Billabong International Limited - Example

Billabong International Limited 2010/2011 financial report Student’s Name and ID: Course Name: Course code: Lecturer’s Name: Date Due: Executive summary This is an analysis of the financial position of Billabong ltd in the fiscal year 2010/2011. Various financial ratios have been used. These ratios are profitability ratios, assets efficiency ratios, liquidity ratios, gearing ratio and investment ratio. The company’s profitability has deteriorated over the two years as seen from the profitability ratios this has been brought about by a number of factors that affected revenue income from various regions. The company has been able to manage its assets well and the assets have generated revenue, as seen in the assets efficiency ratios. The company’s liquidity has decreased over the two years meaning that the company has been losing its ability to convert assets to cash easily. Key factors that affect the performance of the company such as competition and competence management have not been covered in the analysis hence this report does not bring to the table the complete picture of the company’s strength and weakness. Company overview Billabong International limited is an international firm. Its principal activities that generate revenue are wholesaling and retailing of surf, stake, snow and sports apparel, accessories and hardware. This firm also licenses the group trademarks to specified regions of the world. These activities were the primary source of revenue for the firm in the fiscal year 2010/2011. This firm, being an international firm is organized into geographical segments. These segments are; Australasia, which comprises of Japan South Africa, Australia, New Zealand, Singapore Malaysia and Indonesia. Europe, which comprises of Germany, Italy, Spain, France, England, Belgium, Netherlands. American, which comprises of Canada, US, Peru, Brazil and Chile Analysis In the analysis of the financial position of Billabong Ltd for the fiscal year 2010/2011, the following ratios will be used; Profitability ratios Assets efficiency ratios Liquidity ratios Gearing ratios Investment ratios 1. Profitability ratios These ratios will show the success of Billabong limited in generating additional wealth during the fiscal year. a) Return on Equity This is a ratio of net profits generated to the amount of shareholders investment in the firm. = x100 2010: 2011: 145,988,000/250,483,588 x 100= 58.3% 119,139,000/251,150,894 x 100=47.4% This indicates that for every $1 invested by shareholders the firm generated revenue of 58.3 cents in 2010 and 47.4 cents in 2011. This is referred to as the basic earnings per share. It is not a measure of cash receivable to owner’s investments b) Return on assets This is a ratio relating profits to assets. Profits (earnings) before interest and income tax are commonly used. (EBIT) = x100 2010: 2011: X100(appendix A) 191,876/2419965 x 100(appendix A) =11.4% =7.9% This indicates that for every $1 of assets, 11.4 cents of earnings (profits) before interest and tax was generated in 2010 and 7.9 cents generated in 2011. The firm had an average mark up of 11.4% in 2010 and 7.9% in 2011. The ratio has deteriorated by 7% which is a decrease of 7 cents. This is because of the decrease in EBIT. This decrease in the earnings before interest and tax is attributed to Weak retail environment in Australia Increase in number of natural disasters in key territories during the fiscal year Unfavorable regional mix impact of appreciation of AUD against USD and Euro Increase in global overhead costs. c) Gross profit margin ratio This ratio tells the profitability of the company by calculating the gross profit as a percentage of sales = x 100 2010: X100(appendix A) =54.6% 2011: X 100 =53.9% This shows that for every $1 of sales revenue, 54.6 cents of gross profit was generated in 2010 while 53.9 cents was generated in 2011. Despite the increase in sales, the ratio has deteriorated. This is because of the increase in cost of goods sold. d) Profit margin = x100 2010: 253,342/1,484,328 x100(appendix A) =17.1% 2011: 191,876/1,685,479 x100(appendix A) =11.4% This shows that for every $1 sales revenue 17.1 cents earnings (profits) before interest and tax was generated in 2010 while 11.4 cents revenue was generated in 2011. The ratio has deteriorated by 5.7%. This decrease in profit may be as a result of reduction in selling price by the firm. Conclusion The gross profit margin for the firm reduced from 54.6% to53.9% between 2010 and 2011. T his is due to the increase in cost of goods sold. Although sales increased the increase in cost of goods sold cancelled this increase. Profit margin also decreased for the same reason. These ratios have shown that the company is weak in terms of profitability. This is because of reduced profits in 2011. 2. Assets efficiency ratio a) Assets turnover = 2010: 1,484,328/2,210,319 = 0.67 times 2011: 1,685,479/2,419,964 =0.69 times This shows that for every $1 invested in assets 0.67 cents revenue was generated in 2010 while 0.69 cents revenue was generated in 2011. The firm used the assets available efficiently to generate revenue. b) Time’s inventory turn over and day’s inventory. = 2010: 675,533/240,400 = 2.8 times Days inventory = = 365/2.8 = 130 days 2011: 778,312/348,738 =2.2 times Days inventory = 365/2.2 =165 days This shows that Billabong had inventories to efficiently last for 130 days in 2010 and for 165 days in 2011. The firm was moving more inventories in 2010 as compared to 2011. c) Times debtors turnover and days debtors = 2010: 1,482,319/398,378 =3.7 times Days debtors = = 365/3.7 =98 days 2011: 1,683,268/374,375 =4.5 times Days debtors = 365/4.5 =81 days This shows the number of day’s debtors holds the firm’s money. The firm has improved its debt management comparing 2010 and 2011. This means improved cash flow in the firm. Conclusion The firm has been able to use its assets well to generate revenues. It was also able to move inventories sufficiently over the fiscal year. The debt management is good because the debtors did not old the company’s money for too long, these ratios are therefore strong. 