Analyzing The Financial Performance Of Billabong International Limited In An Essay.

Introduction to Billabong International Limited

Question:

Discuss About The Billabong International Limited Skyrocketed?

Billabong International Limited is an Australian company engaged in the business of distribution, wholesale and retail of sports apparel, accessories, sports equipment, eyewear and wetsuits. The sports for which the company majorly provides the accessories include surf, skate and snow. The company operates through various brands which include Billabong, RVCA, Element, Tigerlily, Von Zipper, Xcel, Palmers, Kustom and Honolua. The company has presence in Asia Pacific, America, and Europe with major operations in Australia, France, California and Hossegor (Bloomberg) The Company operates through its own branded stores and specialized board sports retailers. It also sells online for each of its major brands. It employs over 4000 people globally and has around 407 stores win more than 100 countries around the world (Billabong, Annual General Meeting and Annual Report, 2016)

Financial ratios are used as tools to analyse the financial performance and position of a business. They may be used to compare the performance of a company over the years or comparison with another company. A ratio analysis has been performed for Billabong International Limited for the financial years 2015 and 2016 and the results are presented as under:

(Billabong, Annual General Meeting and Annual Report, 2015)

The revenue of the company has increased by 4.5% in 2016 as compared to 2015. The increase is due to the three major brands Billabong, Element and RVCA as a result of the growth in social media engagement which led to higher sales. The company’s market share in speciality retail channels increased in America and Australia. The revenue increase in America was 6.5% and in Europe it was 8.4%. The year 2016 was also marked by increase in operating costs as a result of currency movements. The company operates majority of its business outside Australia, hence is exposed to currency risks. As a result, the cost of sales increased due to currency movements in Asia Pacific and Europe. The gross margin fell by 3% even though the revenue has increased. Another reason for decreased margins was costs incurred in clearing excess inventory in America for Sector 9 brand. The brand performed poorly; hence it was sold off in June 2016.

The company incurred losses in 2016. This is majorly on account of income tax expense of $7.8 million in 2016. In 2015 there was an income tax benefit of $12.2 million. Hence there were profits in 2015 but in 2016 apart from the increased cost of operations on account of current movements, income tax expense accounted for majority of the loss. Also the interest expense increased due to strengthening of the US dollar as the company’s debt is US dollar denominated. There were losses in 2015 before tax due to currency movements and sale of Surf Stitch and             Swell in 2015 (Harbaugh, 2016)

Financial Ratios Analysis for 2015 and 2016

The return on equity decreased in 2016 as a result of losses incurred in the year. The total equity has decreased in 2016 due to an increase in retained losses. However the increase in losses are more than decrease in equity and hence the return on equity is negative.

The return on assets has also become negative in 2016 due to losses incurred. The total assets have also decreased by 7.4%.  This is majorly on account of decrease in current assets as the inventory has reduced and the cash balance has reduced significantly. The cash balance has reduced due to cash utilized in purchase of a property in America and also costs incurred in selling off Sector 9 in America.

Liquidity ratio measure the ability of the company to meet its short term obligations with its current assets. The liquidity of a company can be measured by using ratios like current ratio, quick ratio and interest coverage ratio.

The current ratio of the company is almost the same in both the years above 2.  The current assets comprise of cash and cash equivalents, receivables, inventories, current tax receivables and others and the current liabilities comprise of payables, borrowings, current tax liabilities and provisions. Both current assets and current liabilities have reduced in 2016. The current assets have reduced on account of a decrease in cash and cash equivalents and inventory. The cash balance has decreased due to repayment of borrowings worth $16 million. Also the company has purchased a property in Australia. The cost of sales and finance costs have increased as a result of strengthening of dollar. The inventory has reduced due reduction in surplus inventory for the Sector 9 store in America. The payables have reduced leading to a decrease in current liabilities. Also the deferred payment amounting to $20 million has been eliminated.

