Financial Performance And Ratio Analysis Of Billabong International Limited Essay.

• 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 2015 to 2016 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). and the written report is not to exceed 2,500 words (excluding the Executive Summaryand calculations which are to be incorporated in an appendix).  Students are required to use the ‘APA system’ for the acknowledgment of sources.  In order to help ensure that assignments meet required presentation standards, students are strongly advised to use the ‘Presentation check-list’ attached to these notes.

Students may, if they wish, seek and use additional information about the company from sources other than the annual report (for example, from newspapers, business magazines etc.).  However, it is not envisaged that students will be engaged in extensive research of this nature and it is expected that the annual report provided will be the primary resource relied upon in completing the assignment.

 Students are expected to obtain relevant share price data for the company so that investment ratios (such as a dividend yield ratio) can be calculated.  (It is recommended that students obtain the company’s share price as at 30 June 2015 and 30 June 2015 for the purpose of calculating relevant ratios on these dates.  Share price data is available, among other sources, from newspapers archived in the library or on the ASX website).  Under no circumstances are students to make direct personal contact with the company or its officers (for example by telephone, fax, letter or email) in an attempt to gather further information.

Company Overview

This report will provide the information of the Billabong International Limited financial performance for the years 2015 and 2016. The performance of this company is assessed through conducting ratio analysis technique to recommend whether the existing investor should continue to invest in the company or not and also to the potential investor whether to invest in the company or not. Further this report begins with the company overview followed by ratio calculation for the years 2015 and 2016 and ends with recommendations and conclusions.

Company Overview

Billabong derived from the word ‘bilaban’ which means ‘creek which goes only throughout the rainy period’. Billabong was established by Gordon Merchant in Gold Coast, Queensland, Australia in 1973. It has been part of the world for over more than 44 years. It is publicly listed company on Australia Stock Exchange (ASX: BBG) (ASX, 2017). Its headquarters is located in Queensland, Australia. It provides skateboards, snowboards, accessories, hardware goods and sports clothing under Billabong, Von Zipper, Xcel, Palmers etc. trade names. It also runs retail online e-commerce business (Billabong, 2017).

The company operates 407 retail outlets as on 30 June 2016 under name of Billabong, two seasons, element, Amazon, rush etc. Key executives are: Dr. Ian Pollard, he is the chairman of the company and Mr. Mcneil Seymour Fiske Jr., he is the Chief executive officer of the company (Bloomberg, 2017). The company sells sports products worldwide with more than 100 countries and about 10000 doors worldwide. The revenue is generated mainly from North America, Australia, Europe, Japan, Brazil, New Zealand etc. The Billabong employs approximately 5000 workforce and the products of this company are marketed and promoted by high profile events and athletes (Billabong International Limited, 2015).

Ratio analysis

Ratio analysis is very vital for the assessing economic performance of the company. It is the quantitative theory which determines the financial position in figures. It is also helpful in making comparisons from the previous year’s data. The required information is obtained from the Statement of financial position, statement of Income or loss and from the cash flows statement of Billabong International Limited for 2015 and 2016. In this report following ratios are determined such as Liquidity, profitability, efficiency, leverage and performance so as to evaluate the company’s performance.

Liquidity ratios:

This ratio determines the short-term creditworthiness of the company. It assesses the company’s ability to payback its financial obligations from existing resources whey they become due. In other words, it identifies the company’s capability to payback its immediate debts. The two common calculations covered under this ratio are current ratio and quick ratio. These ratios will measure the liquidity of the entity. This ratio is computed in times (Tracy, 2012).

Ratio analysis

(i). Current Ratio: This ratio measures the liquidity of the firm through establishing the relationship between current assets and current liabilities. Current ratio helps in finding out the ability of the company to disburse the current liabilities from the current assets.

Current ratio is computed as below:

Current ratio = Current Assets ÷ Current Liabilities

 (ii). Quick ratio: It describes how well the companies can meet its current obligations with its most liquid assets. Mostly all the current assets are liquid that is they are quickly converted into cash except inventory. It is also termed as acid test ratio.

