Essay: Analysis Of Financial Ratios Of Billabong International Limited.

Explain briefly what is revealed by the ratios and other calculations in the context of the company’s profitability, efficiency, liquidity, gearing (leverage) and investment performance. In particular, any important changes from 2016 to 2017 should be identified, discussed and, where possible, explained.

Provide an overall assessment of the company from the perspective of existing and potential equity investors (shareholders).

The title of the report has been the detail of financial ratios. As the title suggests the whole of the report has revolved around the accounting ratios and its deep interpretation and analysis. The analysis can only be made with the help of the figures and the relevant data and accordingly the reliable source shall be there. For the furtherance of the report, the company that has been selected is the Billabong International Limited.    

The company has been formed and founded in the year of nineteen hundred and seventy three only. It is based in the country of Australia, Queensland and has been founded by the first promoter and the founder known by the name of Golden Merchant. In the beginning of the operations of the company, it has started with the designing and the creation of the shorts which they have started from the house only. After its preparation, they sell the same to the surfers. After few months of this process, the merchant has started realizing the durability of the goods and that too has been due to the process of having the triple stitching process. Soon the company has realized that this product has gained reputation in the New Zealand and Australia and according; has started entering into the business promotion activities and accordingly by the year of the nineteen hundred and eighty, this product has been presented in the county of Australia. With this success, the company has then started the export of their products and now the product has been made available across the globe majorly in New Zealand, Japan and similar other countries. The company has got itself registered under Stock exchange of Australia in the year of two thousand and since then the company has been into the growing stage (Billabong International Limited, 2017).     

The company is basically engaged in the trading and wholesaling of apparels, wet suits, eye wear and shorts and etc. The company also deals with the hard goods and services which includes wear items in the board sports. The company has been operating under different brand names as obtained for each of the product. The brand name includes the Billabong, Xcel, element, von zipper and many more. The company has received the innovation and the invention award from the department.      

The company has been in the continuous losses and there have been the times where the performance of the company is not being deteriorated with the huge amount of the losses and the same has been pending from the year of the two thousand and some losses have been found covered in the year of two thousand and eleven but after that also the loss have been reporting as on the day of the reporting period. Therefore, although there has been the market for the company’s product and the customers also but the loss that has been reporting at end of the year is high as compared to the earlier years.

Profitability Ratios

The company has been into operations for the last so many year and in the next section the ratio of the company in accounting and finance terms  have been calculated and then analysed as to what are the changing which have occurred for the last two years.   

Under this section, the accounting ratios have been calculated and each of the ratios has been described as to how the same will have the effect and necessary impact on the profitability and efficiency of the company. For the purpose of this section, the annual report of the company for the year ending 2017 and for the year ending 2016 and accordingly the ratios has been calculated. Following are the detailed analysis of the ratios along with the explanation as to why it has reached such a level as defined and listed by the calculations so made and the detail of the calculation has been marked as Appendix 1.

Profitability ratios - These are the ratios which help in assessing the profitability of the company. Profitability is judged through the analysis of the statement of the profit and loss account which is prepared on the annual basis. Statement of the profit and loss account is the part of the financial statements of the company which acts as the basis for some stakeholders for taking the decision regarding their vested interests. Apart from looking from the statement of the profit and loss, it is necessary to have the ratios from the reported figures not only from the current year but also for the prepare so that it can be checked as to how the company has been working and will work (Horngren, 2012). Following two ratios have been calculated and laws have been discussed in detail with regard to the functioning of the company:

• Net Profit Margin – This ratio tells about the ratio that the net profit for the year has in relation to the sales or revenue of the company. The company has been in losses from the year of 2001 and since the company has the reported losses for the future years. Only in the year of 2011, they have come up with the better margins. Under this, the net profit has been decreasing considerably to -2.21% from the year of 2016 to -7.87% to the year of 2017. It shows that the company has not installed such a system in place so as to avoid the problem of having the losses and converting them into profits. The cost control technique shall be installed as the company’s other expenses have been increased invariable from 2016 to 2017.
• Return of Assets – This ratio tells about the net profit which is generated out of the use of the asset concerned to ascertain whether the company has been utilizing the assets effectively so as to generate the high profits (Zimmerman, 2015). But this is not the case because of the fact that the company has been running into losses for the last so many years and therefore the net assets ratio of the concerned company. The ratio in the year of 2016 was -3.20% and in the year of 2017 it was -13.34%.

Thus, from the analysis of the profitability ratios, it is very much clear and concise that company is total in loss and it shall be revived at the earliest. 

Efficiency ratios – This ratio is the very prevalent form of the given ratios in the current scenario. It is due to the fact that the companies so concerned will have to know whether the company is working and performing its functions in an effective and efficient manner. The major premise of this ratio is that helps in measuring whether the assets so installed in the company has been helping the company in generating the revenues and also this ratio deals with the optimum utilization of the assets so as to have the requisite income out of it.      For the purpose of having the better measurement tool for checking the efficiency of the company, the ratio of the asset utilization ratio has been selected.

Efficiency Ratios

Asset utilization rate states that whether company has been able to generate the income with the proper and due use of an asset of the same current year. The identification of this generation of the income in itself details how far the efficiency can be measured.      

The asset utilization rate has been 1.45 in the year ending June 2016 and for the year ending June 2017, the ratio has been 1.69. It denotes that though the company is having the negative net profit margin but the company has the increased .capacity to effectively utilize the assets so that revenue will be increased.

