Financial Statement for 2011 and 2012 - Billabong International Ltd - Case Study Example

Executive Summary This report analyzes the financial statement for 2011 and 2012 by making a comparison based on different ratios like current ratios, profitability ratio, asset efficiency ratio and market performance ratio. This is followed by a recommendation for the short and long term and the limitations. This will thereby help the user of the financial statement to understand the performance better and based on it can take decisions. The analysis shows that Billabong International Ltd performance has improved in 2012 as compared to 2011. The analysis shows an improvement in new profit margin but reduction in gross profit margin which has to be looked at. The operational efficiency in the use of assets is witnessed and will require working similarly. Improvement needs to be made in the direction of short term liquidity by improving both the current and quick ratio. In a similar manner a better balance needs to be achieved with regard to debt and equity and the organization have to work on smaller areas for better performance. The overall analysis shows sound performance with improvement over the previous year Table of Content Introduction 3 Financial Analysis 3 Profitability Ratios 4 Asset Efficiency Ratios 6 Liquidity Ratios 8 Capital Structure Ratio 10 Market Performance Ratio 11 Recommendations 12 Limitations 12 Conclusion 13 References 14 Appendix 15 Introduction Billabong International Ltd has been able to create a niche market for itself due to the manner in which the organization has been able to attract people and retain them. The company deals in surf, skates and snow apparel and accessories which itself is rare and manufactured by few has helped them to develop a brand image for their products. This has helped them to develop their business which started in Australia to other parts of the world like New Zealand and South Africa. The growth is further witnessed through a change witnessed in the work culture which has increased the number of employees in the organization to more than 1800. This report will look to analyze the financial statement for 2011 and 2012 by making a comparison based on different ratios like current ratios, profitability ratio, asset efficiency ratio and market performance ratio. This is followed by a recommendation for the short and long term and the limitations. This will thereby help the user of the financial statement to understand the performance better and based on it can take decisions. Financial Analysis Financial analysis holds an importance aspect while making decisions as looking into the different factors and analyzing the manner the organization has performed helps to develop present and future strategies. The financial analysis for Billabong International Ltd based on the different ratios is as Profitability Ratios This ratio helps to determine the manner in which the business has been able to make profits by carrying out the daily activities (Birt, Chalmers, Byrne, Brooks & Oliver, 2012). This is one of the most important as it helps the business to make future strategies and ensure that all the expenses can be covered by the organization itself. The calculations is Gross Profit Margin: This ratio attributes the profit which the business has made after deducting the direct cost associated with production. The graphical representation for Billabong International Ltd is as The ratio highlights a huge dip in gross profit margin from 53% in 2011 to 47% in 2012 which is an area of concern. This could be either due to increase in direct cost like labour or reduce in sale while having the same cost. This is an area which has to be looked at and ways have to be developed to reduce cost and improve the margins. Net Profit Margin: This ratio highlights the final profit which the business is able to make after meeting all the expenses. The graph for the same is as The analysis shows that the net profit margin has improved which is a good sing and shows better control over indirect expenses. This is a good sign and shows proper use of resources (Fridson & Alvarez, 2011). The business needs to continue similarly and has to ensure that shareholders are properly compensated through higher profits. Return on Assets: This ratio determines the manner in which the assets have been used to generate the profits for the business. The graph is as The returns on assets has improved drastically primarily due to the increase in the profits. This also highlights the fact that the business has managed the assets properly and have ensured that they have the required assets which is neither more nor less so that adequate returns can be ensured highlighting good use of assets Return on Equity: This ratio helps to find out the manner in which the shareholders are compensated through profits for the additional risk taken by investing in the organization. The graph is as The returns on equity has improved drastically primarily due to the increase in the profits. This also highlights the fact that the business has compensated the stakeholders adequately by earning high profits so that better returns are provided for the additional risk which has been undertaken by them (Brigham & Houston, 2004). Asset Efficiency Ratios This ratio looks into the manner the business has been able to use the different assets for conducting its business and the effectiveness that has been witnessed due to it. The different ratios are as Inventory Turnover Ratio: This ratio calculates the time span within which the inventory is revolved and helps to understand whether the business has more inventory than required or not. The graph is as The analysis shows a dip in inventory holding as the ratio has improved showing that inventory is revolved more. This reduces the chances of inventory becoming obsolete and also ensures that unnecessary investment is not parked in inventories which can be used in other areas to develop the business Inventory Turnover Ratio in days: This ratio helps to find out the number of days till inventory is kept within the business. The graph is as The analysis shows improvement as inventory is revolved quickly thereby reducing the chances of it becoming obsolete and has also reduced the level of investment made in inventories. This is a good aspect and provides an opportunity to use the financials in different areas. Liquidity Ratios This ratio helps the investor to understand the short term liquidity of the