Chosen Firm: Under Armour, Inc.
Benchmark Firm: VF Corporation
CHART: SUMMARY OF FINANCIAL RATIOS
The Current Ratio measures a company’s ability to cover its short-term debt obligations. It is the most commonly used measure of short-term solvency. It is calculated by dividing the Current Assets by Current Liabilities. The Industry Average for 2012 was 4.30. While Under Armour, Inc. is only slightly below the Industry Average, with a Current Ratio of 3.58. It has remained stable over the past 3 years. They are still considered to be a smaller company, so their Current Ratio should be higher than the ‘Rule of Thumb – 2:1.’ VF Corporation is larger than Under Armour, Inc., and the majority of the other companies in this Industry. They do not necessarily need to have the ‘extra’ level of safety to cover unexpected cash needs. So, even though their Current Ratio of 2.00 is well below the Industry average, it is still a good ratio. But, a 2:1 ratio could mean that they have too many short-term assets or too little short-term debt.
The Inventory Turnover Ratio is defined as Sales (or Business Revenue) divided by Inventory. This measures how effectively a firm is managing its assets and whether or not the level of those assets is properly related to the level of operations as measured by sales. It gives us an idea of how quickly inventory ‘turns over.’ The Industry Average for 2012 was 3.80. Under Armour, Inc.’s Inventory Turnover Ratios for the past three years are as follows: 2010 – 4.94, 2011 – 4.54, and 2012 – 5.75. The target ratio should be right at or slightly above the Industry. Under Armour’s Inventory Turnover Ratio is above average, but not quite as good as VF. VF Corporation is one of the most successful in this Industry. So the fact that they have an Inventory Turnover Ratio of 7.95 is not surprising. This is why I chose to use one of the Industry’s leaders as the Benchmark. Under Armour, Inc. has set goals for high-level performance, so this will provide beneficial guidance.
The Days Sales Outstanding (DSO) is also called the ‘average collection period’ (ACP). It is calculated by dividing Accounts Receivable by Average Daily Sales to find the number of days’ sales tied up in receivables. So, it represents the average length of time that the firm has to wait after making a sale before receiving cash. The Industry Average for 2012 was 49 days. Under Armour is performing above-average in this area too. They have gone from 35 days, down to 33 days, and back to 35 days in 2012. This means that they have not adjusted their credit policy to try to reduce their DSO, but they are doing better than most. VF has a DSO of 41 days, which is closer to the Industry Average. Their Receivables were also $1,222,345 for 2012, while Under Armour had a Receivable balance of $175,524. So, they have more on their plate to be resolved and it makes sense that their DSO would be higher. Since they are both below the Industry Average, they are performing well. But, 49 days is pretty bad. So, they just need to tighten up a little bit and really enforce their credit policies.
The Total Assets Turnover Ratio measures the utilization, or turnover, of all the firm’s assets. It is calculated by dividing Sales by Total Assets. The Industry Average for all 3 years has remained steady: 2010 – 1.5, 2011– 1.6, and 2012 – 1.5. Under Armour, Inc. has almost matched the Industry Average all 3 years. So, it appears they are managing all of their assets efficiently. They are generating revenues from their total investment in assets. However, VF has a Total Asset Turnover Ratio of 0.126891. This is extremely low, compared to the Industry Average. This usually means that they are “not generating a sufficient volume of business given its total asset investment. Sales should be increased, some assets should be sold, or a combination of these steps should be taken” (94). This shows