Accounting and Business Decisions at Billaboing Company - Case Study Example

BILLABOING COMPANY Introduction Profit making in business is what drives most long existing companies such as Billaboing Company (Campbell, Stonehouse and Houstone, 2002). Every year there has to be a report released by such an organization stating clearly stating its current, previous or future target and whether such targets have been met (Brunnermeier, 2009). Performance measuring techniques are mainly used in such cases and they include use of profitability ratios, leverage ratios, liquidity ratios and efficiency ratios. Those people who are interested in investing in the company usually seek after such kind of information. It is also valuable information for those who have already invested in the organization like the shareholders. It is therefore important to take such records in order to determine the organization's current performance as compared to the previous ones. This write up therefore will look at the various methods that are used to determine a company's performance with regard to Billabong Company and whether a potential investor should invest in it. Background of Billabong Company Billabong is a surfing company, which was founded by Gordon Merchant a surfer and surfboard shaper at the Gold Coast Australia. He was assisted by his partner called Rena in 1973. In those early days, they had to attract market to their product by making short board s and holding many contests at the shore. By the 1980's the company had already found a firm footing at the Australian coast and it was ready to venture in the global market such as in the America coast, Europe, South Africa, New Zealand and Japan. They also integrated other products in their package such as skating to increase the variety of their products and to meet the various demands of their growing customer base. By the 1990s, the surfing game had already been made a professional sport and had gained a level of respectability. The company publicly declared its shares in the mid 2000, which gave it a capacity to grow its business further. The business expanded more after more stable brands were introduced in the organization. This included addition of Von zipper glasses, and a unique brand of skateboard known as Element. The expansion continued further in the years that followed with the introduction of more stable brands like footwear, swimwear, watches and many other accessories. It is no doubt that the company has maintained an upward trend since its formation in the early 70s. It has also been flexible enough to embrace the technological changes such as the on-line trading. All its products can be purchased on-line via on-line stores like Swell.com in the US and Surfstich.com in the Australia. Its latest achievement has independently owned the Nixon brand into its business having approximately more than 48.5% shares in April 2012. Investment prospects When all is said and done, it is worth to find out whether the Billabong Company is worth investing in. The shareholders as well as the other company stakeholders also need to be informed about the financial status of the organization that they have invested in (Taylor, 2003). Ratios are used to give out this information. They are profitability, liquidity and leverage ratios among others. The results given by the ratios are used to give a clear judgement of whether the company is steered upwards or it is making losses. It is done by comparing the current year's performance to the previous years. Although the ratios may not give a clear reason of why the organization has performed in that particular way, it does give a clear direction of where the company is headed and what step they should take next. In the past two years, the Billabong Company has made great strides in expanding its business in the global market. Since making their shares public in August 2000, the company has expanded steadily by introducing more stable brands, which has attracted a lot of investors worldwide. Profitability Ratios Profit is known as the true measure of whether a business is doing well or not. The higher the profit the better the company is doing. In profitability ratio, the firm is measured on how it utilizes it assets. Certain measures like the net profit margin and the gross profit usually evaluate the management team on how they control and manage their expenses. This in return enables the organization to gain on all the resources that have been committed to the organization. Therefore if the profitability ratio is high, so is the company's utilization of resources and assets to get more profits. The most accurate profitability ratios are those that compare the company's profit earnings to the amount spent which is also known as the capital. It is therefore notable that the profitability ratio of Billabong has continued to rise since 2011. The improved economic performance could be because of an acquisition the organization made on RVCA brand, which is based in California and Jetty surf in Australia. Experts have therefore come up with ways to convert the sales that an organization makes to profit. The following are some of those ratios. Gross profit Margin The gross profit according to Schneiderbauer and Feinsilber (2002) is the total profit without deducting any expenses. It compares he gross profit to the generated total sales. The gross profit shows the amount that a company would have made if it did not have to deduct expenses like administrative taxes, salaries and many others. This amount varies significantly from one sector of the organization to the other. It reveals to the investor the total amount of money that a company would make if it did not have to deduct its expenses. The Billabong Company made a total gross profit of 812 million dollars according to its annual report and the company's disclosure. Although the amount is lower than that of the previous year, it could be because of focusing more on expanding the business in recent years. This amount is found by deducting its cost of revenue from the revenue itself. Net Profit margin The net profit compares the total net profit for a certain period with the total sakes revenue. The current net profit for Billabong Company is 126.2 dollars. This marks an increase of its income to 1 %. This is further complimented by a yearly growth of 40.2%. When there is such increase in net profit, then it shows that the management has been capable of monitoring and controlling its organization's resources through sales and marketing activities. This Billabong net profit margin clearly shows that the company is doing very well as far as the recovery form major economic crisis is concerned. The economic crisis has been affecting many companies since the year 2009 and this is quite promising to its future investors as their