Financial Statement Analysis - Billabong International Ltd - Assignment Example

Financial Statement Analysis Name Institution Course Due Date Financial Statement Analysis Question one Recasting a financial statement such as consolidated income statement or a balance sheet is the taking of present historical statements and presenting them in a more consistent and precise manner to reflect profitability, cash flow and asset base of the business (Palepu, Healy, Bernard, Wright, Bradbury, and Lee P 2010). In recast income statement, there is inclusion of sales and cost of sales whose addition results to a higher Gross profit for 2011 than that of 2010. When evaluating a company, gross profit is incredibly imperative since it points out how resourcefully management makes use of the work force and supplies in the process of production (Palepu et al., 2010). More distinctively, information of this type can facilitate the determination of gross profit margin which is a very important ration in indicating the possible red flags for a business (Ferguson, 2003). The recast financial statement also indicates the inclusion of both interest income and interest expenses. This is to basically give the precise figures of these parameters so that a true value of overall expenses is arrived at. This true value will eventually lead to the accurate computation of Net profit. The interest income and expenses as well reveal to the management and investors the actual benefits of interests from other noncore investments and whether or not they ought to be pursued (Friedlob, and Schleifer, 2003). There are other several items that have been shown in the income statement recast. Justifications for Income Statement classifications (using additional information available from notes to actual financial statements): 1) Other operating income: this entails royalty income, related directly to Billabong brands, and other income related to continuing operations (Billabong, 2011, Note 5). 2) Other expense: this entails items from continuing operations, not related directly to operations, including depreciation, loss on disposal of property plant & equipment, foreign exchange loss, inventories losses on write down to net realizable value and doubtful & bad debts expense (Billabong, 2011, Note 7). In regards to the balance sheet, the recast model describes cash equivalent assets as marketable securities. This is important is explaining the deeper meaning of some financial aspects (Bragg, 2007). In the consolidated balance sheet, debt is merely indicated under both current and non-current liabilities as borrowings. Justifications for Balance Sheet classifications (using additional information available from notes to actual financial statements): 1) Accounts Payable: this entails trade payables and other payables, categorized jointly in real financial statements. 2) Long term debt: this entails non-current borrowings and deferred payment. This was recognized in Note 1 to the financial statements (Billabong, 2011) as being revealed at discounted current value, hence meaning an interest rate adjustment has been taken care of. Question two: Financial Analysis In the most logical sense, there is a stagnation of Billabong since 2007 to 2011. There are very apparent and noticeable changes that can be discussed when comparing the performance of the two financial years of Billabong international limited. First of all the gross revenue has taken an upward trajectory of growth since 2007 a sure sign that the company is enjoying a bigger share of the market or that it market is steadily growing with time as they advance their operations (William, 2003). Some of these changes will be better explained using some significant financial ratios which also facilitate the identification of some red flags that might have presented themselves in 2007 fiscal year. The first ration under consideration is the earning per share abbreviated as EPS. This ratio falls under profitability ratios and it characterizes the sum of profit on hand to be spread to each ordinary shareholder. By and large, the higher the EPS ratio, the healthier the organization is performing. When EPS is declining it may be a red flag pointer, because it implies that shareholders will get a lesser return on their investment (Palepu et al., 2010). The reason for the possible decrease in EPS may be due to decline in profit after tax (PAT) or an increase in the number of ordinary shareholders (Kontoghiorghes, 2007) (computation in appendix 2). Before looking at the implication of this figure a few things can be noted; EPS declined alarmingly from 81.4 per share in 2007 to 47.0 per share in 2011 representing about 50% drop. This margin of drop is in line with the 28 % drop in net income; that is profit after tax (Bragg, 2007). The number of ordinary shares has increased by about 23%. As we had mentioned earlier, EPS could decline with a drop in net profit after tax or an increase in number of ordinary shares. The red flag indicated by this figure is that the company is not enjoying healthier performance as it was in 2007 and the increased investment from the increasing number of ordinary share holders is not bringing the anticipated returns as envisaged in the company’s growth forecast of 20%. The drop could also imply that the subsequent financial year-2008. 