Ratio Analysis Sportswear Manufacturing Company

Profitability Ratios

Discuss about the Ratio Analysis Sportswear Manufacturing Company.

This report is based on audited consolidated statements financial that have been released about the company as at 30 June 2015. Billabong International Limited  has branches in other continents including Asia and America and as such the groups consolidated financial statement must factor in currency valuation in the various countries. The financial performance of the group includes but not limited to fair value adjustment charges and other contingent considerations.

The group managed to post a net profit after tax of $ 4.2 million for the full financial year ending 30 June 2015. This is a turnaround compared to a loss of $ 233.6 million that was posted in the PCP previous corresponding period. The results show that the global revenue for the group was up by 2.6 % compared to the previous corresponding period. This was reported to be $ 1.05 billion on the financial year ending 30 June 2015.

The positive results is as a result of  constant growth in the United states wholesale market which grew by 13.1% on a constant currency basis. In Europe the earnings before interest and tax was up $7.0 million from $5.6 million hence we can see the reason for sales. In Asia pacific earnings before interest and tax dropped by $4.1 million which was impacted by retail and currency which affected input prices.

A company is profitable if it  generates enough profit or benefit, that is, when its income is more than its expenses, and the difference between them is acceptable.
But it is necessary  to do an evaluation of the  company’s profitability so that we can  evaluate the relationship between its profits  and the investment or resources it has used to obtain them.And to find this profitability, use is made of indicators, indexes, ratios or reasons of profitability, of which the main ones are the following (Beyersdorff, 2014)

The profitability of a company can be measured by ROA.The Return on Asset Index (ROA) is used to calculate a company’s profitability over its assets. The efficiency of a company to generate profits using its assets is given by the Return on Asset ratio.
ROA = (net income / Assets) x 100

ratio	formulae	2015      ‘000’	2014  ‘000’
Return on assets	Net income/total assets	2552/803980=0.32%	(239933)/751866=32%
Return on Equity	Net income/shareholders equity	2552/281584=0.91%	(239933)/259039=-92.6%
Net profit margin	Net profir/revenue*100%	863/1056130*100%= 0.08%	(238150)/1027478*100%= =0
Gross profit margin	Gross profit/revenue8100%	2552/1056130*100%= 0.24%	(233712)/1027478*100%= =0 Analysis of the results

Billabong international Ltd is surely struggling. The return on assets or equity ratio is an indication on whether or not the company is making enough profits (Bull, 2005). The company’s financial statements indicated that it has been on bear run , and had posted losses from 2013 and year 2014.  This explains much why the return on assets ratio and return on equity ratios are way below the recommended figure for a healthy company. The shareholders of this company should be a worried lot since in normal circumstances they cannot expect dividend pay out in the near future (Bull, 2005). Gross p[rofit and net profit ratios indicate that the company has not been doing very well and has not reached the recommended ration in terms of profit margins.

Liquidity Ratios

The liquidity ratio shows what state your company is in order to pay off short-term debt. It basically serves to determine the economic strength of the enterprise and to evaluate the distribution of the resources with which it accounts (Bull, 2008).

It is an accounting criterion that will be very useful to detect eventual problems in the evolution of your business, regardless of the sector in which you act. There are activities in which we work with a lot of liquidity (since the collections and payments are made very short term) while in other companies the terms are longer (Diamond, Stice, & Stice, 2000).

Thus, although the formula is always the same – a relationship between current assets and liabilities -, the result of the equation will have a different meaning depending on the case, there is no standard value. The liquidity ratio is also known as “liquidity ratio,” “available asset ratio” and “cash flow” (Bull, 2008).

In general terms, the closer to 1 is the result of that equation, the better off your company will be to honor short-term commitments even without relying on sales.The further from 1 down, the more problems you will have, because that means you do not have the resources to honor those commitments.But attention, if the result is much higher than 1, this can indicate a low profitability of resources, as it shows the existence of unused assets for the activity (Elliott & Elliott, 2005)..

Some financial experts  indicate as adequate a ratio close to 0.3, but it is a value to be taken with caution, because it will be different according to the entity, sector to which it belongs, dimension, etc. Therefore, it should be analyzed together with other ratios and if possible with the budgets of the company (Fridson & Alvarez, 2002).

Consider periodically carrying out this calculation of liquidity ratio to evaluate the financial health of your venture so that you can move more safely along the road to success.

Ratio	Formulae	2015       ‘000’	2014     ‘000’
Current ratio	Current assets/current liabilities	523753/239045=2.19 times	495801/225671=2.19 times
Quick ratio	(cash+cash equivalent+short term investments+current receivables)/current liabilities	(153334+7202)/239045= 0.67 times	(145070+10275)/225671= 0.68times

For this case, the company has a current ratio of 2.19 in 2015 which is the same as that of the year 2014. This indicates that the company is in a position to honor its short term liabilities. The recommended ideal ratio for a company to manage its current liabilities in a better way is 2 hence Billabong has managed to control its current assets and liabilities to the level that is recommended (Harrison & Horngren, 2001).

