Discuss about the Financial Analysis of Billabong International Limited.
Billabong International Limited is a retail company with listings in the Australian Securities Exchange (ASX). The company was conceived and founded in 1973 by Gordon Merchant and presently has its headquarters in Queensland, Australia. The products offered by the company comprises of clothing, accessories, travel kits, adventure sports products such as skateboards and snowboards. The company produces and sells products under 11 brands names primary among them being Von Zipper, Element, RVCA and Kustom. The company is headed by CEO Neil Fiske and has operations spanning retail markets in Asia, Europe and North America its local market in Australia. The group revenues comprises of $1.1 billion for the financial period 2015 as per ASX announcements. The strategy adopted by the company is towards creation of global brands complimented by highly efficient logistics and distribution systems integrating the supply chain mechanism with retail, wholesale and online stores.
The report focuses upon analyzing the financial performance and issues pertaining to Billabong International Limited. The evaluation has been carried out using financial ratios in order to gauge the company’s performance based upon parameters of liquidity, solvency, profitability, efficiency and degree of leverage.
Profitability Ratios:
Figure 1: Profit margins of Billabong
(Source: As created by the Author )
Gross margins tends to represent the quantum of revenues left post adjusting the cost of goods sold. The gross margins evaluates the manufacturing activities of the company. A high gross margin of over 50% showcases that the company has been showcasing efficiency in terms of managing productions. The margins showcases that the company is able to cover overheads, distribution and administrative expenses with half of the revenues generated. Moreover, high gross margins showcases the profit generating capability of the company and high growth prospects. However, in order to retain high profit margins Billabong requires focusing upon minimizing or applying controls upon production costs in order to maintain high gross margins. The sales and pricing strategy of Billabong Ltd is highly efficient as can be observed by the gross margins as most firms fails to garner satisfactory levels of revenue owing to faulty pricing strategy or ineffective sales management policies.
Operating margins tends to showcase the proportion of revenue that constitutes income from operating activities after taking into consideration various operating activities. The negative amount of operating margins showcases the fact that the company was unable to capitalize upon high levels of gross margins owing to high proportion of operating costs. However, the company was able to minimize its operating losses over 2015 leading to margin of -0.1 from -0.6.
Earnings per share tends to represent the prospects of earning from the stock outstanding on behalf of the company. This figures demonstrates the degree of return that the shareholder stands to gain from the profits in case all the earnings have been distributed by the company. The earnings per shares is also relevant for investment decisions in the sense that the company’s capabilities to return upon the investments can be construed from EPS. However, the determinants of EPS can vary in the sense that companies with lower volumes of outstanding shares tends to showcase high EPS despite unappreciated levels of revenue and incomes.
From a negative EPS the company has managed to improve its EPS up to 0.01 AUD per share. Even though, in terms of attracting newer sets of investors seems highly improbable in nature, the company needs to focus upon improving the determinants that seeks to influence its degree of earnings. Since the market capitalization and the stock prices of a company is dependant upon the EPS thereby in order to improve market value of the company and facilitate high degree of returns the requires to undertake measures to elevate its current level of EPS.
Figure 2: Profit margins of Billabong
(Source: As created by the Author )
Net margin showcases the ability of the company towards implementation of costs controlling measures taking into consideration the fact that net margin is prepared after taking into consideration numerous overheard expenses pertaining to the administrative costs, distribution and logistical costs along with post sales services. A net margins of -20.84% over 2014 showcases the fact that the company has been unable to put in place cost cutting measures owing to which the proportion of profit left after payment of interest and overheads tends to fail in achieving any positive degree of returns. Return on assets on the other hand showcases the fact that the degree of utilization of company’s assets in order to generate returns. The negative amount of -26% showcases the fact that the company was unable to utilize its capital assets towards revenue generating abilities. The return on equity showcases the amount of return that the equity shareholders tend to achieve out of the operations. A highly unfavorable return of 86.26% showcases the fact that the company has been unable generate any returns from the issuance of share capital. However, the recovery pertaining to 2015 has been highly satisfactory in the sense that the company has been able to mitigate high risks of investor outrage through minimizing the negative returns on equity.