shares are well secured. Return on Investments The return on investments measures the company's returns for those who invest within the company. This has been on the rise in the Billabong Company since major companies such as son has greatly invested in it. It is merging with other major companies like Sony not only makes it a brand company itself but also a media company. Return on equity This kind of ratio is important especially when measuring the company's profitability. It clearly shows the stakeholders and other stockholders who have invested in the company how their money is put into use or re-invested. For Billabong Company, the return on equity is: Net Income/Total Equity * 100 which results to 6.58 % Although this is good, it would be more suitable if it had a 10% to 30 % ROE so that it can be able to pay its dividends to the shareholders. However, low ROE could also show that the company has a high leverage rate. Although the ROE is less than 10 %, it does not mean that the company is not worth investing in. It still has a high potential of generating growth as far as earning is concerned. Liquidity ratios This kind of ratio I used to determine whether an organization could be able to meet all its short-term goals. This kind of information is highly valued by the company's creditors since it determines its credit worthiness in a short period. The liquid ratio is calculated by dividing the organization's current assets with its current liabilities. Current ratio: Current assets/Current Liabilities = 90884/389208 which results to 2.34. This clearly sows that the Billabong Company can be able to handle any short-term debt that it has because it has a large amount of liquid assets with it. This ratio of 2.34 can be highly considered by the potential investors because for every 2.34 dollars of current assets, the firm has1 dollar of current liabilities which in real sense is very suitable for investing. Leverage ratio This kind of ratio is usually known as the debt-to-equity ratio. It is a comparison between the amounts of debt that a company has to its equity. This kind of ratio is used to find out if the company will be able to meet its own financial needs. The main factors that are considered include debts, assets, interest expenses and equity. The leverage ratio is used to measures company's outcome and how it will affect the organization's operating income. The Billabong Company is suitable for any future investor because they have fewer debts compared to their equity. It is therefore able to meet its own financial needs because it has more assets. The other ratio, which is closely related to leverage ratio, is the gearing ratio. This ratio compares the organization's assets to the debts it has. The Billabong Company’s organization's gearing ratio has notably increased in the past 2 years due to its high rate of investing in several other major brands. Cash flow and operational ratios Increase in both operating ratio and the cash-flow ratio shows that the company is making more debts than profits (Jane, 2009). This is because its current assets are not able to meet the liabilities incurred. Therefore the lower the operating and cash-flow ratio, the better a company is performing. Although the Billabong’s operational and the cash-flow ratio has risen a bit in the past financial year, investors should be advised that debt repayment or expansion of the organization be hardly affected by this. Market Indicators There has been a 51 % increase of Billabong market share in the past one year. This is a positive sign to the investors that the company is a great place to invest in as it has been in an upward trend since 1973. Advice to investors Billabong Company has a great opportunity where investors are concerned (Capon, 2008). Since its shares were declared public in mid 2000, the company's shares have been growing. Furthermore, it is an old company, which has a strong market base in more than 60 countries. The marketing sector has done its best to make its products unique form those of the competitor's and having a strong market base ensure that most of its products are actually moving. The company recently started selling its products on-line, which has boosted its sales in a great way. It has also made its products available in other places that it is physically not found. His has opened up new market channels, which has led to major profit making. Despite the hard economical times, Billabong has been able to make profits all through and it remains one of the most recommend companies to invest in worldwide. Due its high rate of investment in the past year, the group has a high anticipation of dynamic growth. Its strategy on making their brands unique has gained it more customers in the broader market. Although its NPAT dropped in the past financial year from 119.14M, this was because of the appreciation of the AUD against other currencies such as the Euro and the USD. The revenues have since increased up to 13.5% since the past year and so does the net operating cash and the diluted EPS cash. Nevertheless, the company's profitability ratio has been the rise and it has been able to cover its short-term debts thus encouraging more creditors to invest in it. Conclusion It is no doubt that the Billbong Company has made major steps to secure all its shareholders and any other stakeholders. This has led to increased confidence in its investors. The analysis above in terms of ratios has shown that given the current financial trends and the future strategy, the company will remain to make more profits. The best time to make an investment is therefore right now in the Billbong Company. References Brunnermeier, M. (2009). Deciphering the liquidity and credit crunch 2007–2008. Journal of Economic Perspectives, 23(1), 77–100. Campbell, D. Stonehouse, G. and Houstone, B. (2002). Business strategy- an introduction, 2nd ed. London, Elsevier Butterworth- Heinemann. Capon, C. (2008). Understanding Strategic Management, Prentice Hall, Hemel Hempstead. Jane, Y. (2009). Fundamental analysis. London: Oxford University Press Taylor, M. (2003). The use of technical analysis in the foreign exchange market. Journal of International Money and Finance. Texas: McGraw-Hill Appendices Profitability ratio Gross profit ratio For instance, the gross profit ratio is a form of profitability ratio. It is calculated as follows; Gross profit= (Gross profit/sales) * 100 For the Billbong Company the gross profit is; 812m/1791.8 This will give a profit ratio of 0.45 % Net Profit margin Net profit margin = Total profit/revenue = 118,045/ 1,687,733 =0.06% Return on investments (ROI) R.O.I = (profits after tax/ Total share capital plus reserves) * 100 =118045/1,196,839 = 0.09 % Return on Equity (ROE) ROE = NI/CSEavg = NI/ (1,082,778 + 1,180,360) = 488,053 (2263138) = 0.21% Read More