A financial statement analysis of Billabong International Limited, a well-known Australian fashion, and clothing company, is carried out in this report using financial figures of 2010 and comparative figures of 2009. The company’s financial position is assessed using ratios in different categories. The results are attached to this report as Appendix.
Return on Equity
Return on equity is defined as the amount of income the company retained as a proportion of shareholders’ equity (Kennon, 2011). Billabong’s return equity has improved by 3.31%. This reflects that the company is better utilizing the capital efficiently, that is raised by issuing shares in the market.
Return on Assets
Return on assets helps experts in analyzing the company’s efficiency in generating revenues against each dollar it has invested in its business activities (Kennon, 2011). Billabong’s return on assets has increased by 2.42% in 2010, as compared to the year 2009. This improvement in assets turnover shows that the company is efficiently utilizing its assets but the business is highly asset-intensive.
Gross Profit Margin
This ratio gives an overview of the company’s ability to earn revenues against its sales after deducting the costs that it incurred in the production process (Gitman, 2008). Billabong’s gross profit margin has declined by 1.29% which reflects that the company’s ability to produce products at lower costs is negatively affected in 2010.
Net profit or profit margin gives an overview of a company’s capability to generate profits from the finances it has invested (Gitman, 2008). Billabong’s net profit margin has declined by 0.7% in 2010, as compared to 2009, which shows that the company has slightly lost its efficiency for generating profits against each dollar it has invested in the business. Profit margin of 14.64% tells that Billabong has earned.14 cents against each dollar it has invested.
“Asset turnover ratio helps in analyzing a firm’s efficiency in utilizing its assets to generate sales” (Gitman, 2008). The asset turnover ratio of Billabong is increased by 20% which shows that the firm has become more efficient in generating enough sales to overcome the costs it has incurred in its assets. For the sake of further increasing this ratio, Billabong should try to utilize its assets efficiently to increase its sales, sell-out some of its assets, or a combination of both these steps is advised.
Inventory turnover tells investors about the time that an organization takes to turn its inventory into finished goods (Gitman, 2008). In 2009, Billabong took 133.48 days to convert its inventories into finished goods, which declined to 108.33 days in 2010, reflecting that the company now takes 25.15 fewer days to convert its inventories into finished goods and sold. This suggests that either Billabong is having better inventory management and lower levels of inventory in stock.
It is the average time that a company takes to pay out its debts to the creditors (Kennon, 2011). Billabong used to payout its debt in 160.34 days in the year 2009, which increased to 110.34 days in 2010. This shows that the company now takes 50 fewer days to pay out its debts to suppliers and vendors. This is a good sign that the company can hold on to its creditors for a longer period if required in the future.
The company has reduced its number of days of debtors in 2010. This implies that the company is managing its receivables in a better way where the collection of proceeds has been improved. Moreover, it also suggests that the company’s receivables have declined significantly in the year 2010. When compared with the sales of the company it can be observed that the company is making more cash sales than sales on credit.
“Current ratio helps investors in determining the company’s level of liquidity to meet its financial obligations” (Bragg, 2010). Billabong had a current ratio of 2.48:1 in 2009 which improved to 3.38:1 in 2010. There is a positive change in the current ratio as the company is better able to reduce its liabilities. This indicates that the company has sufficient liquidity to avoid any problems related to meeting its financial obligations in the short term.
The quick ratio also tells about the level of liquidity that a firm has maintained, but the difference is that the inventories are deducted from the current assets while calculating the quick ratio (Kennon, 2011). Billabong’s quick ratio was 1.80:1 in 2009 and 2.48:1 in 2010. This difference presents a positive picture of Billabong where the company is holding higher current assets compared to its liabilities. However, taking this from the current ratio, it shows that the major portion of the company’s current assets comprises inventories.
Capital Structure Ratios
Debt to Equity Ratio
The debt to equity ratio gives an overview of the degree of debt that a firm has acquired to finance its equity (Bragg, 2010). Billabong’s debt to equity ratio has increased by 0.7% in 2010 as compared to 2009, which seems to be a negative change. This implies that the company has slightly increased its external borrowing to meet its business requirements.
