Financial Ratio Analysis of Billabong Limited - Example

A Report on Financial Analysis of Billabong Limited Student Name Institutional Affiliation A Report on Financial Ratio Analysis of Billabong Limited Ratio Analysis: Profitability Ratios The return on asset ratio decreases significantly from a value of 0.09 in 2010 to 0.05 in the year 2011. The drop in the ratio is a probable indication that the company’s after-tax revenue per each Australian dollar invested is falling at an alarming rate. This might also mean that the company is not operating at a healthy environment since more assets tend to be consumed before an insignificant level of profits can be realized (Collier et al, 2004). The return on equity ratio is perceived as having dropped immensely from 0.23 in 2010 to 0.18 in 2011. This is an indication that the company’s ability to transform equity held into formidable levels of profits has been on the decrease. The ratios do not depict a favorable position of the company given the fact that a significant level of equities continue to be deployed and in return makes insignificant levels of profits (Graham and Campbell, 2001). The net profit margin ratio drops significantly from 0.7 in 2010 to 0.07 in the year 2011. This drop in the ratio depicts an unfavorable environment upon which the company is operating. The drop in the ratio portrays the fact that more sales have to be made in order for the company to try and make significant profits. This might be associated with; first, the company’s prices for products and services might be placed at a higher rate hence chasing potential consumers and attracting less sales volume (Graham and Campbell, 2001). The unfavorable ratio might also be taken to mean that the company has continued to lose the number of loyal customers it had enjoyed within the previous years of operations. The gross profit margin is perceived as having dropped immensely from a figure of 0.55 in 2010 to 0.53 in 2011. The drop in the ratio, over the subsequent years, is a possible indication that the company is facing a great challenge in the effort to yield a huge margin that can be used for purposes of covering impeding expenses and also make profits at the same time. This might be caused by either low prices for goods and services offered so that huge sales volume is needed to offset the balance needed in setting a favorable margin or it might be caused by the assumption that the company has set higher prices hence chasing potential customers from making purchases thus reducing the sales volume (Graham and Campbell, 2001). Efficiency Ratios The asset turnover ratio drops from 0.7 in 2010 to 0.6 in 2011. The drop in the value of the ratio is a clear indication that the company is operating in an unfavorable business environment. This is because it is not placed at fair position to create sufficient levels of business in order to match with the size of the already acquired assets. This situation might be attributed to low participation of the business in promotional appeals so that it can attract huge number of customers for its products (Graham and Campbell, 2001). The inventory turnover ratio increases from 129 days in 2010 to 163 days in the subsequent year: 2011. This drop in the number of days is a possible indication that the company is holding much of its stocks. It is also an indication that the company is selling most of its inventories for a substantial period. This translates to lower levels of sales volume hence fewer profits for the organization as a whole (Collier et al, 2004). The times inventory turnover ratio decreases significantly from 2.8X in 2010 to 2.2X in 2011. This is an indication that the company’s ability to translate stocks held into possible sales is on the downward trend. This is an unfavorable situation for the operations of the company given that more stocks are held as excesses hence the piling up of stock gives rise to fewer numbers of sales volumes. The day’s debtor’s ratio decreases from 4 days in 2010 to 3 days in 2011. This is an indication that the company’s average number of time it takes to collect sales for goods sold on credit has decreased immensely. This is an unfavorable situation given the assumption that the firm cannot survive with sales made on credit for a longer period lest its operations can collapse due to insufficient funds (Collier et al, 2004). The credit turnover ratio decreases insignificantly from 170 days in 2010 to 161 days in 2011. The insignificant decrease in the number of days is an indication that the company takes a longer period before it can be able to effectively money it owes to suppliers and other creditors. It might also mean that the company’s level of operational finances have been reduced immensely so that its capacity to pay-off creditors is also infringed. Liquidity Ratios The current ratio increases from 1.8 in 2010 to 2.02 in 2011. This is an indication that the company has substantial levels of assets in relation to the subsequent levels of liabilities held. This might also mean that the company is placed at a slightly fair position upon which it can offset impeding short-term obligations. The quick ratio for the company decreases significantly from 1.8 in 2010 to 1.4 in 2011. Although there is a decrease in the ratio, it is still safe to postulate that the values are placed at favorable position in respect to the industry average. Thus, despite the decrease it can be comfortably ruled that the company is able to meet impeding short-term obligations without depending greatly on the sale of its inventories. Gearing Ratios The debt-to-equity ratio increases significantly from a value of 0.8 in 2010 to 1.02 in 2011. This is an indication that the company’s amount of capital that is provided by creditors over the owners has continued to increase immensely. This might be because the company cannot be able to raise funds through placement of additional shares into the stock market. This situation is considered to be unfavorable especially because it obligates the already tightened up company to commit to paying more annual interests and other finance costs. The debt ratio increases from 0.4 in 2010 to 0.5 in 2011. This is an indication that the company’s level of credit funds have