Financial Analysis of Billabong International - 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 12 Conclusion 12 Recommendations 13 References 13 Appendix 15 Executive Summary Billabong International has set up a benchmark for its competitors and has been able to tap a niche market by offering its products related to surf, skates, snow apparels and accessories which can be seen through the consistent performance of the company and can be further enhanced by applying feasible strategies in certain areas. A study of the financial analysis of Billabong International shows strong liquidity position of the company as it has more liquidity to cover up its short term obligations. Further, the company enjoys a benefit of taking external loans due to strong capital ratios and proper management of external liability holding. The company is performing well in rotating its inventory thus ensuring no large stock pile and further the collection system of the company is strong and effective to ensure timely collection of customer debts and reduces the chances of bad debts. Thus, we see a sound financial condition of the company with certain key areas of improvement to achieve a higher success rate and ensure better returns to its stakeholders. Introduction Billabong International has successfully been able to achieve a niche market with its products ranging from surf, skates and snow apparel and accessories. It had started its operation in Australia and has widen its market internationally to reach New Zealand, South Africa and other countries due to its huge demand for its products. The number of employees working in the organisation has reached over 1900 and the same is forecasted to have an increasing trend. This report highlights the financial analysis of the company by comparing its current year results with the previous year data in order to establish the future growth rate of the company and find areas of key importance to further accelerate the growth of the company. Financial Analysis Financial Analysis is an important tool for evaluating the current scenario of a business and determine whether an entity is stable, profitable, liquidity position of the company and comparing it with past data to estimate the company’s future performance. The ratio analysis of Billabong International is demonstrated as. Profitability Ratios Profitability ratios are of prime importance as it indicates the profit generation capability of a firm from its operating activities which acts as tools in making future strategic decisions by the management. The profitability ratios for Billabong International are as under. Gross Profit Margin: This ratio highlights what is left from sales after deducting the cost of goods sold and act as a source for meeting additional expenses and future earnings. (Kennon, 2010). The graphical representation is as: The gross profit margin has decreased slightly owing to higher cost of goods sold, however the same is not much of a worry for the company but factors affecting the same is to be examined and tuned in for future success. Net Profit Margin: This is the real profit that a company earns after meeting all its expenses. A higher ratio indicates better earning and better cost control. (Kennon, 2010). The graphical representation is as The results show a decline in the Net profit margin which is an a concern for the company as it has failed to control over its costs and expenditures. Serious problems may arise if the company is unable to control its costs and expenditure and may lead to sustainable losses in the future. Return on Assets: This ratio acts as a tool to understand how effectively and efficiently an entity has been able to generate revenues from optimal utilisation of its assets. The graphical representation is as The results show a declining trend in the return on assets ratio which is primarily due to declining profits and is a major concern for the company as it shows under utilisation of the assets of the company and more assets than required leading to unnecessary blockage of funds. Return on Equity: This ratio is of prime importance to the shareholders as it highlights the return the equity investors are earning by investing in the company. (Joseph, 2010). The graphical representation is as The results show a declining trend which is not appreciated by the equity investors and shall seriously affect the market capitalisation of the company. The major reason for the same is declining profits in 2011 compared to previous year. Asset Efficiency Ratios The ratios help in determining the proper utilisation of assets in an optimal manner and how the company has been able to generate profits from its assets effectively and efficiently. (Joseph, 2010). The ratios are as Inventory Turnover Ratio: This ratio help in determining the efficiency of a company to rotate its inventory and further determine the amount invested in inventory to ensure unnecessary blockage of working capital. The graphical representation is as The ratio highlights a dip in the inventory turnover which means stock pile and blockage of working capital. This is again an area of concern and is to be addressed quickly to mitigate the risk of inventory obsolesce and ensure better performance in future. Inventory Turnover Ratio in days: This ratio highlights the capability of a business to rotate its inventory and is measured in days. A lower ratio is always considered