Billabong International Ltd Performance - Case Study Example

Content Executive Summary 2 Introduction 3 Financial Analysis 3 Profitability Ratios 3 Asset Efficiency Ratios 5 Liquidity Ratios 7 Capital Structure Ratio 9 Market Performance Ratio 12 Limitations 15 Conclusion 15 Recommendations 15 References 17 Appendix 19 Executive Summary Billabong International Ltd has been successful as retail players which deal in products like surf, skates and snow apparel and accessories. Their market has grown which is reflected by the growth in sales. There is even scope for the company to move further as this sector is showing improvement. The financial analysis also highlights some important fact related to liquidity and capital structure. The liquidity shows soundness with current assets being 3 times in respect of current liabilities. Even the ratio after removing stocks shows soundness. The capital ratio shows an equal mix of equity and debt. This is supported by 50% debt being financed by assets. The turnover ratios shows soundness as the company has better policy in managing credit. The company recovers money from is debtor in 77 days and pays in 104 days thereby enabling them to have sufficient liquidity for daily operations. The profits and return on equity supports it as the company has posted a profit 0f over 18% after all expenses. This has enabled the company to distribute dividend which has helped the share price soar up resulting in better earnings. The analysis shows that Billabong International Ltd performance has improved drastically in 2009. It still needs to work on certain areas to stay ahead of other competitors as the company has shown stability so that it is able to withstand competition and capture a bigger market. Introduction Billabong International Ltd is a wholesaler and retailer in surf, skates and snow apparel and accessories. The company has a huge presence in Australia. The fact that the company deals in so many products and huge reach has given a wide market. The company has a presence in other countries like New Zealand, South Africa and others which has given them a huge market to cater to. A look at the operations shows that that the company performs in the retail segment and employs more than 1750 employees. The company started in 1973 and has consolidated its operations since 2000. The company has been able to grow due to better geographic location and sells to more than 2600 stores thereby enabling them to grow. Financial Analysis Financial analysis is very important for all business. Analyzing the statement helps in “planning, budgeting, monitoring, forecasting and improving the financial performance by taking vital decision”. (Micro Strategy, 2011) The following is the ratios for Billabong International Ltd Profitability Ratios The profitability ratios are as follows Gross Profit Margin: It is calculated as “Gross Profit / Sales X 100”. (Kennon, 2010) The graph for the ratio looks as The ratio indicates a dip in profits from 55.11% in 2008 to 53.39% in 2009. A decrease in profits shows an increase in direct expenses. The company needs to improve its performance so that it is able to get a better return on investment. Profit Margin: It is calculated as “Earning before Interest and taxes (EBIT) / Sales X 100”. (Kennon, 2010) The graph for the ratios is as Net profit has seen a dip in 2009. This is a worrying factor and reflects very high indirect expense. The company needs to look at ways to reduce the indirect expenses Return on Assets: It is calculated as “Earning before Interest and Taxes (EBIT) / Average assets X 100). (Joseph, 2010) The graph for the ratios is as Here we see that the return on assets has gone down. This signifies that the assets are being underutilized. This has resulted in having more assets that warranted. Billabong International Ltd needs to improve it as it will result in blockage of funds. Return on Equity: It is calculated as “Net Profit / Average Equity X 100”. (Joseph, 2010) The graph for the ratio is as follows We see that the returns have decreased in 2009 as compared to 2008. This is a worrying factor and shows the strategies and policies implemented hasn’t been successful. The return is low which might lead to shareholders moving out to other companies. Asset Efficiency Ratios Operating ratios are as follows Asset Turnover Ratio: It is calculated as “(Sales Revenue / Average Total Assets”. (Joseph, 2010) The graph for the ratio is as follows The ratio both has decreased though the decrease is not huge. The company has been able to use its assets better in 2008 as compared to 2009. It needs to improve its ratio and ensure better utilization by reducing assets which are not warranted. Days Inventory: It is calculated as “Average Inventory / Cost of Sales X 365”. (Joseph, 2010) The graph for the ratio is as follows It is seen that Billabong International Ltd performance has improved in 2009. They are able to revolve the inventory quicker in 2009. The company needs to look to reduce it so that less fund are parked there and can be used for other purpose. Days Debtors: The lower it is the better it is. It is calculated as “365* (Accounts Receivable / Sales Revenue)”. (Kennon, 2010) The graph for the