investment so that investors based on it are able to understand the risk that their investment will undergo. Based on it investors take decisions regarding their investment. The ratios are as Current Ratio: This ratio helps to find out the short term ability to pay the lenders in the market and is important to ensure financial liquidity in the market over a shorter period of time (Birt, Chalmers, Byrne, Brooks & Oliver, 2012). The graph is as The analysis shows a dip in current ratio which is a worrying factor as the short term liquidity position is not sound. This increases the risk for the investors and it might refrain people from investing in the organization due to additional risk that the financial presents (Eljelly, 2004). This requires an urgent need to develop a process through which it can be improved and better liquidity can be ensured. Quick Ratio: This ratio also examines the short term liquidity position after removing inventories as inventories take more time to be converted into cash. The graph is as The ratio shows improvement in comparison to 2011 and also highlights little inventory as despite having a lower current ratio the quick ratio has improved. The business needs to continuously improve the ratio and continue to improve it further to around 1.5 so that all the short term liabilities can be easily met (Deloof, 2003). Capital Structure Ratios This ratio has its importance for the credit providers as it helps them to understand whether the business is able to pay the debt and interest on debt effectively. The ratio in these areas is Debt to Equity Ratio: This ratio helps to understand the leverage for the business by comparing debt and equity and helps to find out the leverage position. The graph is as The analysis highlights that debt has reduced and equity has grown. This shows less dependence on external financing through borrowings and provides an opportunity to raise the required finance in the future as the leverage is sound (Antony, 2004). The organization needs to ensure that the debt component is managed in such a manner that they are able to save on taxes by paying interest as it is considered as a charge against expenses. Market Performance Ratios This ratio helps to project the confidence of the shareholders and determines the manner in which the business will be able to perform based on the confidence level of the shareholders Earnings per Share: This ratio highlights the return for the shareholder based on their investment made and is provided as a profit for the risk taken in the business. The ratio is as The EPS shows drastic improvement and is due to higher profits which the company has earned. The additional profits have been passed on the shareholders for the risk undertaken by them will help to improve the brand image and ensure that more and more people will be willing to invest in the shares of the organization. Recommendations The recommendations for the short run is The organization needs to cut down direct cost so that the gross profit margin improves The organization has to work on improving their liquidity ratio so that safety of investment and proper short term liquidity is ensured The recommendations for the long run is The organization has to work on improving the debt equity balance so that they are able to take tax advantage and save on taxes The organization has to improve the efficiency ratios through proper and improved use of asset so that the financials improve further. Limitations The analysis doesn’t takes into account inflation which could have affected the financial figures Changes in prices haven’t been considered as increase in price could be a reason for increased sale Changes in technology hasn’t been considered Conclusion The analysis shows that Billabong International Ltd performance has improved in 2012 as compared to 2011. The analysis shows an improvement in new profit margin but reduction in gross profit margin which has to be looked at. The operational efficiency in the use of assets is witnessed and will require working similarly. Improvement needs to be made in the direction of short term liquidity by improving both the current and quick ratio. In a similar manner a better balance needs to be achieved with regard to debt and equity and the organization have to work on smaller areas for better performance. The overall analysis shows sound performance with improvement over the previous year References Antony, T. (2004). Thin Capitalization: Issues on the Gearing Ratio. Journal on Australian Taxation, 7 (1), 39-57 Birt, J., Chalmers, K., Byrne, S., Brooks, A., & Oliver, J. (2012). Accounting: business reporting for decision making (4th Ed). Australia: Wiley Brigham, E. F., & Houston, J. F. (2004). Fundamentals of Financial Management (10th Ed.). Ohio: South-Western, Thomson Learing Deloof, M. (2003). Does Working Capital Management Affect Profitability of Belgian Firms? Journal of Business Finance & Accounting, 30(3&4), 573-587. Eljelly, A. (2004). Liquidity-Profitability Tradeoff: An empirical Investigation in an Emerging Market. International Journal of Commerce & Management, 14(2), 48 - 61 Fridson, M., & Alvarez, F. (2011). Financial Statement Analysis: A Practitioner's Guide (4 Ed.). John Wiley & Sons Appendix Ratio Formula 2012 2011 Current Ratio Current Assets / Current Liabilities 898,921 / 611,443 = 1.47 times 908,854 / 389,208 = 2.34 times Quick Ratio (Current Assets – Inventories) / Current Liabilities (898,921 – 293,201) / 611,443 = 0.99 times (908,854 -348,738 ) / 389,208 = 0.69 times Gross Profit Margin Gross Profit / Sales * 100 678,766 / 1444,079 * 100 = 47% 830,161 / 1,558,459 * 100 = 53 % Net Profit Margin Net Profit / Sales * 100 (275,649) / 1444,079 * 100 = 19.08% 119,139 / 1,558,459 * 100 =7.64% Return on Assets EBIT / Avg. Total Assets * 100 273,686 / 2,079,869 * 100 = 13.15 % 53,418 / 2,419,965 * 100 = 2.20% Return on Equity Net Profit / Shareholders Equity * 100 (275,649) / 1,027,265 * 100 =26.83 % 119,139 / 1,196,839 * 100 = 9.95% Earning per Share [(Net Profit – preferred dividends) / (Weighted avg number of ord shares) ] X cents ($) 158.7 cents 47.0 cents Inventory Turnover ratio CoGS “cost of good sales” / Avg inventory (765,313) / 293,201 = 2.61 times (728,298) / 348,738 = 2.08 times Inventory Turnover in Days 365 / Inventory turnover 365/ 2.61= 139.85 days 365 / 2.23 = 163.67 days Debt to Equity Ratio (Total liabilities / Total shareholders’ equity) 441,161 / 1,027,265 * 100 = 0.42 833,918 / 1,196,839 * 100 = 0.69 Read More