2009 and 2010- have been experiencing a slow decline in performance of the company which sets the stage for further deterioration of performance in the years to come (William, 2003). This may force the management and the entire board of directors to come up with a strategic plan of ensuring growth in the company. The second ratio that identify the changes between the performances of the company in the given financial years as well the red lags that existed is the gross profit margin. This also falls under profitability ratios. The ratio is calculated as sales less cost of sales and it therefore shows what in terms of cash is still available for other expenses when all the cost of other products have been taken care of (Palepu et al., 2010) and (Friedlob, and Schleifer 2003). For this reason the margin will help in measuring the profitability of Billabong in terms of its ability to sell products to customers. Higher GP would indicate Billabong’s better performance while a low and declining of GP is a definite red flag indicator of the company’s route towards a position of not being able to adequately cover other expenses and at the same time leave some profit for the shareholders (Palepu et al., 2010) (computation in appendix two). In comparing the two results, there is a very small increase in GP with 0.5 points of increase from 2007 to 2011. It could be concluded that the GP for Billabong is stable and in both the Fiscal years Billabong had 53 cents of every sales dollar available to contribute to other expenses and profit when cost of sales has been covered. Despite this stability, there is still a red flag being waved in this scenario because the stability in GP for the last three years of Billabong’s operation is an indication of stagnation in growth (Palepu et al., 2010). It will reach a point when the company will not be able to cover expenses and leave some profits for shareholders and this point is when GP will start declining. The other ration to help in spotting changes is the current ratio which is a common liquidity ratio and falls under financial management ratios. Its purpose for this case is to indicate whether Billabong has a sufficient enough level of liquidity to take care of current liability obligation that falls due (Kontoghiorghes, 2007). This is done by comparing current assets and current liabilities (Palepu et al., 2010). The current ratio for Billabong in 2007 FY was 3.3: 1from a current asset of 573,518 and a current liability of 172, 273. In 2011 the current ratio for Billabong was 2.3: 1from a current asset of 908, 854 and current liability of 389, 208. In 2007 the company had 3.3 times as many current assets as current liabilities while in 2011 the company had 2.3 times as many current assets as current liabilities. There is an apparent drop in current ratio from 2007 indicating a red flag of liquidity problems for Billabong in the coming financial years; that is the company will not able to meet its current liability obligations. Question three: Analyst Recommendation This comparison analysis has not found any substantial grounds to believe that Billabong can be a long term buy. This is because the earnings per share ratio have dropped significantly from over the last four financial years. This indicates that increased investments are not yielding sufficient returns to the company. Secondly, Gross profit ratio for the company has been constant with no meaningful improvement since the last four financial years. This indicates stagnation in growth and performance and lastly current ratio indicates future liquidity dilemmas for the firm making it not a suitable long term buy by interested parties. Appendix 1 Recast income statement and balance sheet Billabong International Limited       Balance Sheets as at 03-06-11   30-06-10 $'000's $'000's Assets Cash and Marketable Securities 144,858 208,742 Accounts Receivable 374,375 398,378 Inventory 348,738 240,400 Other Current Assets 40,883 31,165 Total Current Assets 908,854 878,685 Long-Term Tangible Assets 184,852 170,477 Long-Term Intangible Assets 1,268,461 1,118,308 Deferred Tax Asset 35,963 22,656 Other Long-Term Assets 21,835 20,193 Total Long-Term Assets 1,511,111 1,331,634 TOTAL ASSETS 2,419,965 2,210,319 Liabilities Accounts Payable 344,034 315,545 Short-Term Debt 15,262 20,525 Other Current Liabilities 29,912 18,709 Total Current Liabilities 389,208 354,779   Long-Term Debt 597,903 404,933 Deferred Taxes 46,909 54,815 Other long term Liabilities (non interest bearing) 189,106 178,213 Total Long term liabilities 833,918 637,961 Total Liabilities 1,223,126 992,740 Minority Interest - - Shareholder’s Equity Total Shareholder’s Equity 1,196,839 1,217,579 Total Liabilities and Shareholder’s Equity 2,419,965 2,210,319 Income Statement Billabong International Limited           Income Statements for the period ending   30-06-11     30-06-10 $'000's $'000's Sales   1,683,268     1,487,527 Cost of Sales   778,312     675,533 Gross Profit   904,956     811,994 Selling general and administrative expenses   598,969     469,788 Other Operating Income (2,748)     (2,720)   Other Operating Expense           Other Operating Expense (Income)   (2,748)     (2,720) Operating Profit   308,735     344,926 Interest Income (537)     (711)   Interest Expense 36,308     28,595   Interest Expense (Income)   35,771     27,884 Investment Income         0 Other Income (5,138)     (7,061)   Other Expense 151,202     121,072   Other Expense (Income)   146,064     114,011 Profit before tax   126,900     203,031 Tax expense   8,855     57,865 Profit After tax 118,045 145,166 Appendix two Ratio Calculations 1. EPS In 2007 the number of ordinary shareholders was 205, 860 and the profit after tax was at 167,607. This leads to an EPS of 81.4 cents thus; 167607/205860 = 81.4 cents. In 2011, Billabong had 253,321 as its number of ordinary shareholders and a net profit after tax of 119 139 (Billabong 2011). Applying the above computation the earnings per share is gotten to be 47.0; 119139/253321 = 47.0 2. Gross Profit Margin In 2007 FY Billabong had sales of 1222911 and a cost of sales of 570979. Based on the formula of the GP is gotten to be 53.3%, GP = Sales-cost of sales/sales = (1222911-570979)/1222911. In 2011 FY the sales for Billabong was 1687733 and cost of sales 778312. Applying the formula we get the GP for this fiscal year to be 53.8%. References Palepu, K, Healy, PM, Bernard, VL, Wright, S, Bradbury, M and Lee P 2010, Business Analysis and Valuation Using Financial Statements: Text and Cases, Cengage Learning: Australia. Billabong International limited Financial Report 2011. Recast consolidated Income statement of Billabong for 2007 Bragg, MS 2007, Financial Analysis: A Controller's Guide ,Wiley: New York. Friedlob, GT and Schleifer LF 2003, Essentials of Financial Analysis, John Wiley and Sons: New York. Kontoghiorghes, EJ 2007, Optimisation, Econometric and Financial Analysis, Springer: Verlag Ferguson, Stuart 2003, Financial analysis of M&A integration, McGraw-Hill: Sydney William, WA 2003, The Corporate Merger, Beard Books: Texas Read More