Liquidity  - As the name suggests, this ratio tells about the fact as to how far the company will be able to meet its short term liabilities and whether the same will be in time or not. Liquidity is the ever growing area and it measures the short term solvency of the company. Through the liquidity only the running of business can be done. It is because the liquidity helps in operating its business cycle in a define manner and defined time (Kaviyani, 2011). That’s why in order to have the smooth business; the companies generally take the working capitals from the banks or the financial institutions and apply accordingly.   

Under the head of the liquidity, two ratios have been calculated – one is the current ratio and the other one is the liquidity ratio. The liquidity ratios are also termed as the short term solvency ratio. It is because it helps in assessing whether the company will be able to pay or meet the short term liabilities or not. The two ratios have been mentioned below:

• Current ratio – It consists of all the current assets and the current liabilities and measures that how readily the firm’s current asset will be converted into cash so as to pay to the current liabilities. The ratio has been improved from the 2.29 of 2016 to 2.42 of 2017.
• Quick Ratio – It consists of all the current assets except inventory and the current liabilities. It is more frequent than the current ratio and it measures in fast manner as to how far the company will be able to meet the requirements quickly. This ratio has also been improved from 1.38 to 1.46 from 2016 to 2017 year respectively.

Thus, in this manner the liquid position is good.    

Investments – Investment ratios have been defined from the perspective of the shareholders and the stakeholders of the company. It states that how much benefit will be received by the shareholders of the company and how much will be the gain they will have in their wealth. It is considered as the most important ratio in the accounting field. It is because on the basis of these ratios of investment only the stakeholders and the shareholders of the company invest in the company and earns the dividend or other form of return (Premnath, 2012). Following ratios have been calculated as shown in appendix and discussed:

• Earnings per share – The Company have been running into losses for the last so many years and that too on the consecutive basis and due to which the earnings per share is also negative. In the year of 2016, the company has reported the earnings per share of -15.40 and in the year of 2017, the company has reported the earnings per share of -66.00. There has been the huge difference in the two years between the earnings per share. The wealth of the shareholders has been decreased considerably due to which the shareholder will not invest their funds in the company in the future years to come. It also resulted in the loss of faith of the potential investors who were in the belief that the company will earn good but on the last the same has come opposite to the expectation of the shareholders.

• Dividend Per share - It is the other form of the investment ratio which calculates how much return does the shareholder receives on the investment made by them in the company. It is measures in the form of dividend paid by the company and considered as how much dividend is being paid by the company. In the current case, the company has not been paying any form of dividend either the interim or the final and has made the declaration that the company has neither proposed nor declared or paid any dividend to any of the shareholders in the current year which 2017 and also for the year ending 2016. As the dividend per share is zero due to the continuous losses, the investors will further not made any investment in the company.

Thus, in this manner the investment ratio also helps in understanding the structure and the payout ratio of the companies and how far the investor will feel safe in investing their funds in the company. .  

Liquidity Ratios

Leverage - These ratios are the major indicator of the performance of the company. It is because it prescribes the structure of the capital of the company and how far the capital structure so employed by the company is adequate in relation to the nature and the size of the business of the company Leverage ratios are also termed as the gearing ratios and also as the long term solvency ratio. It details that it’s the leverage ratio which help in identifying whether the company will be able to meet its long term liabilities in future. Under this head, two ratios have been calculated:

• First one is the debt to equity ratio. The debt equity ratio has been in the year of 2016 as 1.05 and in the year of 2017 as 1.23.  As per the industry standards, there shall be debt equity ratio of 2:1. In case it is required to be maintained then the company shall borrow funds from the banks or the financial institutions for the expansion of the business.  As the ratio is below the industry ideal ratio, it cannot be said that the ratio is adequate.
• Second one is the equity ratio. The equity ratio in the year of 2016 as 0.34 and in the year of 2017 as 0.30. It must have been increased and therefore it is also not adequate.

Both of the ratios are inadequate and hence the capital structure also which creates the reasonable doubt that the company will not for near future.   

Conclusion

Ratios have always been the important part in the financial accounting which is very helpful in analyzing the financial statements of the company. Through this report the financial statements of the Billabong International Limited has been analysed with respect to the five major headings of the ratios for the year ending two thousand and sixteen and two thousand and seventeen. The company has been headquartered in Australia and has now been operating through their products across the globe. These five heads have been the profitability, efficiency, liquidity, investment and leverage. Calculation of all the ratios has been made with respect to the data given in the annual report of the company for the aforesaid respective years. Each of the ratios has given the different results and interpretation has been done accordingly. In order to conclude the report, major finding have been included which will help the stakeholders and investors including the potential investors to have the valid and informed decision and also for the management of the company to take the corrective action so as to improve the ratios.  

The ratios are the measures on the basis of which the appropriate recommendation is being given for the management of the company as well as for the stakeholders and the shareholders of the company.

It’s recommended for the management to improve the financial ratios by modifying their business strategy so as to attract more and more investors.

It’s recommended for the shareholders and the stakeholders of the company to not to invest in the company further until the workings of the company seems better and these accounting ratios gets improved.

References

Horngren, C. T, (2012), ”Introduction to Management Accounting”, Chapters 1-17. Prentice  Hall.

Kaviyani M, (2011), “A Theory to Analysis of Annual Report ”, Research Journal of Finance                 and     Accounting, Vol 10, No. 15, pg 192-202

Premnath S, (2012), “Analysis of the Financial Statements”, International Journal of                     Accounting and Finance, Vol20, Issue 17, pp 24-42.

Billabong International Limited (2017), “Annual Report 2017”, available on https://www.bbil/ accessed on 30-05-2018.

Zimmerman, (2015), “Accounting for Managers” Issues in Accounting Education, 35, 77-99.