ratio is as The company has a very good rate and it reduces its chances of bad debts to be less as there is consistency in the ratio. The company needs to improve it then it would be a good sign and reduce the chances of debts. Days Creditor: It is calculated as “365* (Average payable / Cost of goods sold)”. (Kennon, 2010) The graph for the ratios is as follows It is seen that the company has consistency its turnover ratio. This is a good sign and shows that the reputation has improved with the suppliers and also ensures steady supplies. This will help to earn a good reputation for the future. Liquidity Ratios Liquidity ratios are as follows Current Ratio: It is calculated as “Current Assets / Current Liabilities”. (Financial Modelling Guide, 2010) The graph for the ratios is as The ratio also shows improvement for Billabong International Ltd and needs to reduce the current ratio as it is very high and look towards bringing it to 2.5 as it will help to reduce the funds parked in current assets. Quick Ratio: It is calculated as “(Current Assets – Inventories) / Current Liabilities”. (Financial Modelling Guide, 2010) The graph for the ratio is as The ratio has grown for Billabong International Ltd and indicates that it has very high proportion of the money in current assets after removing inventories. They need to take steps to reduce it to around 1.5 Cash Flow Ratio: It is calculated as “Net Cash from Operating Activities / Current Liabilities X 100”. (Financial Modelling Guide, 2010) The graph for the ratio is as follows The ratio for Billabong International Ltd has decreased in 2009. It shows that the ability to pay its current bills has decreased. The company need to ensure that the operating activities contribute more as it will improve the liquidity position. Capital Structure Ratios Capital Structure ratios are as Debt to Equity Ratio: It is calculated as “Total Liabilities / Total Equity”. (Transtutor, 2010) The graph for the ratio is as The ratio indicates soundness on the part of Billabong International Ltd. It shows that the company has a scope for more investment through debts. This is a good sign and shows the company has a space for future projects. Debt Ratio: “It is calculated as “Total Liabilities / Total Assets”. The graph for the ratio is as The ratio indicates soundness on the part of Billabong International Ltd. It shows that the company has a scope for more investment through debts. The ratio indicates that liabilities form less than 50% of the total assets thereby signalling that the company is sound to pay the debts. Equity Ratio: It is calculated as “Total Equity / Total Assets”. The graph for the ratio is as The ratio indicates soundness on the part of Billabong International Ltd. It shows that the company has a scope for more investment through debts. The ratio indicates that equity holders form a good percentage of total assets. Interest Coverage ratio: It is calculated as “EBIT / Net Interest”. (Transtutor, 2010) The graph for the ratio is as follows The ratio shows that Billabong International Ltd performance has decreased in 2009 as in 2008. The company has decreased its interest paying ability showing improvement in performance. The company needs to improve it to be able to meet its interest expenses. Debt Coverage Ratio: It is calculated as “Non Current Liabilities / Net Cash Flow from Operating Activities”. (Financial Modelling Guide, 2010) The graph for the ratio is as The ratio for Billabong International Ltd shows better performance in 2009. Billabong International Ltd needs to continuously work and ensure that the debt coverage ratio improves further so that growth is better. Market Performance Ratios Market Performance ratios are as follows Earnings per Share: It is calculated as “Net profit available to ordinary shareholders / ordinary shares”. (Joseph, 2010) The graph for the ratio is as follows The above ratio indicates soundness on the part of Billabong International Ltd. The return for Billabong International Ltd has decreased in 2009 as compared to 2008 which shows that the profit has dipped. Dividend per Share: It is calculated as “Dividend Paid / Ordinary shares on issue”. (Joseph, 2010) The graph for the ratio is as follows It is seen that Billabong International Ltd has given dividend for both the years. This is a good sign and shows good prospects. It is seen that Billabong International Ltd has reduced the dividend paid per share which reflects that the company has some future projects and is looking to reinvest it. P/E Ratio: It is calculated as “Current Market Price / Earnings per Share”. (Kennon, 2010) The graph for the ratio is as follows The above ratio for 2009 shows, that Billabong International Ltd has a good P/E ratio. It can be due to the fact the company has declared dividend which has affected it. Overall the performance is good steps need to be taken improve it so that the company is more preferred by shareholders. Net Tangible Assets per Share: It is calculated as “Ordinary shareholders equity – intangible assets / Number of Ordinary share on issue”. (Kennon, 2010) The graph for the ratio is as follows The above ratio for 2009 shows, that Billabong International Ltd has a good net tangible assets