Billabong International Limited Performance - Essay Example

?Executive Summary This report is aimed at analyzing Billabong International Limited (BBG)’s performance of last three years. The report covers analysis of six important factors which an investor needs to take into consideration before investing in a company. Firstly, profitability was considered where earnings were analyzed. Company’s liquidity was also analyzed to determine the risk of insolvency. Company’s efficiency was a point of question as well. Long term debt was also analyzed in relation to equity to identify riskiness of the firm. Lastly, investor’s return on capital investment was closely taken into account. The report also provides sufficient grounds for investing in Billabong International Limited, and reasons for its dampened growth from prior years. Company Overview Billabong International Limited (BBG) was founded in 1973 in Queensland by Gordon Merchant. Billabong is known to produce surf wear, sport apparels and accessories for surfing, skate and snowboard. BBG has expanded its operations to more than 60 countries. It has expanded its distribution to states like Japan, United States of America and Europe. It has positioned itself for people with extreme love for sports like surfing and skating. BBG is used by people who desire to be identified with its image. It has been a leader in promoting its brand through sponsoring athletes and events. BBG has given stiff competition to its competitors like Quicksilver and Nike. In terms of geographic spread, BBG has a high advantage over Quicksilver as it is centered in USA in comparison to BBG which has spread its operations to Japan and Europe as well. Moreover, diversity due to huge geographic spread has been a basis of competitive advantage over Quicksilver. Quick’s earning has been seasonal but BBG has overcome this weakness by diversifying its operations to different geographic regions. BBG’s products are sold to around 2,600 surf and extreme sport shops worldwide. This is the prime source of revenue as a major chunk of revenue comes from wholesalers and independent retailers. Name of Ratio Expression 2010 2009 2008 2010 result 2009 2008 result ROE 12.2 15.45 22.7 Gross Profit margin 54.58% 53.3% 55.1% Net Profit Margin / 9.8% 9.1% 13% Current Ratio 2.47 3.3 3.07 Acid Test 1.8 2.48 2.1 Inventory Turn over ratio 2.73 3.368 3.18 Inventory Turnover Period 133days 108days 114.5days Payables’ turnover period 103 days 80days 84.2days Gearing Ratio 0.33 0.47 0.59 P/E Ratio 14.3 11.15 10.46 Debt to Equity Ratio 81.5% 88.67% 104.4% Note: Average= (Current year+previous year)/2 Analysis: Profitability ratios measure the income or operating success of an enterprise for a given period of time. BBG has had a decline in their profitability mainly because of bad economic conditions. They have faced losses from their customers who haven’t paid their bills in stipulated time and have, in effect, defaulted. BBG almost doubled their common equity in 2009 but couldn’t accelerate their earnings with the same pace hence, causing a sharp decline in the ROE. Moreover, poor economic conditions and exchange rate risks have played their part in generating a plummet for BBG. Considering company’s return on equity, the trend has been downward. ROE was 22.7% in 2008, and then it dropped to 15.45% in 2009 and a further dip down to 12.2% in 2010. Gross profit Margin for the year 2010 was 54.58% compared to 52.55% in 2009 and 53% in 2008. The gross profit margin has been steady as the proportional change in sales and cost of goods sold has been constant. Sales have declined from previous year due to poor economic conditions. Some customers have delayed their shipments hence causing BBG to be cautious. Net profit Margin has been in the range of 9-13%. In 2010, company showed 9.8% profit margin compared to previous year of 9%. In 2008 13% net profit margin was recorded. In 2010 several factors have contributed to the increase from 2009 namely exchange rate which has caused $ 6 million benefit to BBG. Liquidity Analysis: BBG is a high leveraged firm and hence it is important to assess its liquidity position. Current ratio is a popular measure for evaluating a company’s liquidity and short term debt paying ability. It is computed by dividing current assets by current liabilities (Robert, Wai and Walter, 1996). Liquidity is judged by company’s Current ratio and Acid test. BBG’s current ratio for the year 2010 was 2.47 compared to 3.3 last year. This shows that liquidity has fallen by 25%. With reference to the company’s notes in the annual report, company keeps majority of its cash at banks with a minimum of ‘A’ rating hence paying off short term debt would not be a point of concern for BBG. Compared to the industry average, BBG is doing well in terms of liquidity and is competitive to pay off its debts in the short run. Another specific measure of liquidity is acid test, which shows company’s liquidity without inventory. Company has not invested a large sum of money in inventory; this is why there is $1.8 highly liquid asset to pay $1 of liability. Compared to previous years where company had $2.48 of highly liquid asset to pay off each dollar of liability in 2009 