Financial Analysis of Billabong International Limited - Case Study Example

Financial analysis Name: Lecturer: Course name: Course code: Date: Executive summary Financial analysis is the process of investigating the operations of the company to determine the going concern and suitability as well as the viability of the company. Financial analysis is used to find out the stability of a company, the solvency position, its liquidity situation and profitability of the company in relation to interested parties for example investors. Profitability analysis ratios include return on equity, return on assets, and profit margin. When performing asset efficiency, asset turnover ratio, times inventory turnover and times debtors turn over ratios are used. Current ratio and quick asset ratio indicates the liquidity position of the company. Capital structure ratios include debt to equity ratio, debt ratio, equity ratio, interest coverage ratio and debt coverage ratio. Ratios used to analyze the investment performance of a company include net tangible assets per share, earnings per share, and price earnings ratio. Introduction Billabong International Limited engages in distribution, marketing, wholesaling and retailing of accessories, apparel, eyewear, hardgoods and wetsuits in the entire sports sector under the umbrella of Palmers Surf, Element, Billabong, Tigerlily, Honolua Surf Company, DaKine, Von Zipper, Honolua Surf Company, Kustom, Nixon, Xcel, RVCA and Sector 9 brands. The financial analysis of Billabong will reveal its financial viability. The information for analysis will be based on the financial year2010/2011. Profitability ratios a) Return on equity The owners of a company are interested in the return on their investments. Return on equity is used to reveal the performance of the business in relation to equity of the shareholders. Return on equity ratio compares the extent of net profit to the amount equity of shareholders contributed to the company. The formula for ROE = net profit / average shareholder's equity x 100. 2011 2010 Net profit 118,045 145,166 Average shareholder's equity 678,949 671,761 ROE 17.39% 21.61% From the table above, ROE of Billabong International ltd has downward trend in ROE from 21.61% in 2010 to 17.39% in 2012. This shows that for every $1 invested by shareholders, the company generated 17.39 cents of net profit in 2011 and 21.61 cents of net profit in 2010. b) Return on assets Return on assets is used to ascertain the profits of a company in relation to the available assets used to make those profits. This ratio draws the comparison between the generated profits to the total assets that the company owns. The formula for ROA = earnings before interest and tax / average total assets x 100 2011 2010 EBIT 164,388 228,195 Average total assets 2,419,965 2,210,319 ROA 6.79% 10.32% It is drawn from the above information that ROE of Billabong ltd declined in 2011 as compared to 2010. This reveals that for each dollar of assets, the company made 10.32 cents of profits before interest and tax in 2010 followed by a decline in 2011 with each dollar of assets generating 6.79 cents of profits before interest and tax. d) Profit margin This ratio compares the revenue from sales to earnings before interest and tax (EBIT). It is used to determine the average amount every dollar of sales contributes to the profits before interest and tax of the company. The formula Profit margin = earnings before interest and tax / sales revenue x 100 2011 2010 EBIT 164,388 228,195 Sales revenue 1,687,733 1,487,527 Profit margin 9.74% 15.34% The profit margin of Billabong decreased from 15.34% in 2010 to 9.74% in 2011. This reveals that for every dollar of revenue from sales, Billabong was able to generate 9.74 cents of profit before interest and tax in 2011. From the information deduced from the above profitability ratios, Billabong ltd profitability is seen to declining in 2011 as compared to 2011. Asset Efficiency Ratios a) Asset turnover ratio Asset turnover ratio reveals the overall efficiency of the business in generating income per dollar of the total assets investment. The ability of the company to generate profits from sales determines its going concern. The formula for Asset turnover ratio = sales revenue / average total assets 2011 2010 Sales revenue 1,687,733 1,487,527 Average total assets 2,419,965 2,210,319 Asset turnover ratio 0.70 0.68 It is revealed from the above table that the asset turnover ratio of Billabong increased in 2011 to 0.70 up from 0.68 in 2010. This means that for each dollar investment in assets, Billabong was able to make $ 0.68 of revenue from sales in 2010 which rose to $ 0.70 in the year 2011. b) Days inventory The faster the rate at which inventory is sold, the more efficient the company is in meeting its short term liabilities. This is because the company will use the sales revenue in settling their short term obligations. There are risks involved in holding large amounts of inventories which are slow moving, for instance the risk of damage and obsolescence. Days inventory turnover ratio is a key ratio that measures the period of time a business takes to turn over its inventory during a financial period. The formula for Days inventory turnover ratio = average inventory / cost of goods sold x 365 2011 2010 Average inventory 348,738 240,400 Cost of goods sold 778,312 675,533 Days inventory 164 days 130 days Billabong’s efficiency in inventory turnover deteriorated in 2011 as compared to 2010. From the table above, it took the company 130 days to sell of its inventory in 2010, and it increased to 164 days in 2011. Billabong held inventory