Billabong International Ltd Analysis - Assignment Example

Content Executive Summary 2 Introduction 3 Financial Analysis 3 Profitability Ratios 3 Asset Efficiency Ratios 5 Liquidity Ratios 8 Capital Structure Ratio 9 Market Performance Ratio 12 Limitations 14 Conclusion 15 Recommendations 15 References 16 Appendix 18 Executive Summary Billabong International Ltd which deals in products like surf, skates and snow apparel and accessories has been able to grow as highlighted form the financial analysis. The company be dealing in products which are produced by few have been able to create a niche market and has been able to grow. The analysis shows that the overall performance has grown. The ratio analysis shows a sound liquid position by having a quick ratio above 2.5 it shows the ability to meet the immediate obligations which is even highlighted in the long term liability where the company has more equity than debt. With regard to the turnover ratio it shows soundness in policy as the company recovers money from the debtors in 77 days but pays in 104 days. This enables the company to use money efficiently and build a better reputation. The concern for the company is a dip in profits to 18% owing to the growth in indirect expenses. Despite declaring dividends and having a sound EPS profits seems to be a consideration which needs to be worked upon. The financial analysis thus shows improvement in certain areas and areas where it needs to work upon. This will help the company to grow and ensure better return and policies in the future. Introduction Billabong International Ltd which started in 1973 deals in surf, skates and snow apparel and accessories. The company operates over different countries by having a presence in Australia, New Zealand, South Africa and others where it operates both through the wholesale and retail format. The company by dealing in products which are scarce has been able to grow since its operations from 1973. The company has an employee base of more than 1800 employees. Added with the geographic location the company has been able to improve its sales over the 2600 locations. The increased nature of adventurous tours is bound the sales to grow further and will help them consolidate their position in the market. Financial Analysis Financial analysis defines the success for every business. A careful analysis of the financials helps to “plan, budget, monitor, forecast and improve so that useful decisions can be taken accordingly”. (Financial Ratio, 2011) The following is the ratios for Billabong International Ltd Profitability Ratios The profitability ratios are as follows Gross Profit Margin: It is calculated as “Gross Profit / Sales X 100”. (Gross Profit, 2011) The graph for the ratio looks as The ratio shows a fall in profit from 55.11% in 2008 to 53.39% in 2009. This is due to the increase in expenses. The company needs to reduce the direct expenses as gross profit has a bearing from direct expenses. This will help to ensure smooth manufacturing for the company thereby generating sufficient returns. Profit Margin: It is calculated as “Earning before Interest and taxes (EBIT) / Sales X 100”. (Net Profit, 2011) The graph for the ratios is as Net profit has fallen to 12.31% from 18.13% on account of indirect expenses. The company needs to reduce the indirect expenses as the change from gross profit to net profit is very high and is due to indirect expenses. Return on Assets: It is calculated as “Earning before Interest and Taxes (EBIT) / Average assets X 100). (Kennon, 2011) The graph for the ratios is as The return on assets has fallen to 9.28% from 15.11%. This signifies that the assets are being underutilized. This is due to rise in indirect expenses high is affecting the return on assets. This is making the company carry more assets than required thereby hampering the growth for the equity shareholders. Return on Equity: It is calculated as “Net Profit / Average Equity X 100”. (Kennon, 2011) The graph for the ratio is as follows The return on equity has decreased from 22.18% in 2008 to 12.99% in 2008. This is due to decrease in net profits. The company needs to take steps to revive the profits else investor might withdraw money in some other share thereby having a double effect on growth Asset Efficiency Ratios The operating ratios are as follows Asset Turnover Ratio: It is calculated as “(Sales Revenue / Average Total Assets)”. The graph for the ratio is as follows The ratio has decreased slightly from 0.83 to 0.75 in 2009. This shows that the company has more assets and the efficient in using them has reduced. They need to improve the usage of the assets so that fewer funds are parked in assets and used elsewhere. Days Inventory: It is calculated as “Average Inventory / Cost of Sales X 365)”. (Schreibfeder, 2011) The graph for the ratio is as follows The day’s inventory has increased to 97.13 from 114.52 in 2008. This shows better policies in using inventories. This is due to proper ordering limits and economic order quantity being sound by the company. This has helped to reduce the expenses associated with storage and will pay rich dividends in the long