been on the increase. This is also an indication that the company’s overreliance on creditors continues to increase regardless of its performance efforts. The equity ratio for the company decreases from 0.6 in 2010 to 0.4 in 2011. This is an indication that the company is utilizing most of its equities to pay-off debts rather than purchase necessary assets that are needed in the day-to-day activities of the company. This depicts an unfavorable position for the entity given that profits are made whenever necessary fixed assets have been purchased. Investment Ratios The dividend per share ratio for the company decreases from 0.3 in 2010 to 0.2 in 2011. This is an indication that the company’s capacity to pay dividends to existing shareholders is on the decrease. This might also be associated with the fewer levels of sales that are affected within a particular time. Thus, the company is perceived to be operating on an unfavorable environment that cannot attract newer investors. The earnings per share ratio for the company are perceived as having dropped from 0.6 in 2010 to 0.5 in 2011. The decrease in the level of the ratio is a possible postulation that the capacity of the company to avail earnings to its existing shareholders is on the decrease. Thus, it depicts an unfavorable position in terms of attracting more investors into the company. The price per earnings ratio of the company decreases significantly from 12.85 in 2010 to 3.52 in 2011. This is an indication that the company has lost its attractiveness ability within the equity markets given the assumption that there are no newer investors interested with purchasing shares of the company. This is also an unfavorable condition that affects the company’s financial stability and day-to-day operations as a whole. Section B: Position of the Company from Existing Shareholder’s Perception The overall performance of the company is not favorable at all. This is depicted by the fact that the amount of investment deployed as equities by existing shareholders is not used for the purpose it was intended for. In fact, it seems that the company is utilizing the monies received as equities to pay for liabilities rather than purchase fixed assets that are needed in making effective sales. Existing shareholders are also enjoying fewer amounts of earnings per each share held. The earnings per share for these investors have been on a significant decrease thereby fostering an element of loss for equities put in with the company. Position of the Company from Potential Shareholder’s Perception The current position of the entity is not favorable for any given potential investor. Thus, they are advised not to purchase any amount of stocks listed by the company in the ASX markets. This is because the company is not placed at a fair position to make huge profits needed in paying dividends. Given the assumption that the purpose of potential considering making investments with any firm is placed on its ability to pay dividends, Billabong International Limited is not fairly placed to do so (Kootanaee, 2012). References Billabong International Limited. (2011), 2011 annual reports. Accessed from Billabong Annual Report 2011 Collier. H.W, Grai.T, Haslitt. S and McGowan. C.B. (2004), An example of the use of financial ratio analysis; the case of Motorola, Research Online Papers, University of Wollongong: Faculty of Business Graham, J, R. and Campbell R. H. (2001), “The theory and practice of corporate finance: evidence from the field,” Journal of Financial Economics, 60:187-243 Kootanaee, A, J. (2012), A comparison of performance measures for finding the Best measure of business entity performance. Journal of Finance and Investment Analysis, 1(4): 27-35 Yahoo Finance (2010), Historical prices: Billabong International Limited. Accessed from http://au.finance.yahoo.com/q/hp?s=BBG.AX&a=00&b=10&c=2009&d=04&e=27&f=2013&g=m Appendix Profitability Ratios a) Return on Assets = Profit before interest and tax/Average total assets For 2010, =203,031/2,210,319, 0.09 For 2011, = 126,900/2,419,965, 0.05 b) Return on Equity = Net Profit/ Average Ordinary Equity For 2010, = 145,988/671,761, 0.23 For 2011 = 119,139/678,949, 0.18 c) Net Profit Margin = net profit/ net sales For 2010 =145,988/1,487,527, 0.1 For 2011, = 119,139/1,687,733, 0.07 d) Gross Profit Margin = gross profit/ sales or revenue For 2010 = 811,994/1,487,527, 0.55 For 2011 = 909,421/ 1,687,733, 0.53 Efficiency Ratios a) Asset turnover ratio = sales or revenue/ total assets For 2010 = 1,487,527/2,210,319, 0.7 For 2011 = 1,687,733/2,419,965, 0.6 b) Inventory turnover ratio = Average inventory*365/ COGS For 2010 = (240,400*365)/675,533, 129 days For 2011 = (348,738*365)/ 778,312, 163 days c) Times inventory turnover = COGS/Average inventory For 2010 = 675,533/240,400, 2.8X For 2011 = 778,312/348,738, 2.2X d) Days debtors = (Average Accounts Receivables * 365)/ Sales For 2010 = (17,172*365)/ 1,487,527, 4 days For 2011 = (14,106*365)/ 1,687,733, 3 days e) Creditors turnover = (Average Accounts Payables*365)/ COGS For 2010 = (315,545*365)/ 675,533, 170 days For 2011 = (344,034*365)/ 778,312, 161 days Liquidity Ratios a) Current ratio = total assets/ total liabilities For 2010 = 2,210,319/1,217,579, 1.8 For 2011 = 2,419,965/1,196,839, 2.02 b) Quick ratio = (total current assets- inventory)/total current liabilities For 2010 = (878,685-240,400)/354,779, 1.8 For 2011 = (908,854-348,738)/389,208, 1.4 Gearing Ratios a) Debt to equity = total liabilities/total equity For 2010 = 992,740/1,217,579, 0.8 For 2011 = 1,223,126/1,196,839, 1.02 b) Debt ratio = total liabilities/ total assets For 2010 = 992,740/2,210,319, 0.4 For 2011 = 1,223,126/ 2,419,965, 0.5 c) Equity ratio = total equity/ total assets For 2010 = 1,217,579/2,210,319, 0.6 For 2011= 1,196,839/ 2,419,965, 0.4 Investment Ratios a) Dividend per share = (profit after tax- preference dividends)/ no. of ordinary shares For 2010 = (145,166-78,129)/253,123, 0.3 For 2011 = (118,045-78,952)/ 254,038, 0.2 b) Earnings per share = profit for shareholders / no. of ordinary shares For 2010 = 145,988/253,123, 0.6 For 2011 = 119,139/254,038, 0.5 c) Price earnings ratio = current market price/ earnings per share For 2010 = 7.71/0.6, 12.85 For 2011 = 1.76/0.5, 3.52 Read More