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Billabong International Limited

Question:

Write an essay on Billabong International Limited.

Answer:

Company Overview

Billabong International Limited is a clothing retailer and also deals in accessories like watches, backpacks snowboard and skateboards. It was founded By Gordon and Rena Merchant in 1973 in the Gold Coast Australia. The word “Billabong” means creek that runs only in the rainy season. The company initially designed board shorts and by 1980s they were able to expand to the entire Australia. In the late 1980s the company also expanded to New Zealand, japan and South Africa. In 2000 the company was listed in Australian Securities Exchange. 

In the early 2000s the company started to acquire other brands and retail outlets to expand quickly. It acquired Von Zipper- an eyewear brand and Element- skateboarding apparel brand in 2001. The brands which the company also possess includes Honolus, Xcel, Tigerlily, Sector 9, RVCA and Palmers. The sales of the company grew from $225 million in 2001 to $1.7 billion in 2011. However by the end of 2012 the company underwent a restructuring process and closed more than 150 stores with loss of jobs for more than 400 employees internationally. In the year 2013, Billabong accepted the takeover offer by Altamont Partners.  The losses to the company in the year 2013 was $536.6 million. (Reuters)

Analysis

The ratio analysis is very useful method to analyze the financial performance of the company. It helps the investors to understand the financial health of the company and understand if the company was able to perform as their expectations. It also helps in judging if the company has been able to utilize its resources and assets to earn better profits.  Some of the important financial ratios are 

Profitability: Profitability of a company is defined as the ability of the business to generate profits. In a business all the revenue earned by the sales of goods and services minus all the expense incurred in conducting the business will provide profit. Profitability is the most important goal of any business. It helps in determining whether the company will be able to generate returns for the investors who have invested in the company.

Profitability is defined as accounting profits or economic profits.

Accounting profits is the profits generated by subtracting the expenses from the revenue generated. It does not take opportunity cost into account while doing the business. It helps in providing the viability of the business. A company occurring losses for consecutive years may put in danger the entire business. 

Economic Profits is the profits generated by the business by subtracting not only the expenses from the revenue generated but also the opportunity cost while doing the business. Opportunity cost are the earnings which could have been received if the money was not invested in the business. The economic profits helps us in the long term decision making. The company can evaluate the various projects it should undertake and if there is any other alternative which can help company in earning a better return than the current investment plan.

The various Profitability ratios are

1. Gross Profit Margin: It is defined as Gross Profit/ Sales.  It measures the profit earned by the company while selling its invento

For the company Billabong,

In 2015, Gross Profit Margin = 560822/ 1056130 = 53.10 %

In 2014, Gross Profit Margin = 53643100/ 1027471= 52.21%

Thus the gross profit for the company has increased. This may be due to increase of revenues by the company and better procurement of the raw materials which reduced the cost of the goods sold

2. Return on assets: It is defined as Net Income/ Average Assets. It helps management to understand if the investment in assets are being converted to profits.

In 2015, Return on assets = 2552/ (751866 + 803980)/ 2 = 0.33 %

In 2014, Return on assets = -239933/ (751866+751866)/ 2 = -31.91 %

The company has incurred huge loss in 2014 and thus the return on assets is negative. The company has been able to generate a net profit by reduction in finance cost and other expenses.

3. Return on sales: It is defined as Net Income/ Sales. It helps in identifying if the company is able to generate profits by selling goods and reduce the wastage of resources. 

In 2015, Return on sales = 2552/ 1056130 = 0.24 %

In 2014, Return on sales = -239933/ 1027471 = -23.35 %

The company has shown improvement in the return on sales which is a good indicator for the investors.

4. Return on Investment: It is defined as Net Income/ Investment. T helps the investors identify the return they will get for the investment they made in the company.

In 2015, Return on sales = 2552/ 1094274 = 0.23 %

In 2014, Return on sales = -239933/ 1094274 = -21.93 %

The return on investment is positive in the year 2015. Thus the investors will get a better return for their investments. 

Efficiency ratios: The efficiency ratio helps in identify how efficiently the company is able to use its resources and generate profits.

The most commonly used efficiency ratios are

1. Assets turnover ratio: It is defined as the net sales/ Average total assets. It reflects the amount of sales generated by the company for the amount invested in the assets of the company.

In 2015, Assets turnover ratio = 1056130/ (803980 + 751866)/2 = 1.35

In 2014, Assets turnover ratio Assets turnover ratio = 1027471 / (751866 + 751866)/ 2 = 1.36

The company in 2014 was able to utilize its assets more efficiently. The investment in assets did not gave the same kind of return as was expected by the investors.

2. Fixed assets turnover ratio: It is defined as the net sales/ Average fixed assets. It reflects the amount of sales generated by the company for the amount invested in the assets of the company. This is more refined ratio as it takes only assets like plant, equipment, property etc. into account.

In 2015, Assets turnover ratio = 1056130/ (89504 + 94305)/2 = 11.49

In 2014, Assets turnover ratio Assets turnover ratio = 1027471 / (94305 + 94305)/ 2 = 10.89

Thus the company in 2015 utilized its assets more efficiently as compared to the year 2014. Taking both assets turnover ratio and fixed assets turnover ratio it is clear that the management has not been able to utilize the intangible and other assets as efficiently as it did the previous year.

