Here’s What To Make Of Under Armour’s (NYSE:UAA) Decelerating Rates Of Return

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Under Armour (NYSE:UAA) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.15 = US$525m ÷ (US$5.0b – US$1.5b) (Based on the trailing twelve months to December 2021).

So, Under Armour has an ROCE of 15%. That’s a relatively normal return on capital, and it’s around the 17% generated by the Luxury industry.

See our latest analysis for Under Armour

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.

So How Is Under Armour’s ROCE Trending?

There hasn’t been much to report for Under Armour’s returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn’t reinvesting in itself, so it’s plausible that it’s past the growth phase. So don’t be surprised if Under Armour doesn’t end up being a multi-bagger in a few years time.

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 than15% because total capital employed would be higher.The 15% 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. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

The Bottom Line

In a nutshell, Under Armour has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 27% so the market doesn’t look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren’t typical of multi-baggers, so if that’s what you’re after, we think you might have more luck elsewhere.

Under Armour could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.