+0.04%)
     
  • USD/JPY

    135.0850
    +0.1520 (+0.11%)
     
  • BTC-USD

    21,388.02
    +166.46 (+0.78%)
     
  • CMC Crypto 200

    462.12
    +8.22 (+1.81%)
     
  • FTSE 100

    7,208.81
    +188.36 (+2.68%)
     
  • Nikkei 225

    26,491.97
    +320.77 (+1.23%)
     

Investors Met With Slowing Returns on Capital At Under Armour (NYSE:UAA)

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
·3 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Under Armour (NYSE:UAA) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Under Armour is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.13 = US$422m ÷ (US$4.5b - US$1.3b) (Based on the trailing twelve months to March 2022).

Thus, Under Armour has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 15% generated by the Luxury industry.

See our latest analysis for Under Armour

roce
roce

In the above chart we have measured Under Armour's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Under Armour.

What Can We Tell From Under Armour's ROCE Trend?

Over the past five years, Under Armour's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Under Armour to be a multi-bagger going forward.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 29% of total assets, this reported ROCE would probably be less than13% because total capital employed would be higher.The 13% ROCE could be even lower if current liabilities weren't 29% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.

The Bottom Line On Under Armour's ROCE

In summary, Under Armour isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last five years, the stock has given away 46% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Like most companies, Under Armour does come with some risks, and we've found 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.