to, on average, last for 164 days in 2011 which increased from 130 days in 2010. c) Days debtors Efficient management of trade debtors leads to prompt collection and improved cash flows. It is expensive for the company if most of its debtors are not efficient in making their payments. Days debtors shows the average period of time it takes for a company to collect the money from the trade debtors. The formula for Days debtors = average trade debtors / sales revenue x 365 2011 2010 Average trade debtors 374,375 398,378 Sales revenue 1,687,733 1,487,527 Days debtors 81 days 98 days The efficiency in days debtors improved in 2011 to 81 days from 98 days in 2010. It is shown from the table above that, on average, customers made payments to Billabong 98 days after the sale was made in 2010, and it improved to 81 days in 2012. Liquidity ratios a) Current ratio This ratio is used to determine the relationship between current assets and current liabilities. In most cases companies use current assets in meeting their short term liabilities. Current ratio determines the dollars of current assets the company has per 1$ of current liabilities. The formula for Current ratio = current assets / current liabilities 2011 2010 Current assets 908,854 878,685 Current liabilities 389,208 354,779 Current ratio 2.34 2.48 The current ratio of Billabong decreased in 2011 to 2.34 up from 2.48 in 2010. This reveals that the company had $ 2.48 of current assets for every $ 1 of current liabilities in 2010 which decreased to $ 2.34 of current assets for each $ 1 of current liabilities in the year 2011. b) Quick asset ratio This ratio measures stern test on liquidity position of a company. Quick ratios deem that some current assets take longer periods to be transformed to cash than others. The quick ratio determines the dollars of current assets available (excluding inventory) to meet a dollar of current liabilities. Quick asset ratio = current assets less inventory / current liabilities 2011 2010 Current assets less inventory 560,116 638,285 Current liabilities 389,208 354,779 Quick asset ratio 1.45 1.80 Quick asset ratio of Billabong is seen to have a decreasing trend from 1.80 in 2010 to 1.45 in 2011. This means that Billabong had $ 1.80 of quick assets for every $ 1 of current liabilities in 2010, and it decreased to $ 1.45 of quick assets for each $ 1 of current liabilities in 2011. Gearing ratios The gearing ratio of a company measures the percentage of debt financing in relation to equity financing. Gearing ratio reflect the financing decision of a business. a) Debt to equity ratio Debt to equity ratio measures the total amount of dollars of debt that exist per each dollar of equity funding. If this ratio is more than 100 per cent, then the company employed much on debt funding than on equity funding. The formula for Debt to equity ratio = total liabilities / total equity x 100 2011 2010 Total liabilities 1,223,126 992,740 Total equity 1,196,839 1,217,579 Debt to equity ratio 102.20% 81.53% From the table above, Billabong relied on debt financing more than equity financing in2011 as compared to 2010. The ratio increased in 2011 to 102.20% down from 81.53% in 2010. This reveals that for every $ 1 of equity fund, Billabong used $ 81.53 of debt funding in 2010, this increased in 2011 such that for every $ 1 of equity finance, the company used $ 102.20 of debt fund. b) Debt ratio This ratio determines the amount of dollars of liabilities that exist per dollar of assets in a company. If the ratio is more than 50 per cent, then the company financed its investments in assets by relying on more debt than equity. Debt ratio = total liabilities / total assets x 100 2011 2010 Total liabilities 1,223,126 992,740 Total assets 2,419,965 2,210,319 Debt ratio 50.54% 44.91% From the table above Billabong relied more on debt to finance its investments in assets in 2011 with a percentage of 50.54% as compared to 2010 which was 44.91%. It reveals that for each $ 1 of assets, Billabong used $44.91 of debt to fund in 2010; it increased in 2011 such that for each $ 1 of assets, Billabong used $50.54 of debt to finance. Investment performance analysis a) Earnings per share Earnings per share ratio compares the total earnings made to the number of shares issued by the company. The formula for Earnings per share = Net profit available to ordinary shareholders / Weighted number of ordinary shares on issue. Basing on the financial report o Billabong, the basic EPS from continuing operations attributable to the ordinary equity holders of the Company decreased in 2011 to 47.4 down from 58.3 in 2010. The diluted EPS also decreased in 2011 to 47.0 down from 57.8 in 2010. This information reveals that Billabong made a basic of $ 58.3 of profit for each ordinary share in 2010, which decreased to $ 47.4 of profit for each ordinary share in 2011. Conclusion The company did not perform well in 2011 financial year as compared to 2010 financial year. This is revealed in the analysis of profitability which went down, the asset efficiency also revealed that the company’s efficiency is going down except asset turn over which rose with a very small margin, the liquidity position of the company also did not improve, and the company is employing more debt to finance its activities. The EPS reveals that the company is not improving on the investment performance. Reference List Cecilia, D. (2007). Corporate Accounting in Austalia. UNSW Press. Clerke, H. (2007). The international handbook of financial reporting and analysis. Cengage Learning EMEA. Markenzie, L. A. (2011). 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