Manchester United has spent a lot of money buying players but yet the team has been severely underperforming.
In a leaked meeting with some of the supporters, the new CEO, Richard Arnold, said the following…
“We spent a billion pounds on players. We have spent more than anyone in Europe… I’m not thrilled where we are. It doesn’t sit easy with me and I worry how we get this sorted for the future. What’s happened is we have f*cking burned through cash.”
Is Manchester United going bust? It is easy to find out as the club is listed on the NYSE with its finances disclosed to the public.
#1 Accumulated losses
Man Utd made losses in 3 out of the last 5 years. The highest loss was £92m in 2021 due to Covid where matchday tickets revenue plummeted. That is understandable. But the cumulative losses in the past 5 years amounted to £95m. Retained earnings have been wiped out and now it is in deficit.
#2 Current Ratio = 0.55 (less than 1 is bad)
Man Utd has current assets of £213m and current liabilities of £384m. These liabilities are due within a year and there ain’t sufficient liquid assets to meet the obligations. Selling Ronaldo might not be a bad thing as reducing the wages would help – that’s £26.5m a year.
#3 Debt-to-Equity Ratio = 195% (considered high, bad)
Man Utd has £65m borrowings to be repaid this year and another £465m due beyond. That is half a billion worth of debt. The accumulated losses have lowered the equity value over the years and hence the debt-to-equity shot to 195%, high for a non-financial company.
#4 Positive free cash flow (good)
Unlike normal companies where capital expenditures (CAPEX) involves plant and equipment, football clubs have to buy players to function. The costs of buying these players are capitalised as intangible assets. Hence they should be treated as CAPEX.
Surprisingly Man Utd still managed to edge out a positive free cash flow in 2021. It spent £138m buying players and got back £46m selling some. The operating cash flow was £113m and £6m was splashed on maintenance. It ended up with a positive free cash flow of £15m. The club won’t fall as long as the cash flow is positive.
#5 High intangible assets (risky)
Majority of Man Utd assets are in intangible assets, worth £754m. Out of which £421m was goodwill. This was the excess payment during the acquisition of the club and can be treated as the brand. It has not been impaired and there isn’t an amortization schedule. If Man Utd continue to slide in performances, this branding value can be eroded eventually.
Players formed the other £328m worth of intangible assets. This has an amortization schedule as the players contracts have expiry dates. I think this is one of the reasons why the club keep extending the contracts of players they don’t intend to field, so as to keep their intangible value. Moreover these players may not be worth as much when sold. Hence, there is risk that these assets are over stated.
All in all, the debt level is high and there is some short term liquidity challenge. But it isn’t something that Man Utd cannot get through. It is likely they need to borrow more money, or roll over the debt. Man Utd isn’t going to be bankrupt as their cash flow is still positive.
The bigger risk is obsolescence if it continues to underperform on the pitch, like a frog in boiling water. Time is ticking.