The quick ratio is the same in both the years. This is because both the current assets and current liabilities have reduced and the change in inventory is not significant enough to change the ratio. The quick ratio is more than 1 which means the company has enough immediate liquid assets to pay for its current obligations.

The times interest earned ratio is negative for both the years and has decreased further in 2016. The company has a negative EBIT in both the years. Year 2015 was also challenging for the company due to currency movements leading to an increase in cost of goods purchased. Though the loss before interest and tax has reduced in 2016 due to increased revenue, however, the negative earnings make the company unable to pay for its interest expenses. The interest expense has increased in 2016 as the company has undertaken additional borrowings in 2016 and also the value of interest expense has increased due to strengthening of the U.S. dollar against the Australian dollar as most of the debt is dollar denominated.

Revenue Analysis

 The efficiency ratios measure the ability of the company to utilize its short term and fixed assets to generate sales. It also measures the working capital management of the company and takes a look at its operations efficiency.

The inventory turnover ratio is low at approx. 3. Though the ratio has improved in 2016, however the inventory is very slow moving and only rotated three times in 2016. This also can be related to the nature of the industry the company operates in. It is a retail and wholesale company and hence has to maintain large stocks of items for sale. The increase in the ratio in 2016 as a result of a decrease in inventory and increase in cost of goods sold. The inventory reduced owing to reduction of surplus inventory in Sector 9, America.

The receivables turnover has remained the same in both the years. The receivables have increased to some extent in 2016 and so has the revenue.  The turnover is at approx. 6 which mean the company can turnover its receivables six times into cash during the year.

The payables turnover ratio has increased in 2016 from 2.7 to 3.2. This is due to an increase in revenue and decrease in payables. The payables have reduced as a result of the company’s supplier consolidation strategy. This has improved the ratio. This means the company is paying its suppliers faster as it is now concentrating only on limited suppliers.

The total assets turnover ratio has increased from 1.3 to 1.5 due to an increase in revenue and a decline in total assets. The fall in total assets is majorly on account of a decline in cash. The fixed assets have more or less remained the same.

Gearing ratio measures a company’s long term stability. The capital structure of a company comprises of debt and equity.

Debt to equity ratio shows the share of debt and equity in a company’s financing. The ratio has increased in 2016 as the company has increased its debt whereas the total equity has declined due to retained losses. The net debt has increased from $185.2 million in 2016 as compared to $113.5 million in 2015. The additional debt was taken to pay for the deferred consideration of RVCA which was acquired in 2014 (Bradstreet, 2015), to finance the capital expenditures undertaken by the company and the increase in finance charges. The company is undergoing a structural change since 2013 where it is focusing on the three major brands and selling off the unprofitable ones. Hence, capital expenditures are taking place. The group has more debt than equity in 2016. This makes it a little risky.

Cost Analysis

Debt ratio is the ratio of total liabilities to the total assets. The company has more assets than liabilities as the ratio is below 1. The total liabilities have decreased in 2016 due to a decrease in the payables owing to supplier’s consolidation strategy and the total assets have also decreased due to a decrease in the cash balance. The company is in a position to pay for its total liabilities from its total assets.

These ratios are specific to the market performance of the company in terms of its share price. It shows how the share prices have moved and measures the returns of the shareholders.

The earnings per share have become negative in 2016 due to losses incurred. There is no change in the number of outstanding shares.

The price earnings ratio is the prospect of the market for the company in relation to its earnings. A higher ratio means the market is positive about the company and the shares are trading at higher than the earnings. Billabong has a negative ratio in 2016 again due to negative earnings. The share price has gone down from $2.88 to $1.21 (Yahoo)as a result of negative performance.

The dividend pay-out ratio and the dividend yield are both at 0 because the company has not paid out any dividends in the two years. This show the shareholders have not received any returns from the company in last two years and hence the negative market sentiments about the company.