and approximately $2 in 2008. It is also important to determine how efficient BBG’s operations are. A low turnover implies poor sales and, therefore, excess inventory. In case of BBG, the inventory turnover is very low. In 2010, BBG’s turnover ratio was 2.73 compared to 3.36 in 2009 and 3.18 in 2008. This ratio is considerably low which shows that BBG has not been managing its inventory efficiently causing a larger sum of money stuck in inventory. Also, day sales outstanding is another key indicator of company’s efficiency. As visible from inventory turnover ratio that BBG’s inventory rotates about twice or thrice in a year which means that days sales outstanding in the year 2010 was 133 days compared to 108 days in 2009 and 115 days in 2008. One reason could be high ordering cost or high lead time for the inventory which has caused BBG to compile huge sum of inventory on hand. On the other hand, their payable turnover is almost the same as inventory turnover. This means that they are ordering material from their suppliers in bulk to avoid cost associated with it. Solvency ratios are used to measure the ability of a corporation to survive over a long period of time (Jan, Mark, Sue, & Joseph, 2011). Gearing ratio explains the degree of debt financing versus equity financing. The higher a company's degree of leverage, the more the company is considered to be risky. Net debt decreased 69.4% to $200.1 million over the prior corresponding period. This reduction in borrowing was result of the repayment of debt from the proceeds received from the capital raising announced in May 2009, together with several initiatives which have been implemented to improve treasury management efficiency across the Group. In percentage terms, company had $0.59 of debt for each dollar of equity in 2008. The rate dropped to 0.47 because of equity borrowing activity in 2009 and currently is $0.33 in comparison to $1 of equity. This indicates positive sentiments about the company as the risk of bankruptcy has lowered down considerably. The riskiness has lowered and hence company can bargain on a lower rate of return to its investors. In order for a company to attract investors, it essential that earnings of the company coupled with mitigated risk is offered to investors. Hence, investment ratios help us in analyzing how company’s earnings are related to market price of shares. Price-Earnings ratio is a key indicator of it. In 2010, the market price of share is 14.3 times the fundamental earning per share. In 2009, market price was 11.3 times earnings per share. A Stock’s realized return is the actual amount of return earned on a security investment over a period of time (Besley and Brigham, 2000). Therefore BBG’s stock has given 8.4% capital gain in 2010 from previous year. Summary: Overall, BBG has performed relatively well in comparison to the industry average. The prime reason for reduced profit margins has been increase in global overhead costs including corporate overhead, international advertising and promotion costs, central sourcing costs and foreign exchange movements. The increase in the global overhead cost compared to last year is due to foreign exchange movements. A significant drop in Earnings before interest and tax margin was witnessed in Australia and Europe due to increased allocation of global overheads. Liquidity position has been relatively good for BBG; they do not have a chance of bankruptcy in the near future as they have twice the no. of immediate assets to pay off maturing liabilities. In terms of efficiency, BBG has failed to manage their inventory turnovers. This can be a result of dying profits for them. As money stuck in inventory pays 0% return, BBG needs to work on their inventory management plans. BBG has had a higher dependence on equity in comparison to debt as shown by the gearing ratios. Issuance of shares in May 2009 has considerably lowered the riskiness of the company. On analysis of its solvency it was revealed that company’s solvency risk is low and therefore can be classified as a low-risk firm. Lastly, BBG has prospects to do well; they have managed to maintain a growth rate of more than 8% in the past five years. However, systematic risk is high due to the strong interlinkages within markets and hence failure of one market might have a cascading effect that leads to the failure of the entire system (Levinson 2006). Yield on investment will increase if foreign exchange risk could somehow be mitigated. Overall, BBG in comparison to the industry has been doing well. Their share prices have been increasing which is a sign of positive sentiments in the market. In a nutshell, BBG has prospects to do well in the near future provided that the foreign exchange risk is mitigated. References: Besley, S., & Brigham, E. F. (2000).Essentials of managerial finance. Washington, DC: South-Western College. Levinson, M. (2006).Guide to Financial Markets. New York, NY: Bloomberg Press. Jan, W., Mark, B., Sue, H., & Joseph, C. (2011). Financial & Managerial Accounting. New York, NY: McGraw-Hill Companies,Inc. Robert, F. M., Wai, P. L., & Walter, B. M.(1996). Accounting: The Basis for Business Decisions. 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