per share. It can be due to the fact the company has decreased in tangible assets and increased equity. This highlights efficiency and growth for the company. Operating Cash flow per Share: It is calculated as “Net cash flow from operating activity – preference dividend / Number of Ordinary share”. (Kennon, 2010) The graph for the ratio is as follows The above ratio for 2009 shows, that Billabong International Ltd has a good operating cash flow per share. The ratio shows that the operating cash flow has improved thereby enabling the company to have a higher return for the shareholders highlighting efficiency. Limitations Inflation and changes in price has not been accounted for which might be misleading Historical cost has been considered which might not be true in the present scenario as value changes with time Changes in technology for production, distribution, marketing has not been accounted for Conclusion The financial statement of Billabong International Ltd highlights improvement in performance. The financial ratios show some demarcating things and also highlight the different strategies taken in each year. The company needs to dwell upon similar strategy and look towards improving the basic nature of the business so that it is able to improve. Recommendations The company needs to improve its current ratio so that it reflects soundness in its policies and strategies The companies need to reduce the amount held in inventories as it is high leading to a lot of money being invested The companies need to take more debt especially long term so that they are able to save on the taxes Billabong International Ltd needs to improve its operating ratios so that it can match its competitor References Financial Modelling Guide, 2010, “Liquidity ratios”, retrieved on January 14, 2011 from http://www.financialmodelingguide.com/financial-ratios/liquidity-ratios/ Joshua K, 2010, “Analyzing an income statement: Return on Assets”, about.com guide, The New York Times Company retrieved on January 14, 2011 from http://beginnersinvest.about.com/od/incomestatementanalysis/a/return-on-assets-roa-income-statement.htm Joshua K, 2010, “Analyzing an income statement: Return on Equity”, about.com guide, The New York Times Company retrieved on January 14, 2011 from http://beginnersinvest.about.com/od/incomestatementanalysis/a/understanding-return-on-equity.htm Joshua K, 2010, “Analyzing an income statement: Inventory Turnover”, about.com guide, The New York Times Company retrieved on January 14, 2011 from http://beginnersinvest.about.com/od/analyzingabalancesheet/a/inventory-turns.htm Kennon J, 2010, “Analyzing an income statement: Gross Profit”, about.com guide, The New York Times Company retrieved on January 14, 2011 from http://beginnersinvest.about.com/od/incomestatementanalysis/a/gross-profit.htm Kennon J, 2010, “Analyzing an income statement: Net Profit Margin”, about.com guide, The New York Times Company retrieved on January 14, 2011 from http://beginnersinvest.about.com/od/incomestatementanalysis/a/net-profit-margin.htm Kennon J, 2010, “Analyzing an income statement: Receivable Turnover”, about.com guide, The New York Times Company retrieved on January 14, 2011 from http://beginnersinvest.about.com/od/incomestatementanalysis/a/receivable-turnover.htm Micro Strategy, 2011, “Financial Analysis”, retrieved on January 14, 2011 from http://www.microstrategy.com/financial-analysis/ Transtutor, 2010, “Capital Structure Ratios”, retrieved on January 14, 2011 from http://www.transtutors.com/finance-homework-help/dividend-decisions-and-tools-of-financial-planning/Capital-Structure-Ratios.aspx Appendix Ratios Formula 2008 2009 Return on Equity Net Profit / Average Equity * 100 22.18% 12.99% Return on Assets EBIT / Average Total Assets * 100 15.11% 9.28% Gross Profit Margin Gross Profit / Sales * 100 55.11% 53.39% Net Profit Margin EBIT / Sales * 100 18.13% 12.31% Asset Turnover Ratio Sales Revenue / Average Total Assets 0.83 0.75 Days Inventory Average Inventory / COGS * 365 114.52 days 97.13 days Days Debtor Avg Accounts Receivable / Sales * 365 77.75 days 77.15 days Days Creditors Avg Accounts Payable / Purchases * 365 103.9 days 110.34 days Current Ratio Current Assets / Current Liabilities 3.08 3.3 Quick Ratio (Current Assets – Inventories) / Current Liabilities 2.11 2.48 Cash Flow Ratio Cash flow from operating activities / Current Liabilities 0.71 0.57 Debt to Equity Ratio Total Liabilities / Total Equity 1.04 0.89 Debt Ratio Total asset - total equity / total assets 0.51 0.47 Equity Ratio Total Equity / Total Assets 0.49 0.53 Interest Coverage Ratio EBIT / Net Interest 8.83 5.34 Debt Coverage Ratio Non Current Liabilities / Net Cash flow from operating activities 4 4.18 Earnings per Share Net Income to ordinary shareholders / Outstanding shares 85.7 cents 69.2 cents Dividend Per Share Dividend paid / Average Ordinary Shares 54 cents 52.05 cents Price Earnings Ratio Current Market Price / Earnings Per Share 18.31 22.62 Net Tangible Asset Per Share Ordinary shareholder equity - intangible asset / No of ordinary share on issue -2.79 0.79 Operating Cash Flow Per Share Net Cash flow from operating activity - Preference Dividend / Ordinary Shares 73.86 cents 78.98 cents Read More