Conclusion

The company’s profitability is poor as it has incurred losses before tax in both the years as a result of increased cost of sales due to tough economic and business environments. Also the selling and administration expenses have increased along with an increase in the finance costs resulting in loss for the company before tax. Also the company is under the process of brand strengthening where it is selling off the unprofitable ones and strengthening the profitable ones. It aims to focus on the three main brands which are Billabong, Element and RVCA. It has sold off Surf Stitch and Swell in 2015 and Sector 9 in 2016. This restructuring cost have added to the total costs and hence made the company unprofitable. The liquidity of the company is good as both the current ratio and quick ratio are more than 1. The current assets are more than the current liabilities and hence the liquidity is good. The trade payables have reduced as a result of selling off of the unprofitable brands like Sector 9 which has reduced the excessive purchasing of raw materials. Also Sector 9 sale has enabled the company to get rid of surplus inventory. The asset management efficiency of the company is poor as all the turnover ratios have low values. The inventory is slow moving with turnover of 3, the receivables turnover is only at 6 and payables turnover is at 3. This shows lot of company funds are stuck in working capital. The company is highly geared with more debt than equity. The company is undergoing a structural change and the funds required for the restructuring is being financed through debt as the company is low on cash balance also. Thus, the riskiness of the company is increasing. The debt ratio is at 70% which means most of the assets of the company are financed through debt. The investment performance ratios also show poor performance as the earnings per share and price earnings ratio are negative and the dividend pay-out ratio is 0 as the company has not declared any dividends over the last two years. The shareholders are not getting proper returns on their shareholding.

On the basis of the above ratio analysis, we do not recommend to invest in the shares of Billabong International Limited as the company has poor profitability, inefficient asset management, instable business as it is highly geared and thus exposed to risks and also poor market performance with no dividends at all for the shareholders. The company has been incurring losses for continuous two years. The company has many brands and most of the brands are performing poorly. As a result the company has undertaken a restructuring activity under which it is selling off the non performing brands and focussing on three major brands which are Billabong, Element and RVCA. The company is faced with challenges which are outside its control like foreign currency exposure and channels disruption. Such challenges have slowed down the effect of the brand strengthening strategy the company is working on. The company believes to have positive EBIDTA with the implementation of the strategy provided the external environment remains stable.

Thus, on the basis of the current performance, we do not recommend investing in the shares of Billabong but the future outlook of the company may be good if the implementation of the strategy is successful and the external environment is also supportive of the changes being made by the company (Mickleboro, 2016) Hence, in future depending on the company’s financial performance one may think of investing but as of now, it is not a good investment.

References

Billabong. (2015). Annual General Meeting and Annual Report. Australia: Billabong International Limited.

Billabong. (2016). Annual General Meeting and Annual Report. Australia: Billabong International Limited.

Bloomberg. (n.d.). Company Overview of Billabong International Limited. Retrieved September 15, 2017, from Bloomberg: https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=1061739

Bradstreet, K. (2015, February 25). Billabong Returns To Profitability In Half-Year Report. Retrieved September 13, 2017, from Transworld Business: https://www.grindtv.com/transworld-business/news/billabong-returns-profitability-half-year-report/

Harbaugh, J. (2016, August 30). The Future Isn't Here Yet: Billabong Results for the Year. Retrieved September 15, 2017, from Jeff Harbaugh & Associates: https://www.jeffharbaugh.com/the-future-isnt-here-yet-billabongs-results-for-the-year/

Mickleboro, J. (2016, November 22). Why Billabong International Limited shares have skyrocketed today. Retrieved September 16, 2017, from The Motley Fool: https://www.fool.com.au/2016/11/22/why-billabong-international-limited-shares-have-skyrocketed-today/

Yahoo, F. (n.d.). Billabong International Limited (BBG.AX): Historical Data. Retrieved September 14, 2017, from Yahoo Finance: https://au.finance.yahoo.com/quote/BBG.AX/history?period1=1433097000&period2=1467225000&interval=1d&filter=history&frequency=1d