Billabong Financial Performance Analysis in 2014-2015

Profitability ratios

Question:

Discuss about the Billabong International Limited.

Billabong International Limited was started by Gordon and Rena Merchant in 1973 in the Gold Coast Australia. It deals in clothing and other accessories like watches, backpacks snowboard and skateboards. It. The company name has been derived from the word “Billabong” which means creek running only in the rainy season. In the beginning, the company made board shorts. In 1980s the company was expanded its business and were selling board shorts in the entire Australia. With this high growth rate in the business, by the late 1980s the company did international expansion to New Zealand, Japan and South Africa.

Billabong listed itself in the Australian Securities Exchange in the year 2000 and soon the company began to acquire other brands and retail outlets to expand rapidly. In 2001, the company acquired Von Zipper- an eyewear brand and Element- skateboarding apparel brand. Honolus, Xcel, Tigerlily, Sector 9, RVCA and Palmers are also few other brands which are possessed by the company. In 2001, the sales of the company was $225 million and it grew to $1.7 billion in 2011. However by the end of 2012 the company closed more than 150 stores after it underwent a restructuring process and 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)

The ratio analysis is very beneficial method to examine the financial performance of the company. It assists the investors to comprehend the financial health of the company and understand if the company was able to accomplish as their expectations. It also helps in judging if the company has been able to make use of its resources and assets to earn better profits. These ratios also help the company to identify the areas where they need to improve and formulate plans in accordance with the trends of its financial performance. Some of the important financial ratios are

Profitability ratios: Profitability of a company is defined as the capacity of the business to make 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.

The various Profitability ratios are

Gross Profit Margin: Gross Profit Margin is defined as Gross Profit/ Sales. It measures the profit earned by the company while selling its inventory. A higher gross profit margin ratio is preferred as the company will have more revenues to pay its expenses.

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 can be due to increase of revenues by the company and reduced the cost of the goods sold by better procurement of the raw materials.

Gross Profit Margin

Return on assets: Return on assets is defined as Net Income/ Average Assets. It helps management to understand if the investment in assets are being converted to profits. The more the return on assets the better for the company.

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

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

In 2014, the company has incurred huge loss 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.

Return on sales: Return on Sales 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. The higher value of Return on sales indicates that the company is generating more revenue with the increase in sales.

Return on Investment: Return on Investment is defined as Net Income/ Investment. It 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 compared to the previous year.

Efficiency ratios: The efficiency ratio helps in identify if the company is able to use its resources and generate profits efficiently. It is used by the company internally to identify areas where resources are being wasted.

The most commonly used efficiency ratios are

Assets turnover ratio: Assets turnover ratio 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 than 2015. The investment in assets did not yield the same kind of return as was expected by the investors.

Fixed assets turnover ratio: Fixed assets turnover ratio 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 = 1027471 / (94305 + 94305)/ 2 = 10.89

Thus the company in 2015 utilized its fixed 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.

Return on assets

Inventory turnover ratio: Inventory turnover ratio 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 if the company will be able to pay of its debt both long term and short term.

The most commonly used liquidity ratios are

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.

Quick ratio: Quick ratio 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. A higher value of Quick ratio is preferred as it reveals that the company will be easily able to pay its 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. There has been a sudden decline in the quick ratio and the management should focus on improving the ratio so that it can boost the confidence of the creditors and investors.

Interest Coverage Ratio: Interest Coverage Ratio 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

Debt ratio: Debt ratio 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. It states that 65% of the total assets is the liabilities of the company.

Return on sales

Debt to Equity ratio: Debt to Equity ratio 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.

The important Financial Leverage ratios are

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

Dividend Yield ratio: Dividend Yield ratio 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

Thus after the analysis of various financial ratios of the company Billabong International Limited for the past two years it has been identified that the company has suffered major losses in 2014 which has affected the performance of the company. The plans executed by the company in 2015 has performed considerably well. The company has been able to utilize it fixed assets better and the inventory turnover ratio has also improved. The company however since the last two years has not paid any dividend to the investors and the earnings per share is low compared to similar competitors in the industry. These are the major concerns for the investors and the management and they need to improve these areas to build trust of the investors. Thus the report helps in understanding the significance of various financial ratios and help understand the current financial health of Billabong International Limited

The following are the few recommendations based on the analysis

The quick ratio of the company has fallen to 0.75 (less than 1). The company should increase this ratio so that it can use easily convertible assets to cover all the current liabilities.

The operating expense for the company can be reduced by improving the waste control in resources while operating the business.

The company should divide the profits made as dividends to the investors to gain their trust.

Reference

Billabong International Ltd. (2015). 2014 annual report of Billabong International Ltd. Retrieved from http://www.billabongbiz.com/phoenix.zhtml?c=154279&p=irol-reportsannual

Profitability Ratio. (n.d.). Retrieved from http://www.myaccountingcourse.com/financial-ratios/profitability-ratios

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

Loth Richard. (n.d). Investment Valuation Ratios. Retrieved from http://www.investopedia.com/university/ratios/investment-valuation/

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