Billabong International Financial Analysis - Case Study Example

Table of Content Executive Summary 2 Introduction 3 Financial Analysis 3 Profitability Ratios 3 Asset Efficiency Ratios 6 Liquidity Ratios 8 Capital Structure Ratio 10 Market Performance Ratio 11 Limitations 11 Conclusion 12 Recommendations 12 References 13 Appendix 15 Executive Summary Billabong International which has a presence in the market due to the fact that it deals in surf, skates and snow apparel and accessories has been able to capture a niche market. This is visible by the consistent performance shown by the company and working on certain areas will further help to enhance their performance. The financial analysis shows that Billabong has a sound liquid position as they have more liquidity than their short term obligations which will ensure that the business will be conducted smoothly. The capital ratio further substantiates a strong position as it highlights that the company has scope for taking external loan because of a proper external liability holding. The turnover ratio shows efficiency in conducting business as the company is able to revolve the inventories and also ensure that money is collected from the market at the correct time which has reduced the chances of bad debts. This thereby shows a sound picture with certain areas for improvement which will help to improve the performance and ensure better returns to the stakeholders. Introduction Billabong International has its presence in the market and deals in surf, skates and snow apparel and accessories. It has been working in Australia but has also spread its wings to New Zealand, South Africa and others due to the opportunity and demand for the products that the market has. This has thereby grown the employees in the company and has reached more than 1700. This report presents a financial analysis for the company by comparison the financial with the pervious years so that direction for future growth can be identified. Financial Analysis Financial analysis has an importance for business as it help to find out the manner in which the player has performed and based on it looks towards developing strategies so that better return can be provided in the future. (Micro Strategy, 2011) The ratio analysis for Billabong International Ltd is as Profitability Ratios Profitability ratios are the life line for the organization as it helps to understand the profits that the business has earned from their daily operations and helps to make strategies for the future so that profit increases. The ratios for Billabong is as Gross Profit Margin: This ratio looks to present the profit for the business after meeting the direct expenses (Kennon, 2010). The graphical representation if as The ratio highlights that the gross profit margin has decreased slightly. It is not much of a worry but need to be examined so that factors which has led to its downfall can be identified and worked on Net Profit Margin: This is the profit which the business earns and is after paying all the expenses of the business (Kennon, 2010). The graphical representation is as The findings show that the indirect expenses have grown for the business which is primarily due to the fact that the business has not been able to control the expenses. This has resulted in decrease profits and is a concern for the business which needs to be addressed as the return for the stakeholders is being affected. Return on Assets: This helps to understand the manner in which the business has been able to generate revenues in regard to the assets (Joseph, 2010) The graphical representation is as The finding shows that the return has decreased and is primarily due to the fact that profit has decreased. This implies that the assets for the business is more than required which has affected the return on the assets and has thereby affected the business fundamentals Return on Equity: This ratio shows the manner in which the business has been able to ensure better return on their equity and shows that the company has proper equity representation (Joseph, 2010). The graphical representation is as The findings highlight that the return on equity has decreased and is because of the fact that the profits have dipped in 2011 and has thereby adequately affected the business and resulted in having more equity than required. Asset Efficiency Ratios These ratios throw light on the manner the company has been able to use its assets efficiently and generate profits based on the use of the assets (Joseph, 2010). The ratios are as Inventory Turnover Ratio: This ratio examines the manner in which the business was able to revolve its inventory so that the amount invested in inventories remains within controllable limits (Joseph, 2010). The graphical representation is as follows The ratio shows that the inventory holding has increased as the ratio has dipped. This means that the company has more inventories than required and increases the risk as the chances of inventories becoming obsolete is high and needs to be addressed for better performance. Inventory Turnover Ratio in days: This ratio examines the manner in which the business was able to revolve its inventory and lower the holding period better is the performance for the business as they have to keep inventories for a shorter period (Joseph, 2010). The graphical representation is as follows The ratio shows that the inventory holding has increased as the ratio has dipped. This means that the company has more inventories than required and increases the risk as the chances of inventories becoming obsolete is high and needs to be addressed for better performance Liquidity Ratios This ratio is of prime importance to the lender as it helps to understand the manner in which the business is able to manage their liquidity and ensure that the business is able to show continuous improvement and growth (Financial Modelling