Efficiency Ratios

On the other hand, the quick ratio that is at 0.72 in the year 2014 and 0.77 in the year 2015 portrays a picture that the company could be struggling to honor its short term debt.  The rate recommended for this type of ratio is 1, and hence the company could do much better.

This analysis completes the impact assessment since it allows to know:
 If the impact was achieved (effectiveness),

 If the impact generated justifies the cost of the action (efficiency),

 Whether there can be more effective and efficient alternatives to achieve the same impact. Efficiency ratios are used to determine whether the company’s asdsets can manage the liabilities of the company (Harrison & Horngren, 2001).The effectiveness of an action is given by the degree to which the expected objectives in its design were fulfilled. Usually a form of planning is used as the logical framework, in which the hierarchy of objectives is established: general, immediate, specific, goals and activities

For each of the objectives envisaged, the effectiveness of the action being evaluated is analyzed, obtaining a general index of effectiveness through a weighting59 of each of the indexes by evaluated objective (Hove, 2006).

The impact during the four years of operation is different and in the fourth year, it is zero. It is possible that there have been other training actions and that other companies have developed and  competences to achieve better results (Kieso, Weygandt, & Warfield, n.d.).

Ratio	Formulae	2015 ‘000’	2014 ‘000’
Inventory turnover	Cost of goods sold/average inventory	495308/(180222+187125)/2 =0.81	491040/(179662+180222)/2 =2.73
Fixed asset turn over	Sales turnover/average fixed asset	1137367/(256065+280227)/2 =4.2	1356946/(202103+256065)/2 =5.92
Creditors turnover	Net recivable sales/average sales net receivable*100	207185/(207185/365)*100 =365	185687/(167890/365)*100 =508

The inventory turnover  shows that the company has not been managing its inventory well. As indicated in the ratios in 2014, inventory turn over was 2.73 which reduced to 0.81 in 2015.  This shows that the company is not managing its assets well enough to generate revenue. This also can be said of the fixed asset turnover ratio, Billabong is not maximizing its fixed assets well enough to generate revenue (Libby, Libby, & Short, 2004).

The practical interpretation of this result is that for each peso that the company must pay no later than a year, in its short-term asset, discounted inventories, has 70 cents. That is to say, in immediate terms the business no longer looks as good as the solvency ration suggests: it has little liquidity and could (although not necessarily, as it would have to analyze its case more thoroughly) to have problems to pay its debts (Melville, 2011) .

On the other hand, too high liquidity is not necessarily good because it would indicate that the company is not investing in the generation of the product or service it offers. It maintains resources available but these practically do not generate yields.

Interpretation of Results

It measures the ability of the company to generate profits based on the invested resources. And it is calculated as follows:Ebitda is an indicator of what a business is gaining or losing through its core business, by eliminating distortions brought about by financial and accounting deci sions. It is obtained from the income statement and serves to measure the profitability, however not the cash flow.. It does not factor in the cost to fund working capital and  old equipment replacement ( and this may be significant).Its calculation is made by adding again the depreciation and amortization to the operating profit, which is the profit that a company has to operate. Depreciation and amortization is a reserve that reduces the taxable tax base and represents the annual decline in the value of certain assets such as real estate, computers and patents (Weygandt, Kieso, & Kimmel, 2003).

In order to obtain operating income, which represents the tax base of the Treasury, depreciation and amortization, as well as expenses that include salaries and commissions of sales agents, are subtracted from gross profit; publicity and promotion; Per diems; Executive salaries, payroll and office expenses

Financial leverage is simply using debt as a means  to finance a certain project. As simple as that may sound there are ratios for measuring the leverage of a company. That is, instead of carrying out its operations and projects with own funds, it will be done with the company’s  funds and or credit. The advantage it is possible to  multiply profitability and the main disadvantage  is that the projects being financed or operations do not go well it may  end up being insolvent (Wild, Bernstein, & Subramanyam, 2001).
This huge data load can be overwhelming. Fortunately, there are many well-proven relationships that ensure that the task a little less daunting. Analyzing comparative relationships ( i.e from one year to another) enables to quantify and identify  the company’s weaknesses as well as stregnths, assess the  financial position, and comprehend the risks you are taking.

As with any other form of  financial statement analysis, These comparative techniques are not definitive and their results should not be taken as an absolute truth. Many factors that are not on the balance sheet can be decisive in the  failure or success of a company. However, when combined  with other evaluation processes, comparative relationships are invaluable.

This text includes descriptions and analysis of Billabong International Ltd  and  the eight most important types of relationships used in financial analysis: profitability, working capital,  income, liquidity, long-term analysis,  leverage,hedging and bankruptcy. We understand by financial leverage, or leverage effect, the use of debt to increase the profitability of own capital. It is the measure of the relationship between debt and profitability.

