Aveneu Park, Starling, Australia

Financial 2.3 Liquidity Ratios………………………………………………………………………………………………………. 6 2.4 Gearing Ratios………………………………………………………………………………………………………..

 

 

Financial Ratio Analysis

    

 

BILLABONG INTERNATIONAL LIMITED

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Course Code: BUACC 1508
Course’s Name: Principle of Accounting and Finance
Tutor’s name: Anbu Chellarani Gnanarathinam
Year: 3rd Semester, 2017
Date of Submission: 26th Jan, 2018
 
 
Group members
30341303 Suhel Rai
30341115 Sujan Gopali
30324050 Yuhang Wu
 
 

 

 
 

 

 

Executive Summary

This report explains the financial ratios – profitability, efficiency, liquidity, gearing and investment performance of Billabong Limited. Each category is represented by at least three indicating ratios. The report analyzes the trends in these ratios and explains the possible reasons for the trend. The findings help offer recommendation to the investors and management of Billabong. Based on the analysis, Billabong performs well except for its profitability. The firm has incurred losses that affect its profitability. The firm is efficient, highly liquid and financial stable based on its gearing ratios. Due to the low profitability, the firm is a low return investment. Managers should work towards reducing the level of production and operating costs of the firm. These costs are the reason for the low earnings of the firm. Billabong is a great investment for low risk investors who are looking for growth and not wealth. There is potential for growth hence existing investors should not buy or sell the shares until the firm begins to improve steadily.

Table of Contents
Executive Summary…………………………………………………………………………………………………………. 1
1.0 Introduction………………………………………………………………………………………………………………. 3
1.1 Company Overview………………………………………………………………………………………………… 3
2.0 Financial Ratio Analysis 2015-2016………………………………………………………………………………. 4
2.1 Profitability Ratios………………………………………………………………………………………………….. 4
2.2 Efficiency Ratios…………………………………………………………………………………………………….. 5
2.3 Liquidity Ratios………………………………………………………………………………………………………. 6
2.4 Gearing Ratios……………………………………………………………………………………………………….. 7
2.5 Investment Performance…………………………………………………………………………………………. 8
3.0 Conclusion and Findings……………………………………………………………………………………………… 9
4.0 Recommendations……………………………………………………………………………………………………… 9
REFERENCES…………………………………………………………………………………………………………………. 11
 

 

1.0 Introduction

The ultimate purpose of a business is to generate profits and wealth for its shareholders. A firm has a number of stakeholders with different interests in the business. It is important for the firm to ensure that it meets the interests of these stakeholders and provide them with the best performance. Financial performance is the overall factor that affects the interests of all these stakeholders. For instance; the government has stake in income of the firm as this is revenue to the government as income tax – poor financial performance affects this revenue. Shareholders have interests in dividends which are determined by the financial performance of an entity (Moreno 2016).

Financial performance is analyzed through various metrics – one of which is financial ratio analysis. Financial ratios are metrics that determine the overall performance of the firm based on profitability, efficiency, liquidity, gearing and investment performance. These metrics provide the management and investors an insight on how the business is performing based on these aspects. Each of these categories of ratios has a number of ratios that help determine the aspects represented by each.

This report provides a financial ratio analysis on Billabong – a surf apparel retailer in Australia. The report is based on the aforementioned ratios each with different ratios that help determine the five aspects. For the purpose of this report, each ratio has at least three ratio calculations that describe the performance of the company in the five different aspects. The report then evaluates each ratio to determine any significant changes or issues that relate to the performance of Billabong. The reasons for these changes and issues are then discussed and recommendations made on strategies to improve and whether investors should buy or sell the shares.

1.1 Company Overview

Billabong International Limited is a wholesaler and retailer of surf, snow, skate and sports apparel, accessories and hardware under multiple brands. The firm is operation in Asia Pacific, America and Europe where the brands have a great market share. The company brands are Billabong, Element, RVCA, Palmers, Kustom, Honolua, Xcel, Tigerlily and Von Zipper. According to the 2016 annual report, the Group has 407 retail stores in the operating segments mentioned above. Australia has the most stores followed by Europe but in each store there are a variety of banners that the stores trade in. Billabong group also has an online retail market for each of the key brands. In 2016, the firm sold a number of its retail stores leading to the significant net loss after tax. The company is also affected by the changes in currency rates leading to translation risks hence the drop in performance (Billabong International 2016).

2.0 Financial Ratio Analysis 2015-2016

In this section, we discuss the profitability, efficiency, liquidity, gearing and investment performance ratios. The calculations and analysis are based on the annual reports of the company for the financial year 2016 and 2015. We evaluate any key results and trends of these ratios and the implications of the same. We also discuss the reasons for the results based on relevant sources. Calculations on each ratio are provided in the Appendices.