Figure 3: Efficiency ratios of Billabong
(Source: As created by the Author )
Figure 4: Efficiency ratios of Billabong
(Source: As created by the Author )
The proportion of receivables turnover showcases the amount of time its takes in order to recover the amount of receivable outstanding on the part of debtors of the company. A receivables turnover of over 6 represents the fact that the company has been able to receive the outstanding payments within 60 days of making such advancements to its creditors. High receivable turnover are beneficial towards mitigating risks pertaining to shortage of capital in the sense that the company is more capable through efficient collection of dues. Low inventory turnover showcases the fact that the proportion of obsolete stocks in the inventory are rising. Moreover, a highly unfavorable degree of inventory turnover showcases a high degree of fault at the behest of inventory man agent policy.
Figure 5: Liquidity ratios of Billabong
(Source: As created by the Author )
A current ratio of 2.2 is highly satisfactory in nature owing to the total current assets are more than double than the current liabilities resulting towards ability of the company in meeting short terms debt obligations as well maintaining short terms solvency position with regards to the company operations. Moreover, being a retailer, the company may require immediate procurement of cash from time to time to meet emergency costs and thereby require highly favorable quick ratio comprising cash and highly liquid current assets.
Figure 6: Leverage ratios of Billabong
(Source: As created by the Author )
The proportion of debts have risen considerably in comparison to capital procured from shareholder s and degree of retained earnings . The data showcases that the leverage pertaining to degree k of debts in the capital composition of the company. The company has chosen towards procuring capital from external sources as opposed to share issue in the sense that the company has been unable to attract sizeable amount of investors to invest in the share capital of the company owing to highly unfavorable EPS and returns on shareholders equity.
Figure 7: Investment ratios of Billabong
(Source: As created by the Author )
The investment ratios tends to showcase the relevant financial figures essential towards undertaking investment decisions by the utilization of different sets of ratios. Except the price to earning ratio the amount pertaining to all other metrics are unfavorable for the company in the sensed that the company has failed to attract adequate investment from its shareholders over the past one year resulting towards high degree of financial leverage over the two year period.
Conclusion and Recommendations:
The current report showcased that Billabong has efficiency towards generating quantum of revenue owing to the fact that the company has been showcasing a gross margins of over 50% in the past two years. However, subsequent amount of operating and net margins showcases the fact that the company has been unable to capitalize upon high revenue due to inadequate sets of operating and administrative activities. The amount pertaining to the earnings per share showcases that the company has failed towards providing enough incentive to the present sets of investors. Moreover, the EPS is a reflection of the future valuation of the company as the market capitalization rate tends to depend upon the EPS. Further, the company has been unable to meet desirable levels of return on assets and return on equity thereby showcasing the fact that the company has been unable to utilize the assets in order to generate high degree of returns. In addition, the utilization of assets tends to showcase the fact that the company has not been able to undertake efficient management of resources available under its paradigm in order to improvise upon a higher degree of profits and capture a sizeable share of markets.
References and Bibliography:
Cantoni, E. (2012). Financial statement analysis and insolvency forecast models: a proposal for local firms. Economia Aziendale Online, (4), 1-17.
Haijun, Z. (2013). Discussion on the Limitation of Financial Statement Analysis. Journal of Baotou Vocational & Technical College, 2, 029. Healy, P. M., & Palepu, K. G. (2012). Business Analysis Valuation: Using Financial Statements. Cengage Learning.
Phillips, F. (2016). Withholding Financial Statement Analysis Formulas When Instructing and Testing: A Desirable Difficulty. Available at SSRN.
Sridharan, S. A. (2015). Volatility forecasting using financial statement information. The Accounting Review, 90(5), 2079-2106.
Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & Managerial Accounting. John Wiley & Sons.
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