Accounting for asset, liabilities and equity
Referring to the notes to the financial statements, we found that the company prepares its consolidated financial statements, according to Generally Accepted Accounting Principle(GAAP), while the assets, liabilities and equity are measured on cost basis.
Inventory Valuation
Referring to the notes to the financial statements, we found that the company is using FIFO method to value its inventory. Following FIFO method for inventory valuation, leads to higher value of inventory and lower cost of goods sold(COGS), which leads to higher gross profit and tax bills for an entity. Important to note, GAAP allows the use of both FIFO and LIFO inventory accounting methods, therefore, had the company use the latter inventory valuation method, the value of inventory would have been lower than what the company reported currently. In addition, the value of COGS would have been higher that would have further lead to lower gross profits and tax bills for the company.
Approach to internal control and SOX act
Following the mandatory provisions of Sarbanes Oxley Act, the management of the company duly acknowledges the accuracy of the financial statements and the material information communicated within it. In addition, the management also evaluated and ensured the effectiveness of the internal control measures which included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a final acknowledgement, related to effectiveness of these measures.
Common Size Income Statement
-Horizontal Income Statement
Vertical Income Statement
Income Statement Analysis
Referring to the above figures, we can see that during the year, the revenue figures of the company increased by an appreciable 32.55%, while a controlled cost of sales, did assisted the company with an increase in the gross profit margin from 48.76% to 49.03%. Furthermore, the cost management of the company was further visible in the operating expenses, as despite of significant increase in the revenue figures, the proportion of operating expenses to the sales figure was almost constant over the year, recorded at 37.45%. This assisted with the increased amount of operating income margin that soared high from 11.36% to 11.48%, while the net income margins reduced marginally from 6.95% to 6.74%, amid increase in non-operating expenses that increased by three times during 2014.
Common Size Balance Sheet
-Horizontal Balance Sheet
-Vertical Balance Sheet
Balance Sheet Analysis
Referring to the above figures, the most notable point is the significant surge in the current assets of the company that increased by 37.20%, while their proportion to the total assets increased from 71.55% to 73.94%. In contrast, the company did manage to achieve a decline in the current liabilities by -1.17%, while their proportion to the total assets plummeted from 27.06% to 20.14%, thus giving strength to the working capital position of the company. On the other hand, the non-current assets also increased by 21.60%, indicating observatory policy of the company for both current assets as well as non-current assets.
As for liabilities, the most notable figure here was significant increase in the long-term debt that increased from $48 Million to $255 million, recording an increase of 431.25%, while the total non-current liabilities increased by 229.59%. On the whole, the proportion of total liabilities to total assets increased from 33.21% to 35.56%, confirming adoption of highly leveraged capital structure by Under Armour as with increased proportion of debt, the proportion of equity capital was reduced from 66.73% to 64.44%.
Ratio Analysis
In order to dig further into the financial position of the company, we will now run the financial figures for past two years under the microscope of ratio analysis. While the calculations are attached in the excel sheet attached with the report, the final outcome of the ratios is discussed below:
i)Liquidity Ratio
-Current Ratio: Current Assets/ Current Liabilities
Referring to the above figures ,we can witness that the current ratio multiple surged from 2.64 to 3.67, amid 37.20% hike in the current assets while the current liabilities decline by -1.17%, thus providing strength to the liquidity position of the company
ii)Profitability Ratio
-Operating Profit Margin: Operating profit/ Revenue
Referring to the above figures we can see that during the year, the operating profit margin of the company increased from 11.36% to 11.48%, amid significant increase in the revenue figures and controlled operating expenses, that lead to a sustainable rise in the operating profit margin of the company.
iii)Debt Ratio: (Short term debt +long-term debt)/ Total Assets
As noted from the above figures, we can see that during the year, the company increased the proportion of assets financed with the debt funds.
iv)Efficiency Ratio:
-Days of Inventory: (365* Inventory)/ COGS
In order to calculate the efficiency of the company, we calculated the days of inventory, and found that during 2014, Under Armour was able to sell its inventory within a reduced period of time, and the capital was freed up from the inventory levels quickly, thus indirectly assisting the liquidity position also.
v) Equity Ratio:
Debt- Equity Ratio: (Short term debt +long-term debt)/ Total Equity
While we did witnessed in Debt Ratio calculation that during 2014, Under Armour increased their reliance on debt funds, the conclusion was confirmed through the debt-equity ratio which indicated that during the year, the company did employed additional debt into its capital structure, thus increasing the financial leverage.
Use of the above information by the end users
Important to note, the information contained in the financial statements is used by both the internal as well as external users. For instance, while the management use the financial statements for evaluating its performance and designing future strategy, external parties such as shareholders, creditors, et cetera use the financial statements to adjudge the strength in the financial performance of the company, and whether they should continue their affiliation with the company or should sell their stocks.
References
(2014). Annual Report 2014. Under Armour.