2.1 Profitability Ratios

Profitability of a firm refers to its ability to make profits after all expenses are incurred in the business. Profit is the income less expenses in a financial year. Profitability ratios, therefore, determine a firm’s ability to generate profit and adequate rate of return on its assets and revenue (Tugas 2012). We calculate the following ratios for Billabong;

PROFITABILITY

2016

2015

1.      Return on equity.

= 0%

= 4150/270310*100
= 1.535%

2.      Return on asset.

= (15895)/774114*100
= (2.05%)

=  (20195)/777923*100
= (2.59%)

3.      Gross Profit Margin

= 561162/1103535*100
= 50.85%

= 560822/1056130*100
= 53.10%

4.      Profit Margin.

= (23735)/1103535*100
= (2.16%)

= 4150/1056130*100
= 0.39%

5.      Cash flow to Sales

= (22103)/1103535*100
= (2.0029)

= (14625)/1056130*100
= (1.384%)

According to the calculations, overall, the firm is not profitable in the year 2016. In 2015, the firm makes profit but the level of profitability is quite low. In 2016, all profitability ratios except asset turnover are negative. In 2016, the net income or earnings after interest and tax (EBIT) was a loss of $(23,739) thousand compared to a net income of $2,552 thousand in 2015 (Billabong International Limited 2015). This difference in net income brings out the difference in overall profitability of the firm. The asset turnover in 2016 is 1.43 times and 1.36 times in 2015. Despite the loss in 2016, the firm was able to generate more revenue in the year than 2016. The total assets in 2015 are more than in 2016. Due to the percentage increase in revenue in 2016, the asset turnover is higher in 2016 than in 2015.

The firm has experienced losses since 2008 except in 2015 where there was a slight profit. From the profitability ratios, the firm is able to generate profits from its assets and not revenue. In each year where there was a loss, the firm had high revenue but its level of expenses is very high. It is important for Billabong to strategically reduce expenses by strategizing on ways to improve efficiency in the firm. Efficiency will help maximize profits and reduce expenses. The American market is the cause of the losses in the firm hence strategies to improve operations in this segment will help improve profitability

2.2 Efficiency Ratios

Efficiency refers to the ability to carry out tasks and getting the desired results without wastage. Efficiency ratios determine the ability of firms to use their resources (assets) to generate income. These ratios determine the aspects of the business that use resources without wastage to maximize income (Santosuosso 2014). The analysis on efficiency ratios is based on the following;

EFFICIENY RATIO

2016

2015

1.      Asset Turnover.

= 1103535/774114
= 1.4255

= 1056130/777923
= 1.358

2.      Days Inventory.

= 186340.5/542373*365
= 125.4

=  183674/495308*365
=  135.35

3.      Days Debtors.

= 168074/1103535*365
= 55.59

= 159177/1056130*365
= 55.01

According to the above ratios, Billabong is very efficient. The accounts receivable turnover (2016; 147.20 and 2015; 120.86) and days in sales receivable (2016; 3days and 2015; 2days) indicate that the firm does not offer long credit periods to debtors. It efficiently collects up to 147 times of its receivables in 2016 and 120 times in 2015. The firm also offers two to three days for the firm to collect revenue from credit sales. The inventory turnover of 5.92 in 2016 and 5.75 in 2015 indicates that the firm is able to sell an average of five times its inventory in the two years. All these ratios indicate that the firm efficiently uses its debtors and inventory to generate income for the firm. The gross profit percentage however indicates that the firm is not able to maximize profits due to the high costs of goods sold.

Billabong should ensure that the credit and inventory management strategies continue to be in use to ensure continued efficiency. However, it is important for the firm to emphasis on reducing production costs that affect the gross profit of the firm. Production costs exceeding revenue indicate inefficiency in the production system of the firm – the product prices may not match the production costs since inventory turnover is very high. This indicates that the firm is using a inefficient pricing strategy (Pandey 2007).

2.3 Liquidity Ratios

Liquidity ratios determine a firm’s ability to meet its short-term obligations when they fall due. Liquidity of a firm is affected by the level of liquid assets that a firm holds compared to its liquid liabilities. Liquid assets are those that can be converted into cash fast to meet the short-term obligations (Chen et al. 2014). Liquidity ratio analysis on Billabong is based on the following;

Liquidity Ratio

2015

2016

Current Ratio

523753/236768=2.21

464454/197932=2.35

Quick Ratio

336628/236768=1.42

278898/197932=1.41

Cash Flow Ratio

(14625)/236768=(0.062)

(22103)/197932=(0.112)

Both the acid test and current ratios determine the liquidity of a firm except that acid test is more effective as it eliminates inventories and prepayments that are less liquid assets. From the calculations, in 2016, the firm has a current ratio of 2.35 compared to 2.21 in 2015. This is a 6% increase in the ratio between 2015 and 2016. The increase is due to a reduction in current liabilities in 2016. The acid test ratio indicates liquidity to be 1.41 in 2016 and 1.42 in 2015. Inventory levels are quite consistent hence the slight difference in acid test ratio. It is true to say that the firm is highly liquid based on the two ratios.