The formula for calculating quick ratio is:

Quick ratio = (Current Assets – Inventories) ÷ Current Liabilities

Examples of Current Assets are cash, prepaid expenses, marketable securities, accounts receivables, inventories and other financial assets.

Examples of Current Liabilities are Accounts payable, provisions, short-term notes payable and other financial liabilities.

Data taken from the consolidated balance sheet:

Particulars	2016 ($’ 000)	2015 ($’ 000)
Total Current Assets	464,454	523,753
Inventories	185,556	187,125
Total Current Liabilities	197,932	236,768

(Source: Appendix II).

Liquidity ratios for 2015 and 2016 are computed as follows:

Particulars	2016	2015
Current Ratio	2.35	2.21
Quick Ratio	1.41	1.41

Liquidity performance evaluation:

Below is the assessment of Billabong International Limited performance by taking figures of 2015 and 2016.

Having said that, higher the liquidity ratios better is the wealth of the company that is company is able to meet its short-term liabilities when they come due.

Current ratio: The current ratio of 2015 was 2.21 which were increased to 2.35 in 2016 that indicates the short-term financial condition of the company is satisfactory.

Quick ratio: This ratio excludes inventories from current assets.  In both years 2015 and 2016, the quick ratio remains constant that indicates Billabong can meet its short-term liabilities with most liquid assets very easily.

Profitability ratios:

The most frequently tools of ratio is profitability ratio because it determines the company’s overall efficiency and performance. The main aim of the company is to earn adequate profits. Some of the important profitability ratios are as follows:

(i). Net Profit Ratio: It is the main ratio of the profitability ratios. The high net profit ratio indicates company’s operations is efficient in converting revenue into actual profits. It is expressed in percentage form. The formula for calculating Net profit ratio is:

Net profit ratio = Net profit after Tax ÷ Revenue

(ii).  Return on Investment (ROI): This ratio defines the overall profitability of the company. This ratio compared the net income and the capital employed. It is also known as Return on capital employed or rate of return. It is expressed in percentage form. The formula for calculating ROI is:

Liquidity ratios

ROI = Operating profit or EBIT ÷ Capital Employed

Where,

Capital Employed = Total assets - current liabilities

(iii). Return on Equity (ROE): this ratio is very important for the investors of the company in deciding whether or not to invest in the company. It is expressed in percentage terms. The formula is:

ROE = Net profit after tax ÷ Stockholder’s equity

Data Taken from consolidated Balance Sheet and consolidated Income Statement:

Particulars	2016 ($’ 000)	2015 ($’ 000)
Net Profit after tax	(23,739)	4,150
Revenue	1,103,535	1,056,130
Stockholder’s Equity	259,289	281,584
Operating Profit or EBIT	18,455	10,047
Capital Employed	546,316	567,212

(Source: Appendix II).

Profitability ratios for 2015 and 2016 are computed as follows:

Particulars	2016	2015
Net profit ratio	-2.15%	0.39%
ROI	3.38%	1.77%
ROE	-9.16%	1.47%

Profitability Performance Evaluation:

Below is the assessment of Billabong International Limited performance by taking figures of 2015 and 2016.

Net profit ratio: The above ratio shows declination in net profit over the previous year indicates overall profitability and effectiveness of the business is decreased. That means the company is incapable to convert their revenues into earnings for the stockholders (Tracy, 2012).

ROI: It indicates how efficiently company’s capital employed is used in the business (Friedlob and Welton, 2008). This ratio is the indicator of the overall financial position of the company. Further it also identifies the borrowing capacity of the company. In this case, ROI has increased over the year by 1.61% which means the company is well managing its investment in assets. Thus, the company is doing well.

ROE: This is very important for the point of view of investors. It calculates the return earned by the investors on their money invested. In this case, ROE is decreased tremendously in 2016 which indicates that the investors were not earned returns from their money invested (Roth, 2017).

Efficiency ratios:

This ratio measures the swiftness and the efficiency of the assets of the company in producing income. In other words, it describes how well the company is managing its assets and controlling their debts. This ratio is also termed as Activity ratios or turnover ratios (Australian institute of business, 2016). This is expressed in times. Some of the common efficiency ratios are discussed below:

(i). Inventory Turnover ratio: It helps in determining the inventory levels of the company. The High inventory turnover ratio indicates that the company is selling its inventories very frequently. This means the company’s inventory policy is efficient. The formula is:

Inventory Turnover ratio = Cost of sales ÷ Average Inventory

Where,

Average inventory = (opening inventory + closing inventory) ÷ 2

Cost of sales is also termed as cost of goods sold.