The debt ratio draws the picture of the company’s total assets financed by debtors or creditors over a period. A higher debt ratio implies that the firm is financing the majority of its assets from investors’ or creditors’ money (Gitman, 2008). Billabong’s debt ratio in 2010 is 0.2% up to as compared to 2009, which shows that the company is depending more upon external financing its assets.
The equity ratio reflects the level of leverage used by the company to finance its assets. It helps in calculating the percentage of assets that are financed by raising capital from investors rather than from creditors (Gitman, 2008). Billabong’s equity ratio has decreased slightly in 2010, from 0.55% in 2009 to 0.53% in 2010.
Interest Coverage Ratio
The interest coverage ratio portrays a company’s obligation to pay interest amounts that are due on the debt that company has taken. It is calculated before deducting interest and tax amounts from the net profits (Bragg, 2010). The decline in its interest coverage ratio has been observed from 9.07 in 2009 to 6.34 in 2010. This reflects the fact that the company is now generating less EBIT to meet its interest obligations. However, it is still showing that the company is enjoying high margin of safety, in the long term and short term both.
Market Performance Ratios
Dividend Per Share
Dividend per share is the amount of money, the shareholders will be returned as a benefit of owning shares of a company (Bragg, 2010). Billabong paid 16% more dividends in 2010 to its shareholders as compared to 2009. This reflects that the company has distributed more profits as compared to the previous years, which has a positive impact on the shareholders’ value.
Earnings Per Share
Earnings per share are the amount of profit that the company is obliged to attribute to shareholders divided by the number of shares outstanding (Gitman, 2008). Billabong’s earnings per share were 69.20 in 2009 which is reduced to 58.30 in 2010. This means that the company is inefficient in utilizing the capital it has raised from issuing shares and stock in the market and the stockholders are receiving fewer amounts as dividends from purchasing shares or stock of Billabong.
Price Earnings Ratio
The price-earnings ratio is the most widely used performance measure by investors and financiers. It bridges a link between the price of a company’s share of stock to the amount the profits that the company is obliged to pay to the shareholders (Gitman, 2008). Billabong’s price-earnings ratio has decreased from 10.05 in 2009 to 12.64 in 2010. The reason behind this increasing price-earnings ratio might be the positive confidence shown by the investors in the company’s ability to maintain its growth level.
Based on the above analysis of the company, the following results can be achieved.
- Profitability: Overall, the company’s profitability position has become weak as reflected from the gross and net margins values. But, at the same time, the company has been able to generate better returns for equity holders.
- Asset Efficiency: Overall, the company’s asset efficiency has increased significantly.
- Liquidity Position: Overall, the company’s liquidity position remains strong.
- Leverage: The Company is maintaining a strong leverage position as its ratio value is less than 1.
- Market Performance: The market indicators compared to 2009. However, its share is still trading at healthy multiple values of its book value.
Based on the analysis, it is recommended through this report that the company’s stock still seems attractive and investors can expect higher returns from their investment in the company’s stocks. However, keeping in view the overall economic condition a word of precaution must be presented for investors, which requires a watchful approach to investing in the capital market.
Bragg, S. (2010). Business Ratios and Formulas: A Comprehensive Guide. New Jersey: John Wiley and Sons, Inc.
Gitman, L. (2008). Principles of Managerial Finance. New Delhi: Dorling Kindersley Pvt. Ltd.
Kennon, J. (2011). Return on Equity. Web.
As of December, 2010
|Return on Equity||15.50%||12.19%|
|Return on Assets||12.72%||10.30%|
|Gross Profit Margin||53.30%||54.59%|
|Capital Structure Ratios|
|Debt to Equity Ratio||0.89||0.82|
|Interest Coverage ratio||6.34||9.07|
|Market Performance Ratio|
|Earnings per Share||58.30||69.20|
|Dividend per Share||0.52||0.36|
|Price Earnings Ratio||12.64||10.05|