High liquidity reduces the risk of liquidation as the firm can meet 1.4 times the amount of current liabilities with its current assets. However, since Billabong is highly efficient in converting inventory into income, the results of the current ratio are most applicable. The current ratio indicates that the firm can meet 2.35 times its current liabilities using its current assets.

 

2.4 Gearing Ratios

Gearing or leverage is the amount of debt to equity that a firm holds as its capital. Gearing ratios indicate a firm’s ability to meet its long-term liabilities when they fall due. It also indicates the capital structure of a firm by evaluating the promotion of debt or equity held to finance its operations (Kajananthan & Velnampy 2014). For the purpose of this analysis, we calculated the following ratios under gearing ratio category;

Gearing Ratio

2015

2016

Debt to Equity Ratio

522396/281584*100=185.52

484959/259289*100=187.03

Debt Ratio

522396/803980*100=64.98

484956/744248*100=65.16

Equity Ratio

281584/803980*100=35.02

259289/744248*100=34.84

Debt Coverage Ratio

285628/14625=19.53

287027/14625=19.62

Debt ratio indicates the firm’s ability to meet its liabilities using its assets. It is the amount of assets required to pay off total liabilities of the firm. In 2016 and 2015, the debt ratio is equal. A debt ratio of 0.65 indicates that Billabong has 1.5 times as many assets as liabilities. This indicates that the firm can meet its long term liabilities. However, this ratio may not be very favorable if debt increases more than the assets. Debt to equity ratio determines the percentage of financing in debt and equity. This is the capital structure of a firm. This ratio is equal for both years – 1.1 meaning that debt and equity is held in almost equal proportions. Times interest earned ratio indicates the ability of a firm to honor its debts. In 2016, this ratio is a negative (-0.69) due to the net loss in the year. In 2015, the ratio is 0.08. This ratio indicates that the company may have difficulties paying their debt due to the low earnings.

Profitability is an issue that the firm has to take note of as it affects its overall business performance. Losses are implicating on the efficiency, gearing and investment performance of the company. Low earnings affect the ability of the firm to meet its finance costs due to the low net profit before tax and interest.

2.5 Investment Performance

Investment performance ratios, market ratios, determine the investor perception to owning a company’s shares and the cost of equity. These ratios determine the rate of return on equity and the value of the firm (Kohansal et al. 2013). In this report, we analyze this category based on the following ratios;

Investment Performance

2015

2016

EPS

2.1

12

In 2016, the EPS was -12 while in 2015 the ratio was 2.10. EPS indicates the net earnings to outstanding shares of a firm. It is determines how much of the earnings are allocated to each outstanding share of owners’ equity. The negative EPS in 2016 indicates no earnings were allocated to the outstanding shares due to losses incurred. In 2015, the firm enjoyed a profit hence 2.10 of the earning were allocated to the outstanding shares (Billabong International Limited 2015). The firm did not payout any dividends due to restrictions by the company’s financial leverage and earnings.

The market ratios indicate that the firm has a low rate of return on the shareholders’ investments. The firm is not able to pay dividends to investors due to the low share performance. The value of the shares is therefore low – the share prices dropped from $3.40 in 2015 to $1.248 in 2016 (Hatch 2017). This is due to the collapse of the firm since 2012 due to rumors on a takeover. The firm has also undergone subsequent restructuring especially in the American market that is under corporate turmoil (Lunan 2014).

3.0 Conclusion and Findings

The ratio analysis indicates a performing company despite the losses in the past five years. The firm is highly efficiency, very liquid and stable due to its low debt levels compared to equity. Profitability ratios indicate an unprofitable firm due to the high and consistent losses the firm incurs. These ratios are negative due to the losses in 2016 and very low margins in 2015 due to the low earning of $2,552 thousand. The losses are due to the adverse changes in the company since 2011. The firm has sold a number of its operating retail stores and made restructuring changes. The American market is under corporate turmoil hence the low earnings in this operating segment.

Efficiency ratios indicate that the firm efficiently uses its resources to maximize revenue. Though the firm incurs losses, revenue increases between 2015 and 2016. The inventory turnover indicates up to five times ability to turn inventory into revenue. Debtors have a short credit period hence credit sales are quickly turned into sales revenue. The high efficiency enables Billabong to be highly liquid. With high inventory turnover, the firm has more liquid assets to meet its current liabilities – this is based on the current ratio.