Profitability ratios

(ii). Accounts receivable turnover ratio: It indicates the rapidity of collecting the debts from the customers. Higher ratio indicates that the company is finding easy in collecting dues from the customers very quickly which shows that the chances of bad debts are also low and it increases the liquidity of the company. The formula is:

Accounts receivable turnover ratio = Revenue ÷ average accounts receivable

Where,

Average accounts receivable = (opening receivables + closing receivables) ÷ 2

(iii). Accounts payable turnover ratio: This ratio indicated how well the company is able to meet its immediate payments from its available resources. Higher ratio indicates that the accounts payable is paid very frequently and thus the creditworthiness of the company is satisfactory. The computation is as follow:

Accounts payable turnover ratio = Cost of sales ÷ average accounts payables

Where,

Average accounts payable = (opening payables + closing payables) ÷ 2

Data Taken from consolidated Balance Sheet and consolidated Income Statement:

Particulars	2016 ($’ 000)	2015 ($’ 000)
Cost of sales	542,373	495,308
Average inventory	186,340.5	183,673.5
Revenue	1,103,535	1,056,130
Average accounts receivables	7,497	8,738.5
Average Accounts payables	177,060.5	196,802

(Source: Appendix II).

Efficiency ratios for 2015 and 2016 are computed as follows:

Particulars	2016	2015
Inventory turnover ratio	2.91	2.70
Accounts receivables ratio	147.20	120.86
Accounts payables ratio	3.06	2.52

Efficiency Performance Evaluation:

Below is the assessment of Billabong International Limited performance by taking figures of  2015 and 2016.

Inventory turnover ratio: This ratio described the inventory levels of the company. In this case, inventory turnover trend is improving over 2015 which indicates that the Billabong sells its inventories very frequently and the company’s inventory policy is very effective.

Accounts receivables turnover ratio: It measures the company’s credit policies. Higher ratio indicates company is finding easy in collecting dues from the customers very promptly. In this case, receivables turnover trend is improving over 2015 which indicates that the Billabong collects debts from their customers very rapidly.

Accounts payables turnover ratio: This ratio measures the creditworthiness of the company. Higher ratio indicates that the company is paying its dues very promptly. As per this case, increasing ratio indicates that Billabong paying its debts very quickly.

Gearing (Leverage) ratios:

It compares the owner’s equity with borrowed funds. It assesses the company’s performance on long-term basis. It is used to evaluate the company’s survival at the time of financial downturn. The two most common calculations covered under this ratio are debt to equity ratio and interest coverage ratio. This ratio expressed in times.

(i). Debt to equity ratio: This ratio establishes the link between the long-term debts and stockholder’s equity. This ratio will evaluate the company’s long-term solvency position. The formula is:

Efficiency ratios

Debt to equity ratio = Debt ÷ Equity

Where,

Debt = total liabilities

Equity = total stockholder’s equity

(ii). Interest Coverage ratio: This ratio is computed by dividing the operating profit or EBIT by the interest costs. Higher ratio indicates that the company paying its interest expense regularly. The formula for calculating interest coverage ratio is:

Interest Coverage ratio = Operating profit or EBIT ÷ Interest expense

Figures Taken from consolidated Balance Sheet and consolidated Income Statement:

Particulars	2016 ($’ 000)	2015 ($’ 000)
Total Liabilities	484,959	522,396
Total Stockholder’s equity	259,289	281,584
Interest Expense	34,350	30,242
Operating profit or EBIT	18,455	10,047

(Source: Appendix II).

Gearing ratios for 2015 and 2016 are computed as follows:

Particulars	2016	2015
Debt to Equity ratio	1.86	1.86
Interest coverage ratio	0.54	0.33

Gearing Performance Evaluation:

Below is the assessment of Billabong International Limited performance by taking figures of  2015 and 2016.