run. Days Debtors: The lower it is the better it is. It is calculated as “365* (Accounts Receivable / Sales Revenue)”. (Receivable Turnover, 2010) The graph for the ratio is as There is consistency n receiving money from debtors as both in 2008 and 2009 tit is 77.75 days and 77.5 days respectively. This reduces the chances of bad debts and will help the company ensure sufficient liquidity and maintain a healthy current ratio. Days Creditor: It is calculated as “365* (Average payable / Cost of goods sold)”. The graph for the ratios is as follows The ratio has grown in 2009 from 103.9 to 110.34. This highlights improving image as the creditors are giving more time to repay the amount. This signifies that the reputation has grown. A comparison with the receivable ratio highlights that the company collects form the debtors in 77 days and pays later in around 100 days signifying good. Liquidity Ratios Liquidity ratios are as follows Current Ratio: It is calculated as “Current Assets / Current Liabilities”. (Liquidity Ratios, 2011) The graph for the ratios is as The ratio has grown to 3.3 in 2009 from 3.08 in 2008. This signifies sufficient liquidity but the company needs to reduce it slightly to around 2.5 as it resulting in more current assets than required thereby affecting the performance to a certain extent Quick Ratio: It is calculated as “(Current Assets – Inventories) / Current Liabilities”. (Liquidity Ratios, 2011) The graph for the ratio is as The ratio is very high at 2.48 in 2009 and should be around 1.5. The company needs to reduce the excess liquidity as it could lead towards using money carelessly and for things which could have been avoided. Cash Flow Ratio: It is calculated as “Net Cash from Operating Activities / Current Liabilities X 100”. (Liquidity Ratios, 2011) The graph for the ratio is as follows The ratio has fallen to 0.57 in 2009 as compared to 0.73 in 2008. This is a bad sign and shows that the return from operating activities is being affected. Steps needs to be taken to improve it and ensure smooth flow of cash. Capital Structure Ratios Capital Structure ratios are as Debt to Equity Ratio: It is calculated as “Total Liabilities / Total Equity”. (Transtutor Capital Structure Ratios, 2011) The graph for the ratio is as The ratio has fallen to 0.89 in 2009 as compared to 1.04 in 2008. The ratio shows that the company has a scope to take more loans and thereby signifies the growth trajectory that the company has in the near future by borrowing money. Debt Ratio: “It is calculated as “Total Liabilities / Total Assets”. The graph for the ratio is as The debt ratio is very sound at 0.47 as the debt component is less than 50%. It shows the company has more chances of taking money from the market through borrowings. It shows that the company can borrow from taking money from the market Equity Ratio: It is calculated as “Total Equity / Total Assets”. The graph for the ratio is as This ratio shows that equity form 53% part of the total company. The equity shareholder thereby has control over the company proceedings. This highlights the growth for equity shareholders if the company improves its earnings. Interest Coverage ratio: It is calculated as “EBIT / Net Interest”. (Transtutor, 2010) The graph for the ratio is as follows The ratio has dipped in 2009 to 5.34 as compared to 8.83 2008. It signifies that the company’s ability to pay interest on debt has reduced. The company needs to improve it to be able to meet its interest expenses. Debt Coverage Ratio: It is calculated as “Non Current Liabilities / Net Cash Flow from Operating Activities”. (Capital Structure Ratios, 2011) The graph for the ratio is as The ratio has increased in 2009 to 4.18 as compared to 4 in 2008. The company needs to perform similarly so that it is able to improve its reputation and ensure that the growth in performance transforms towards better debt management. Market Performance Ratios Market Performance ratios are as follows Earnings per Share: It is calculated as “Net profit available to ordinary shareholders / ordinary shares”. The graph for the ratio is as follows The ratio has decreased in 2009 to 85.7 as compared to 69.2 in 2008 due to fall in profits. This might hurt the equity shareholders and might affect their association with the company if the performance continues similarly. Dividend per Share: It is calculated as “Dividend Paid / Ordinary shares on issue”. The graph for the ratio is as follows The dividend stands at 52.05 in 2009 and 54 in 2008. It shows that the company has sufficient profits to distribute profits evenly thereby signalling uniformity in performance. The dividend has fallen to a certain extent highlighting that a dip in profits as seen from the profitability ratios. P/E Ratio: It is calculated as “Current Market Price / Earnings per Share”. The graph for the ratio is as follows The ratio for 2009 is 22.62 as compared to 18.31 in 2008. The ratio has grown tremendously which will help to win more shareholders in the future. The company needs to perform similarly to ensure a rise in their share prices. Net Tangible Assets per Share: It is calculated as “Ordinary