3. Liquidity a) Current ratio = 2010: 878,685/354,779 = 2.5 2011: 908,854/389,208 = 2.3 The company has $2.5 current assets for every $1 current liabilities in 2010 while in 2011 $2.3 current assets for every $1current liabilities. There is a decrease of $0.2. b) Quick assets ratio = 2010: (878,685-240,400)/354,779 (Appendix B) =1.8 2011: (908,854-348,738)/389,208 (Appendix B) =1.4 This shows that there was $ 1.8 of quick assets available for every $1 of current liabilities in 2010 while there was $1.4 of quick assets available for every $1 of current liabilities in 2011. c) Cash flow ratio = 2010: =187,247/354,779 =0.5 2011: 24,336/389,208 =0.1 This means that for every $1 of current liabilities, $ 0.5 cents of cash from operating activities was generated in 2010, while $0.1 was generated in 2011. Conclusion Billabong ltd liquidity has reduced over the two years. This means that it became weaker in the ability to convert assets into cash. 4. Gearing ratio a) Debt ratio = x100 (Appendix C) 2010 2011 992,740/2210319 x100 1,223,126/2419965 x100 =44.9% =50.5% This shows that for every $1 of assets, $44.9 cents was financed by debt in 2010 and $50.5 cents in 2011. This increase is caused by an increase in debts for the company. The gearing ratio for 2010 was 15% and for 2011 was 28% Conclusion The debt ratio increased from 44.9% to 50.5%. There were increased borrowings to fund the acquisition of RVCA, west 49, SOS/jetty surf, and retail store expansion. This may bring about tax advantage although it is riskier. 5. Investment ratio a) Earning per share = Basic earning per share; 2010: = 145,988,000/250,483,588 x 100 (Appendix D) =58.3% 2011: =119,139,000/251,150,894 x 100 (Appendix D) =47.4% Diluted earning per share; 2010: 145,988,000/252,547,370(Appendix D) =57.8% 2011: 119,139,000/253,312,020(Appendix D) =47.0% The firm made 57.8 cents of every share invested in 2010 and made 47.0 cents in 2011. There was a decrease by 10.8 cents. This is due to the reduced net profits made by the company. b) Operating cash flow per share. = x100 2010: 187,247,000/252,547,000 x 100 =74.1% 2011: 24,336,000/253,312,000 x100 =9.6% This shows that the firm generated $74.1 cents of net cash flow from operating activities in 2010 and $9.6 cents in 2011. There is a huge decrease. Cash flow decreased principally reflecting; Adverse translation impact of movement in foreign exchange of $ 18.0 compared to prior corresponding period (pcp) Reduction of 2010/2011 EBIT of $37.2 million compared to pcp Increase in underlying working capital of $58.4 million compared to pcp Additional working capital required for retail acquisition of $41.6 million c) Dividends per share = x100 2010: 45,562,000/252,547,370 x100 =18.0% 2011: 40,578,000/253,312,020 x100 =16.0% This shows that the firm paid 18.0 cents per ordinary share in 2010 and 16.0 cents in 2011. This decrease of 2.0 cents was as a result of reduced shareholders. Conclusion The earning per share decreased over the two years. This affected the company’s revenue generation negatively. It can be attributed to reduced shareholders over the two years. Overall conclusion The company performed very well in assets management and also in debt management. The company’s profitability however was weak due to reduced revenues that can be attributed to natural calamities in key segments including earthquake in New Zealand and tsunami in Japan. This has also affected negatively the company’s investments as seen in the investment ratios. Increase in debt ratio means that the company has increased debts owing over the two years. The optimal ratio must be evaluated with due regard for the divergent nature of industries, their vulnerability to economic cycles and degree of risk (Seitz, 22) Appendix A i) EBIT for was obtained by adding all the earnings for the segments from the directors’ report: For 2010: $89,175 + $92,311 + $69,847 + $2,009 = $253,342 For 2011: $55,225 + $80,194 + $54,246 + $2,211 = $191,876 Total assets: For 2010=$2,210,319 For 2011=$2,419,965 ii) Gross profit is obtained by subtracting cost of goods sold from sales. For 2010: $1487527-$675533=$811,994 For 2011: $1687733-$778312=$909,421 B Current assets less inventories: For 2010:$ 878,685-$240,400 = $638,285 For 2011: $908,854-$348,738=$560,116 C i) Total debt= current liabilities + non-current liabilities In 2010: $354,779+$637,961 = $992,740 In 2011: $389,208+$833,918= $1,223,126 ii) Total assets= current assets + non-current assets In 2010: $878,685 +$1,331,634 = $2,210.319 In 2011:$908,854+$1,511,111 = $2,419,965 D i) Weighted number of ordinary shares used in calculating basic earning per share was as follows; For 2010: $250,483,588 For 2011: $251,150,894 ii) Weighted number of ordinary shares used in calculating diluted earning per share was as follows; For 2010: $252,547,370 For 2011:$ 253,312,020 References Nikolai, L., Bazley, J. & Jones, J. (2009). Intermediate Accounting. Cincinnati: South-Western College Pub. Seitz. N. (1999). Financial analysis: A programmed approach. Reston, VA: Reston Publishers. Read More