Debt to equity ratio: Generally, 2:1 is considered safe and sound. This ratio evaluates the company’s ability to pay its long-term liabilities. Hence, as per this case the debt to equity ratio is lower than 2:1 which states that adequate safety is provided to long-term lenders.

Interest Coverage Ratio: It identifies the company’s ability to meet the interest expense on time. The interest coverage ratio of Billabong in 2016 is higher from 2015 which clearly shows that company has enough profits to pay the interest obligations frequently.

Investment ratios:

Investment ratios are calculated to judge the company’s share performance. A most common investment ratio is earnings per share (EPS).

• Earnings per share (EPS):It is also called as net income per share. It is calculated by dividing the earnings attributable to equity shareholders to weighted average number of shares issued during the year (Brigham and Ehrhardt, 2016). The formula is:

EPS = Net profit after tax ÷ weighted average number of shares.

Data Taken from consolidated Balance Sheet and consolidated Income Statement:

Particulars	2016 ($’ 000)	2015 ($’ 000)
Net profit after tax	(23,739)	4,150
weighted average number of shares	197,655,647	197,539,609

(Source: Appendix II).

Investment ratio for 2015 and 2016 are computed as follows:

Particulars	2016	2015
EPS	(12.0)	2.1

Investment Performance Evaluation:

Below is the evaluation of Billabong International Limited performance by taking figures of two years i.e. 2015 and 2016.

As per the above calculation, it is clearly seen that Billabong does not distribute profits in 2016 to their shareholders as compared to 2015 because of loss incurred by the company. Further, it is noted that EPS does not considered by the investors for their investment decision making.

Conclusions

The clear picture of the company’s financial performance is evaluated through ratio analysis technique and also it provides the clear picture to the investors both existing and potential whether to invest or not.

Thus, it can be concluded that Billabong short-term performance is satisfactory as they can meet its current obligations on time. On the other hand, profitability performance is not sound because company has incurred loss in 2016. On the basis of efficiency, it is observed that inventory policy of Billabong is very well together with company are paying its dues on time and also collects debts from their customers very easily. In addition to this, it is also observes that Billabong is paying interest charges regularly and the long-term debtors are also protective. But the company is not able to generate returns for the members.

Recommendations

It is recommended that existing and potential investors should invest in the company for long-term purpose because in 2016 it has incurred huge losses but the overall performance of the company is quite satisfactory.

References

Australian Institute of Business. (2016). Financial Management. 7^thEd.

Friedlob,G,T and Welton,R,E. (2008). Keys to reading an Annual Report. Barron’s Educational Series.

Tracy, A. (2012). Ratio Analysis Fundamentals.  Ratio analysis.  Net.

Roth, M. (2017). Top Stocks 2017: A Sharebuyer's Guide to Leading Australian Companies. John Wiley & Sons.

Brigham, E.F. and Ehrhardt, M.C. (2016).Account Finance. Cengage Learning. pp.1-549.

Brigham, E.F. & Ehrhardt, M.C. (2016). Financial Management: Theory & Practice. 15th ed. Boston: Cengage Learning.

Bloomberg. (2017). Company overview of Billabong International limited. Retrieved on 24 May 2017 from https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=1061739.

Billabong. (2017). Corporate Overview. Retrieved on 24 May 2017 from https://www.billabongbiz.com/phoenix.zhtml?c=154279&p=irol-homeprofile.

Billabong. (2017). Reports. Retrieved on 24 May 2017 from https://www.billabongbiz.com/phoenix.zhtml?c=154279&p=irol-reportsannual.

Billabong International limited. (2015). Annual general meeting and annual reports. Retrieved on 24 May 2017 from https://www.annualreports.com/HostedData/AnnualReportArchive/B/ASX_BBG_2015.pdf.

MorningStar. (2017). Billabong international limited annual report. Retrieved on 24 May 2017 from https://quote.morningstar.com/stock-filing/Annual-Report/2016/6/30/t.aspx?t=XASX:BBG&ft=&d=33d11f57842b80e3f98f2d3a357515ea.

ASX. (2017). BBG. Retrieved on 24 May 2017 from https://www.asx.com.au/asx/share-price-research/company/BBG.