Financial Analysis of Billabong International Limited - Case Study Example

Executive Summary: The company that we have chosen to use for financial statement analysis is Billabong International Limited. We plan to conduct a financial ratio analysis on the company based on the figures available for 2007 and 2008. In addition, we will also try to provide recommendations to the company based on the analysis that is carried out. Company Overview: Billabong International Limited is basically an organization that operates in the sportswear industry as it is conducts wholesale and retailing activities for surfing, skating and snow based activities, providing necessary sporting apparel and accessories and also the licensing of the Company’s trademark to different regions around the globe despite having a registered office in Queensland, Australia. According to the corporate structure of the company, its activities are organized into different segments which geographically cover the entire world; segments which include Australasia, Americas, Europe and Rest of the World. Specifically speaking the Australasia segment comprises of Australia, New Zealand, Japan, South Africa, Singapore, Malaysia and Indonesia. The American section consists of United States, Canada, Brazil, Peru and Chile. The Europe chapter constitutes France, Germany, England, Spain, Italy, the Netherlands, Belgium and Austria whereas the division which is marked the Rest of the World basically constitutes the royalty receipts that Billabong International receives from third party transactions which either use their brand name or actually sale Billabong International sporting apparel and accessories. The sub-divisions of Billabong international include Palmers Surf, Honolua Surf, Von Zipper, Kustom (footwear), Nixon, Sector 9 Xcel Wetsuits and Tigerlily brands, and also Element skate clothing and hardware. In addition to these, the company also completed the purchase of DaKine: an outdoor apparel company specializing in sportswear and sports equipment for alternative sports in September of 2008. [1] [2] Financial Analysis: Findings: We will now conduct a ratio analysis in order to examine the performance of Billabong International in the past 2 years. We will first look at liquidity ratios. These ratios provide information about the ability of a company to meet its short-term obligations. They are of particular interest to the short term lenders of the firm. Billabong shows a current ratio of 3.07 and 3.33 which generally show that the company has a decent amount of current assets to pay off its current liabilities. However, its is important to note that this ratio has decreased in 2008 which may be attributable to the global economic conditions that are prevalent, but is certainly something that has to be looked at rather carefully in the coming years in order to prevent a possible continuous downward spiral vis-à-vis this ratio. Secondly, we have the quick ratio or the acid test ratio. This is an alternative method of obtaining liquidity that does not include inventory in the current assets and perhaps is a truer depiction of liquidity as compared to the current ratio. Billabong shows a quick ratio of 2.11 and 2.33 from the two years which again shows a decrease in the statistics over the two years and even though this decrease might not look very ominous right now but it certainly can become a headache for the company in the future if it continues in this trend. Our next ratio is perhaps the most conservative liquidity ratio i.e. the cash ratio. This ratio only takes into account the cash at hand or cash equivalents i.e. marketable securities that are present in the firm. Billabong’s cash ratio shows figures of 1.99 and 2.25 which shows the sound liquidity position the company find’s itself in i.e. with almost double the cash or cash equivalent assets to pay off its liabilities. Due to this reason, the decrease in profitability can be considered just a reaction to the deteriorating global economic conditions, as it was suggested above. [4] [5] Now, we will look at some asset turnover ratios. These ratios depict how efficiently a firm is utilizing its assets. Our first asset management ratio is the non-current asset turnover ratio which shows how quickly the company’s capital investments are being converted into profits. Billabong has a non-current asset turnover ratio of 1.41 and 1.51 shows that the company may be in as sound financial position right now but this position can deteriorate very soon The other asset management ratio i.e. total assets turnover which shows the ability of a company in changing its entire asset base into profits casts a similar picture: Billabong has a total asset turnover ratio of 0.83 and 0.88, statistics which can be considered healthy on their own but when looked at in comparison, show the decreasing asset utilization of the company in 2008. However, this change can be attributed to the acquisition of DaKine in 2008 which has increased the asset base of the firm. [4] [5] Next are financial leverage ratios. Financial leverages ratios are an indication of the long term solvency of the firm. In contrast to liquidity ratios, financial leverage ratios look at how the firm is using its long-term instruments. We first take a look at the debt ratio which shows the part of the business that is financed by debt. Billabong has a debt ratio of 0.29 and 0.26 in 2008 and 2007 which shows that, despite an increase in 2008, only a small part of the business is financed by debt which is a good omen for the company. Next is the times interest earned ratio which shows the ability of a company to cover the interest payable every year on its debts. Billabong has a times interest earned ratio of 10.29 and 11.72 for the two years which again shows the great profitability of the company and the impact of the acquisitions in 2008 on the overall business. Another ratio is EBITDA coverage ratio which basically is EBITDA/ (Interest Expense + Lease payments): Billabong has an EBITDA coverage ratio of 3.66 and 4.49 for the two years which again shows a downward trend symptomatic of the diminished performance of the company which ahs to be traced to the economic conditions around the world. [4] [5] Profitability ratios will be analyzed now. Our first ratio is profit margin which simply shows that part of the revenue generated that is going back to the business as profit. Billabong has a profit margin of 0.13 and 0.14 for the two years, which as well as showing a strongly profitable position i.e. at least 13% of the overall revenues are recovered every year, also shows the operational efficiency of the company who was able to keep overall expenses in check despite the global economic conditions which have dented its other financial ratios. Basic Earning Power ratio basically shows the ability of the company to use its assets to create profits: Billabong has a Basic Earning Power ratio of 0.15 and 0.16 for 2008 and 2007 which basically encapsulates the activities of the company i.e. increasing profitability of the firm and the increase in the total capital base with the acquisition of DaKine showing in the decrease in ratio for 2008. Return on assets, our next ratio determines how effectively a firm is using its assets to generate profits. Billabong has return on assets ratio of 0.11 and 0.12; this ratio goes a long way in showing that diminishing ratios in other avenues of financial ratio analysis for Billabong cannot be entirely attributed to the company as the company has been able to almost match any changes in its asset base with similar statistics of profitability, showing that it ahs been able to handle its operations over the two years. Return on equity, our final ratio is quite simply the bottom line measure for shareholders, which is the statistic of most interest to the shareholders of a company. Billabong has return on equity ratio of 0.22 for both the years which perhaps puts a final stamp of approval in many ways with regards to the overall perception of the performance of the firm, as despite any external factors and conditions which have hit Billabong, it has been able to at least maintain their bottom line returns to the shareholders, which will provide immense confidence to the shareholders vis-à-vis Billabong International. [4] [5] Finally we have the market value ratios which look at the performance of the company in the stock market. Our first ratio is the price to earning ratio which shows figures of 9.16 and 18.25 whereas our second ratio i.e. market-to-book value ratio shows 2.03 and 4.02 in 2008 and 2007 respectively. These ratios clearly show the effect of the global economic downturn that has been faced by companies and the subsequent deterioration of the securities market around the world. The ratios have almost halved in 2008 and upon further study we find that it is primarily due to the halving of the share price of Billabong International. Therefore, it would be a bit harsh to attribute these worsening ratios to abject performance by the company in 2008 as surely when economic conditions improve globally, Billabong’s share price is also expected to increase which will help improve these market ratios. [3] [4] [5] Recommendation: Overall, one cannot really critique the performance of Billabong International in 2008 as most of the hit the company took has to be attributed to the global financial crisis which led to many adverse factors such as increasing costs, higher loan premiums etc. However, the company was able to sale through the murky waters quite admirable and was able to provide consistent bottom line results to its shareholders, which certainly makes it a great prospect for investment. Therefore, we can only suggest the company to continue with its present operational practices as once economic conditions improve; we can certainly expect the company to better its performance and prove to be even more profitable for its shareholders in the future. Bibliography 1. Google Finance, (2008) “Company Background” Available at http://www.google.com/finance?q=ASX:BBG [Accessed February 28, 2009] 2. PR-inside.com (2009) “Billabong International Ltd. - Financial and Strategic Analysis Review” Available at http://www.pr-inside.com/billabong-international-ltd-financial-and-r1077452.htm [Accessed February 28, 2009] 3. Fairfax Digital (2008) ‘‘Dry Billabong for investors as share price drops” Available at http://www.businessday.com.au/business/dry-billabong-for-investors-as-share-price-drops-20081206-6swe.html [Accessed February 28, 2009] 4. NetMBA (2008 “Financial Ratios” Available at http://www.netmba.com/finance/financial/ratios/ [Accessed February 28, 2009] 5. Billabong International Annual Report 2008. Available at http://www.billabongbiz.com/investors-reports.php?id=15 Appendix: Ratio Analysis Name Formula 2008 2007         Liquidity ratios Current Ratio Current Assets/Current Liabilities 3.07 3.33 Quick Ratio Current Assets-Inventory/Current Liabilities 2.11 2.33 Cash Ratio Cash + Marketable Securities/Current Liabilities 1.99 2.25                 Asset Management ratios Non-Current Asset Turnover Revenue/Non-Current Assets 1.41 1.51 Total Asset Turnover Revenue/Total Assets 0.83 0.88         Financial Leverage ratios Debt Ratio Total Debt/Total Assets 0.29 0.26 Times Interest Earned Earning before Interest and Taxes/Interest Expense 10.29 11.72 EBITDA Coverage Ratio EBITDA/(Interest Expense + Lease payments) 3.66 4.49         Profitability ratios Profit Margin Net Income/Total Revenue 0.13 0.14 Basic Earning Power Earning before Interest and Taxes/Total Assets 0.15 0.16 Return on Assets Net Income/Total Assets 0.11 0.12 Return on Equity Net Income/Total Equity 0.22 0.22         Market Value ratios Price-to-Earnings Ratio Price(As of Dec, 31 of the Year)/Earning per share 9.16 18.25 Market-to-Book Ratio Price(As of Dec, 31 of the Year)/Book Value per share 2.03 4.02 Read More