Guide, 2010). The ratios are as Current Ratio: This ratio determines the short term paying ability and the higher the better but certain limits has to be maintained as very high ratios mean that the business has more current assets than required (Financial Modelling Guide, 2010) The graphical representation is as The analysis shows that Billabong has a sound liquidity position and is in a position where it will be able to manage their current liabilities properly and ensure that the short term obligations are easily met thereby signifying efficiency in the management of resources Quick Ratio: This ratio examines the manner in which the business is able to meet its current obligations from the current assets after removing the short term inventories (Financial Modelling Guide, 2010). The graphical representation is as The analysis shows that the position for the business is not very sound and requires to make certain strategies so that the ratio can be improved as it is making the business risky and is increasing the chances of the business not being able to meet its liabilities out of its present current assets. Capital Structure Ratios This ratio has its importance for the lenders as it helps them to understand the present debt capacity and based on it the business will be able to manage the resources so that the interest and the capital is returned on time (Transtutor, 2010). The ratios in this direction is as Debt to Equity Ratio: This ratio helps to understand the debt component in comparison to the equity and helps to understand whether the leverage for the business is high, low or adequate (Transtutor, 2010) The graphical representation is as The analysis shows that the debt component for the business has increased but still has a scope for taking more debts to finance the future projects. This shows soundness and an opportunity to improve the business in the future Market Performance Ratios This ratio depicts the confidence of the shareholders in the market and is a market reflective as it helps to understand the performance of the company with respect to the market requirements Earnings per Share: This ratio helps the shareholders to understand the return they are going to get on the invested sum and helps to change their outlook towards the market (Joseph, 2010). The graphical representation is as The analysis shows a dip which is a concern for the company as the earnings for the shareholder has decreased and will dent their confidence. This has happened due to reduce in profits which has affected the distribution of dividend as well Limitations Inflation which could result in increased sale has not been taken into consideration Changes in prices of the product hasn’t been considered as it might be a situation where the sale has increased because of increase in prices Changes encountered in the manner technology was used hasn’t been dealt with Conclusion The financial analysis shows that Billabong International has improved in some areas and need to work on others to ensure better performance. Overall the situation seems sound and the business has been growing so working on the different quarters will help to ensure changes in the strategies Recommendations The company has to improve their profit by controlling cost as it has shown a dip which has affected other areas as well The company needs to look towards improving their quick ratio as it is very low and requires strategy to deal with it The company has a scope for more loan which will help to save on taxes The operating ratio needs improvement as the company has more inventories than required which is affecting their work The financial analysis shows that Billabong International Ltd performance has improved in 2011 as compared to 2009. References Financial Modelling Guide, (2010), “Liquidity ratios”, retrieved on Septmeber 7, 2012 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 Septmeber 7, 2012 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 Septmeber 7, 2012 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 Septmeber 7, 2012 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 Septmeber 7, 2012 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 Septmeber 7, 2012 from http://beginnersinvest.about.com/od/incomestatementanalysis/a/net-profit-margin.htm Micro Strategy, (2011), “Financial Analysis”, retrieved on Septmeber 7, 2012 from http://www.microstrategy.com/financial-analysis/ Transtutor, (2010), “Capital Structure Ratios”, retrieved on Septmeber 7, 2012 from http://www.transtutors.com/finance-homework-help/dividend-decisions-and-tools-of-financial-planning/Capital-Structure-Ratios.aspx Appendix Ratio Formula 2010 2011 Current Ratio Current Assets / Current Liabilities 878,685 / 354,779 = 2.47 times 908,854 / 389,208 = 2.34 times Quick Ratio (Current Assets – Inventories) / Current Liabilities (878,685 - 240,400) / 354,779 = 1.79 times (908,854 -348,738 ) / 389,208 = 0.69 times Gross Profit Margin Gross Profit / Sales * 100 811,994 / 1,487,527 * 100 = 54.6% 909421 / 1,687,733 * 100 = 53.8% Net Profit Margin Net Profit / Sales * 100 145,988 / 1,487,527 * 100 = 9.81% 119,139 / 1,687,733 * 100 =7.05% Return on Assets EBIT / Avg. Total Assets * 100 125,825 / 2,210,319 * 100 = 5% 53,418 / 2,419,965 * 100 = 2.20% Return on Equity Net Profit / Shareholders Equity * 100 145998 / 1,217,579 X 100 = 11.99% 119,139 / 1,196,839 * 100 = 9.95% Earning per Share [(Net Profit – preferred dividends) / (Weighted avg number of ord shares) ] X cents ($) 57.8 cents 47.0 cents Inventory Turnover ratio CoGS “cost of good sales” / Avg inventory 675,533 / 240,400 = 2.81 times 778,312 / 348,738 = 2.23 times Inventory Turnover in Days 365 / Inventory turnover 365/2.81 = 129.89 days 365 / 2.23 = 163.67 days Debt to Equity Ratio (Total liabilities / Total shareholders’ equity) 637,961 / 1,217,579 * 100 = 0.52 833,918 / 1,196,839 * 100 = 0.69 Read More