3. Inventory turnover ratio: It is defined as the Cost of goods sold/ Average inventory. This ratio tells the number of times the company was able to sell its average inventory. The higher value of inventory turnover ratio is preferred as it indicates well running of the business by the management. A low inventory turnover ratio may be due poor maintenance, over production or other factors.

In 2015, Assets turnover ratio = 1056130/ ((187125 + 180222) /2) = 5.75

In 2014, Assets turnover ratio = 1027471/ ((180222 + 180222) /2) = 5.70

The inventory turnover ratio has improved for the company thus the management is improved and the company was able to sell the average inventory better in 2015 as compared to 2014. However the improvement was small in amount.

Thus the increasing inventory turnover ratio and fixed assets turnover ratio are indicators of good use of assets by the company.

Liquidity ratio:  The Liquidity ratio is used to determine whether a company will be able to pay of its debt both long term and short term.

The most commonly used liquidity ratios are

1. Current ratio: It is defined as ability of the firm to pay off the current liabilities using current assets. It is given by Current Assets/ Current Liabilities

In 2015, Current ratio = 523753/ 239045 = 2.19

In 2014, Quick ratio = 495801/ 225671 = 2.19

Thus there is no effective change in the current ratio 


2. Quick ratio: It is defined as how quickly the company can convert its assets and pay off the current liabilities. It is given by Quick Assets/ Current Liabilities.

In 2015, quick ratio = 179838/ 239045 = 0.75

In 2014, Quick ratio = 298920/ 225671 = 1.32


The quick ratio shows that the company will not be able to cover the current liabilities with the quick assets it has. 


3. Interest Coverage Ratio: It is defined as amount of income that is used to cover the future interest expense. It is defined as EBIT/ Interest expense


Financial Leverage Ratio: It is used to measure the overall debt of the company compared to its assets and equity. It determines the share of owners and creditors in the company.

The important Financial Leverage ratios are

1. Debt ratio: It is defined as the total liability of the company / total assets. The higher the value of debt ratio the more risky is the investment in the company.

In 2015, Debt ratio = 522396/ 803980= 0.65

In 2014, Debt ratio = 492830 / 751866 = 0.66

The debt ratio for both the years is almost same. 65% of the total assets is the liabilities of the company.


2. Debt to Equity ratio: It is defined as the total debt of the company / total equity. The higher value of debt to equity means the creditors financing is more in the company. 

In 2015, Debt to equity ratio = 522396/ 281584 = 1.85

In 2014, Debt to equity ratio = 492830 / 259036 = 1.90


Thus the Debt to equity ratio has decreased in the year 2015. This is a good sign as the share of creditors in the business has decreased.

Investment ratio: These ratios helps the investor to understand the financial health of the company and make decision whether or not to invest in the company. 

1. Earnings Per share: It is the amount of profit each share of the company will receive. It helps in comparing returns by investing in various shares. It is given by Net income- Dividends/ No. of shares.

In 2015, Earnings Per share = 0.5 cents

In 2014, Earnings Per share = (28.6) cents


2. Dividend Yield ratio: It is defined as the dividend paid by the company by No. of shares. It is used to compare the investment in various companies.

The company has not declared in the year 2015 and 2014. Thus the shareholders might want to invest in other companies which is giving better return. 

Conclusion and findings

After comparing the different financial values of Billabong for the past two years it is found that the company has incurred major losses in 2014 which has affected the performance of the company. The company has performed significantly well and has been better able to utilize it fixed assets and the inventory turnover ratio has also improved. However since the last two years the company has not paid any dividend to the investors and the earnings per share is low compared to similar competitors in the industry. Thus the report helps in understanding the significance of various financial ratios and help understand the current financial health of Billabong International Limited

Recommendation

The following are the few recommendations based on the analysis

1. The company should improve operating expense by reducing the waste in resources while operating the business. 

2. The quick ratio of the company has reduced to 0.75, less than 1. The company should improve this to cover all the current liabilities with easily convertible assets.

3. The company should generate more profits and provide dividends to gain the trust of the investors 

Thus the company has improved a lot since 2014 but needs to reduce the expenses to improve the operating margins

Reference

Billabong International Ltd (BBG.AX). Reuters. Retrieved from http://in.reuters.com/finance/stocks/companyProfile?symbol=BBG.AX

Profitability Ratios. My Accounting Course. Retrieved from http://www.myaccountingcourse.com/financial-ratios/profitability-ratios

Claire Boyte White. (2015). Investopedia. Why are efficiency ratios important to investors? Retrieved from http://www.investopedia.com/ask/answers/032615/why-are-efficiency-ratios-important-investors.asp

Investment Valuation Ratios. Investopedia. Retrieved from http://www.investopedia.com/university/ratios/investment-valuation/

Annual report Billabong International Limited. (2015). Retrieved from http://www.billabongbiz.com/phoenix.zhtml?c=154279&p=irol-reportsannual  


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