beneficial to the company. (Joseph, 2010). The graphical representation is as follows The ratio highlights an increase in the number of days of inventory which is a sign of unnecessary blockage of working capital and stock pile further inviting risk of stock obsolesce and needs to be addressed quickly for better performance. Liquidity Ratios This ratios help in determining the liquidity position of an entity, it implies how quickly an entity is able to cover its short term obligations in an effective and efficient manner. (Financial Modelling Guide, 2010). The ratios are as Current Ratio: This ratio determines how effectively an entity is able to pay its short term obligations, a higher ratio is usually considered better but a very high ratio indicates unnecessary current assets in the company. (Financial Modelling Guide, 2010) The graphical representation is as The study shows that the company is enjoying a sound liquidity position and is able to manage its short term obligations in an efficient manner, thereby showing a sound management system. Quick Ratio: This ratio determines the manner in which an entity is able to meet its current obligations and liabilities from its current assets without considering the short term inventories. (Financial Modelling Guide, 2010). The graphical representation is as The analysis highlights that Billabong International is having a serious treat with its Quick ratio and require immediate implementation of strategies in order to meet its current obligations with current assets to avoid the threatening business risks which the company is presently engraved it. Capital Structure Ratios This ratio is always eyed upon by the lenders as it shows how well a company is able to manage a proper mix of debt and equity in its capital structure and further future scope of an entity to meets its interest obligations and infuse more debts into the capital structure. The ratios in this direction is as Debt to Equity Ratio: This ratio helps to understand the correct leverage position of an entity, as it takes into account the proper mix of debt and equity as per the requirement of the company. (Transtutor, 2010) The graphical representation is as The analysis highlights that the company has increased its debt component to meet its obligations and still has ample scope to further increase debts to make future expansions and achieve higher growth. Market Performance Ratios These ratios are of prime importance to the stakeholders as investment decisions are based on these ratios. These are market reflectors and show how effectively an entity is meeting the market requirements. Earnings per Share: This ratio is eyed by the shareholders as it depicts the return an investor will be receiving by investing his fund in the company. (Joseph, 2010). The graphical representation is as The analysis shows a decreasing trend which is obvious as the company has lower profits, this shall seriously affect the current shareholders and new investors investing decision making process and give competitors an edge over the company. Dividend Yield Ratio: This ratio shows the dividend that a company pays relative to its share price. The graphical presentation is as under The study shows a slight increase in the yield as the market price of the shares had gone up and dividend payout being quite stable. This is a good sign as investors are yielding higher returns on their investment. Limitations Inflation which could increase selling price and might lower profits due to increase in prices of raw materials has not been considered. Price changes had not been considered which might be a serious reason for increased sales. Technological changes had not been encountered in the calculations. Conclusion The financial analysis highlights that Billabong International has improved in certain areas however lower profits and high blockage of funds is a concern for the company. In a nutshell the company seems sound and management strategies are working well to improve the growth of the company. Recommendations Profit growth is a concern as increasing the profit rate will further automatically counter many other areas as well. The management should develop short term strategies to control its quick ratio then laying emphasis on long term goals. The company has ample scope for debt thereby making a proper capital structure is easier. Unnecessary blockage of funds and stock piling are areas of concern which can be lowered by effective management strategies. References Financial Modelling Guide, (2010), “Liquidity ratios”, retrieved on May 13, 2013 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 May 13, 2013 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 May 13, 2013 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 May 13, 2013 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 May 13, 2013 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 May 13, 2013 from http://beginnersinvest.about.com/od/incomestatementanalysis/a/net-profit-margin.htm Micro Strategy, (2011), “Financial Analysis”, retrieved on May 13, 2013 from http://www.microstrategy.com/financial-analysis/ Transtutor, (2010), “Capital Structure Ratios”, retrieved on May 13, 2013 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 Dividend Yield ratio Annual dividend per share/ Price per share 0.36/8.74*100=4.19% 0.34/6.01*100=5.66% 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