" Oh, that's right -- we can't. Under Armour is sporting negative trailing free cash flows."
-- Anders Bylund, five minutes ago

Hey, Anders? You actually looked at the financials, right?

Though he's correct that real free cash flow has faltered in recent months, exactly none of that is attributable to poor performance. Instead, it's due to big increases in inventory. You don't really believe that a business that grew sales by 47% and net profit by 90% in its most recent quarter ought to lighten up on inventory, do you? Of course you don't.

Earning more for owners
Besides, when it comes to the real cash earnings of the business, Under Armour (NASDAQ:UARM) does extremely well. Have a look at the past four quarters' worth of owner earnings, which is calculated as net income plus depreciation and amortization minus capital expenditures.


Quarter Ended 9/30/06*

Quarter Ended 6/30/06*

Quarter Ended 3/31/06*

Quarter Ended 12/31/05*

Net Income





Deprec. and Amort.





Capital Expend.





Owner Earnings





*Numbers in millions.
Source: Capital IQ, a division of Standard & Poor's.

Got that? Including the latest quarter, Under Armour has produced $29.5 million in owner earnings over the past 12 months. Now that's cash flow.

Checking the passport of valuation nation
Of course, there are other areas where Anders' mostly solid argument goes bad. For example, comparing Nike (NYSE:NKE) with Under Armour is like comparing kumquats with spaceships; it's entirely contrary to the well-defined principles taught by Professor Aswath Damodaran, who illustrates in Investment Fables that all valuation is relative.

Here, the disconnect comes from Nike and Under Armour being at entirely different stages of development. A fairer measure of comparative value would feature firms of a similar size growing at similar rates. Two come to mind: Motley Fool Hidden Gems pick Nuance Communications (NASDAQ:NUAN) and East West Bancorp (NASDAQ:EWBC).

To be fair, Under Armour's trailing P/E of 71 still looks expensive when compared with the multiples for these two firms -- especially California's East West bank, which trades for just 16.3 times earnings. But the P/E is a fair metric only if you trust GAAP earnings, which I don't. GAAP can be stretched further than Joan Rivers in an episode of Dr. 90210.

Price-to-sales is far less malleable, and on that score, all three firms are valued at roughly six times trailing revenue. Coincidence? No, probably not.

Can you hear us coming?
Anders is a terrific writer and a strong stock picker, but he's flat wrong when it comes to Under Armour. Cash flow is rising, the valuation is fair, superior investors are on board, and the founding executives remain heavily invested, which makes them motivated to do well by you, their fellow shareholders.

Don't undersell this last point, Fool. Insider ownership may not be a panacea, but it's a powerful enough indicator that Tom Gardner and Bill Mann have used it to build a market-crushing service in Hidden Gems.

What's more, our best picks at Motley Fool Rule Breakers, like the best of the Fortune 500, are companies that are either led by founders or long-tenured managers with significant ownership stakes. Under Armour is just the latest in a long list. Don't be surprised if the stock performs similarly. Click-clack!

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Fool contributorTim Beyers, ranked 2,361 out of 12,276 inMotley Fool CAPS, owns a pair of Nikes that he really ought to wear more. He ought to work out more, too. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. Get the skinny on everything Tim is invested in by checking his Foolprofile. The Motley Fool'sdisclosure policyis a rebel with a cause.