shareholders equity – intangible assets / Number of Ordinary share on issue”. The graph for the ratio is as follows The ratio for 2009 is 0.79 as compared to -2.79 in 2008. This shows improvement and is due to the fact that the tangible assets have decreased and equity increased. This highlights efficiency and growth for the company. The company needs to perform similarly to be able to improve the performance. Operating Cash flow per Share: It is calculated as “Net cash flow from operating activity – preference dividend / Number of Ordinary share”. The graph for the ratio is as follows The ratio for 2009 is 78.98 as compared to 73.86 in 2008. It signifies a good operating flow per share thereby showing improvement in the daily operations. The company needs to perform similarly to be able to bring high return for the shareholders. Limitations Changes in price and inflation has not been accounted over the years which might provide misleading results The analysis is based on historical cost principle which might not reflect the actual position in the market No plan has been made to account for the changes business has encountered due to change in technology Conclusion The performance of Billabong International Ltd is improving as highlighted by the analysis. There are certain areas that the company needs to work upon but on the overall basis the reputation and strategies seems sound. The company looks like a good prospect for the future with different growth opportunities and investment opportunity for the company. Recommendations Steps needs to be taken to reduce the current and quick ratio as they are very high. Steps needs to be taken to reduce inventories in hand as they form a high percentage of current assets Steps needs to be taken to reduce indirect expenses so that the overall performance improves Steps needs to be taken to ensure efficiency in operations so that all the areas of work improves. References Liquidity Ratios, 2011, “Financial Statement Analysis: Liquidity ratios”, retrieved on February 2, 2011 from http://www.creditguru.com/ratios/ratiopg1.htm Kennon J, 2011, “Return on Assets”, about.com guide, The New York Times Company retrieved on February 2, 2011 from http://beginnersinvest.about.com/od/incomestatementanalysis/a/return-on-assets-roa-income-statement.htm Kennon J, 2011, “Return on Equity”, about.com guide, The New York Times Company retrieved on February 2, 2011 from http://beginnersinvest.about.com/od/incomestatementanalysis/a/understanding-return-on-equity.htm Schreibfeder J, 2011, “Why is Inventory Turnover important”, retrieved on February 2, 2011 from http://www.effectiveinventory.com/article2.html Gross Profit, 2011, “Gross Profit Margin”, Bizzed, retrieved on February 2, 2011 from http://www.bized.co.uk/compfact/ratios/profit3.htm Net Profit, 2011, “Net Profit Ratio”, accuntingformanagemnt.com retrieved on February 2, 2011 from http://www.accountingformanagement.com/net_profit_ratio.htm Receivable Turnover, 2010, “What is the Account Receivable Turnover Ratio”, accounting coach retrieved on February 2, 2011 from http://blog.accountingcoach.com/receivables-turnover-ratio/ Financial Ratio, 2011, “Financial Ratio Analysis”, retrieved on February 2, 2011 from http://www.finpipe.com/equity/finratan.htm Capital Structure Ratios, 2011, “Capital Structure Analysis Ratios Homework held Tutoring”, retrieved on February 2, 2011 from http://www.tutorsonnet.com/homework_help/capital_structure_analysis_ratios/capital_structure_analysis_ratio_assignment_help_online_tutoring.htm Appendix Ratios Formula 2008 2009 Return on Equity Net Profit / Average Equity * 100 22.18% 12.99% Return on Assets EBIT / Average Total Assets * 100 15.11% 9.28% Gross Profit Margin Gross Profit / Sales * 100 55.11% 53.39% Net Profit Margin EBIT / Sales * 100 18.13% 12.31% Asset Turnover Ratio Sales Revenue / Average Total Assets 0.83 0.75 Days Inventory Average Inventory / COGS * 365 114.52 days 97.13 days Days Debtor Avg Accounts Receivable / Sales * 365 77.75 days 77.15 days Days Creditors Avg Accounts Payable / Purchases * 365 103.9 days 110.34 days Current Ratio Current Assets / Current Liabilities 3.08 3.3 Quick Ratio (Current Assets – Inventories) / Current Liabilities 2.11 2.48 Cash Flow Ratio Cash flow from operating activities / Current Liabilities 0.71 0.57 Debt to Equity Ratio Total Liabilities / Total Equity 1.04 0.89 Debt Ratio Total asset - total equity / total assets 0.51 0.47 Equity Ratio Total Equity / Total Assets 0.49 0.53 Interest Coverage Ratio EBIT / Net Interest 8.83 5.34 Debt Coverage Ratio Non Current Liabilities / Net Cash flow from operating activities 4 4.18 Earnings per Share Net Income to ordinary shareholders / Outstanding shares 85.7 cents 69.2 cents Dividend Per Share Dividend paid / Average Ordinary Shares 54 cents 52.05 cents Price Earnings Ratio Current Market Price / Earnings Per Share 18.31 22.62 Net Tangible Asset Per Share Ordinary shareholder equity - intangible asset / No of ordinary share on issue -2.79 0.79 Operating Cash Flow Per Share Net Cash flow from operating activity - Preference Dividend / Ordinary Shares 73.86 cents 78.98 cents Read More