When the cost of debt (interest rate) is lower than the yield offered by the investment, it is advisable to finance it from outside resources. In this way, the excess yield on the interest rate implies a higher return on own funds.

Ratio	Formulae	2015                 ‘000’	2014       ’000’
Debt to equity ratio	(Long term debt+short term debt+bank overdraft)/shareholders equity	(239045+283351)/281584 =1.86	(225671+267159+0)/259036 =1.9
Earnings to equity ratio	Earnings before interest and tax/interest payable	2552/0	239933/(962012) =

Ratio	Formulae	2015    ‘000’	2014 ‘000’
Price/earnings ratio	Stock price per share/earnings per share	0.59/0.09 =6.55	0.5/-0.09 =-5.55
Earnings per share	Earnings/ no. of shares	0.5	(24.0)
Dividend per share	Dividend /no. of share	0	0

The stock is doing badly as can be seen above. The company has not given out dividends for the year ending 30 june 2014 and 2015. This is because it posted losses in 2014 and the profits that was registered in 2015 was to be ploughed back into the business.

Conclusion

The group has been facing financial challenges as shown by the ratios.One of the findingsis that the company’s earnings have sometimes been affected by lack of appeal in the market for its products. This might be due to loss of  image in the groups brand that made the company to register a loss in two years consecutively from  2013 to 2014.  The company is trying to make a turn around  and hence it has posted a profit of $2 million in 2015.  However, this kind of profit is not enough to pay share shareholders dividends.

 The financial performance of billabong group is affected  by among other factors interest rates, macro economic conditions, consumer sentiment , inflation , foreign currency exchange among others. There was an economic down turn in Europe as the dollar strengthened against the Euros. Billabong  receives its revenues in more than ten currencies.  Therefore when other currencies have fluctuated, then they will affect the overall performance of the group. This explains why the group has been experiencing dwindling income over the last few years. When the  groups assets, profits and liabilities are denominated in other currencies then  the profits might appear to be lesser than they are.

Secondly, the group’s products do not have the market appeal in the face of stiff competition from the superior sports gear companies.  This explains why the group has all its ratios below the required threshold. Loss of market appeal to the image or the groups brand  positioning is key to its turnaround  strategy.

First, the company should seek to reduce the cost of production which consequently increases the profits. One of the ways of reducing production cost is through outsourcing of materials and labor from cheaper countries. This strategy should be the starting point of its turn around. Secondly, Billabong should consider hedging to mitigate the risk of currency fluctuation that is in turn affecting the results of the company. Hedging makes the makers of financial statement to exactly know the value of the currencies. Thirdly, the company’s management should seek to improve efficiency in production

References

Beyersdorff, M. (2014). International GAAP 2014. Chichester, West Sussex: Wiley.

Bull, R. (2005). Financial ratios. London: Spiro Press.

Bull, R. (2008). Financial ratios. Oxford: CIMA.

Diamond, M., Stice, E., & Stice, J. (2000). Financial accounting. [Cincinnati, OH]: Southwestern College Pub.

Elliott, B. & Elliott, J. (2005). Financial accounting and reporting. Harlow, England: Prentice Hall/Financial Times.

Fridson, M. & Alvarez, F. (2002). Financial statement analysis. New York: John Wiley & Sons.

Harrison, W. & Horngren, C. (2001). Financial accounting. Upper Saddle River, NJ: Prentice Hall.

Harrison, W. & Horngren, C. (2001). Financial accounting. Upper Saddle River, NJ: Prentice Hall.

Hove, M. (2006). Consolidated financial statements. Cape Town, South Africa: Juta Academic.

Kieso, D., Weygandt, J., & Warfield, T. Intermediate accounting.

Libby, R., Libby, P., & Short, D. (2004). Financial accounting. Boston: McGraw-Hill/Irwin.

Melville, A. (2011). International financial reporting. Harlow, England: Financial Times/Prentice Hall.

Robinson, T. (2009). International financial statement analysis. Hoboken, N.J.: John Wiley & Sons.

Tan, L. (2011). Consolidated financial statements. Singapore: CCH Asia.

Temple, P. (2002). Magic numbers. Singapore: Wiley.

Temte, A. (2004). Financial statement analysis. La Cross, WI: Schweser Study Program.

Warren, C., Reeve, J., & Fess, P. (2002). Financial & managerial accounting. Cincinnati, Ohio: South-Western.

Weygandt, J., Kieso, D., & Kimmel, P. (2003). Financial accounting. New York, NY: Wiley.

Wild, J., Bernstein, L., & Subramanyam, K. (2001). Financial statement analysis. Boston, Mass.: McGraw-Hill.

Wink, G. & Corradino, L. (2011). Intermediate accounting demystified. New York, NY: McGraw-Hill.