Gearing ratios indicate that the firm has low debt levels hence low financial leverage. The low financial leverage reduces the risk of the firm to become insolvent. The firm is financially stable due to low debt levels despite its low profitability levels. The market ratios, however, indicate that the firm’s shares are a bad investment due to the low rate of return. Shareholders also have not received any payment in the 2015 and 2016.

4.0 Recommendations

Billabong has potential for growth. The management team has to strategize on ways to increase efficiency by reducing the production costs. From the income statement, revenue is always increasing but the costs of goods sold suppress these earnings. The cost of goods sold is quite high in the two years – almost half the revenue. All expenses are very high hence the low income for the year. The cash flow statement also concurs with this analysis – the payments to suppliers and employees amount almost to the same amount of receipts from customers in the two years. Reducing these costs will go a long way in improving the earnings of the firm as well as the investment performance (Pandey 2007).

Billabong is a low risk and low return investment. Potential investors with such an investment objective should invest in the firm. The existing investors can hold on buying or selling their shares until the firm is able to have a stable earning potential. Billabong is a great investment for investors looking for growth and not wealth. With continued improvement in cost reduction strategies, the firm is likely to grow as its earnings will increase (Rohrich 2007).

REFERENCES
Billabong International 2016, Investor Relations: Reports, viewed 15 MAy 2017, .
Billabong International Limited 2015, Reports, viewed 13 May 2016, .
Chen, R-R, Chidambaran, NK, Imerman, MB & Sopranzetti, BJ 2014, ‘Liquidity, Leverage and Lehman: A Structural Analysis of Financial Institution in Crisis’, Journal of Banking and Finance, vol 45, pp. 117-139.
Hatch, P 2017, Fashion Victim Billabong dives to a $77 Million Loss, viewed 23 January 2018, .
Kajananthan, R & Velnampy, T 2014, ‘Liquidity, Solvency and Profitability Analysis using Cash Flow Ratios and Traditional Ratios: The Telecommunication Sector in Sri Lanka’, Research Journal of Finance and Accounting, vol 5, no. 23, pp. 163-170.
Kohansal, M, Dadrasmoghaddam, A, Karmozdi, K & Mohseni, A 2013, ‘Relationship between Financial Ratios and Stock Prices for the Food Industry Firms in Stock Exchange Iran’, World Applied Programming, vol 3, no. 10, pp. 512-521.
Lunan, C 2014, Billabong Reports $233.7 Million Loss for Fiscal 2014, viewed 23 January 2018, .
Moreno, E 2016, Financial Performance: Analysis, Measures and Impact on Economic Growth, Nova Science Publishers, Hauppage, New York, .
Pandey, M 2007, Financial Management, 9th edn, VIKAS Publishing Home, New Delhi.
Rohrich, M 2007, Fundamentals of Investment Analysis, Oldenbourg Verlag, SI.
Santosuosso, P 2014, ‘Do Efficiency Ratios help Investors to Explore Firm Performance? Evidence from Italian Listed Firms’, International Business Research, vol 7, no. 12, pp. 111-119.
Tugas, FC 2012, ‘A Comparative Analysis of the Financial Ratios of Listed Firms belonging to the Education Subsector in the Philippines for the Years 2009-2011’, International Journal of Business and Social Science, vol 3, no. 21, pp. 173-190.
 

Appendices

BILLABONG LTD

 

Formula

LIQUIDITY

 

Current Ratio

Current Assets/Current Liabilities

Acid Test

Current Assets-Inventory/Current Liabilities

Cash Flow Ratio

Net Cash Flow from Operating Activities/Current liabilities

 

 

EFFICIENCY

 

Inventory Turnover

Cost of Sales/Average trade debtors

Days in inventory

Average inventory/Cost of sales*365

Days debtors

Average debtors/Sales revenue*365

 

 

GEARING

 

Debt ratio

Total liabilities/Total assets*100

Debt to Equity

Total liabilities/total equity*100

Equity ratio

Total equity/total assets*100

Debt Coverage ratio

Non-current liabilities/Net cash flows from operating activities

 

 

PROFITABILITY

 

Return on equity

Profit/Average equity*100

 Return on  assets

Profit/Average assets*100

Gross profit margin

Gross profit/Sales revenue*100

Profit margin

Profit/Sales revenue*100

Cash Flow to sales

Cash flows from operating activities/ Sales revenue*100

INVESTMENT

 

EPS

Profit/No. of ordinary shares

 

 

 

 

x

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