Billabong Limited has always endeavored to improve its financial and operational performances. This company has constantly been seen to be in line with its mission of increasing its operational mobility and financial reliability.
During the fiscal 2010 and 2011, Billabong financial statements namely income statements, cash flow, and statement of affairs have shown remarkable improvements despite lagging behind at some point. From the financial ratios like profitability ratios, liquidity ratios, efficiency and gearing ratios, it is evident that Billabong Limited has streamlined its operation processes to reduce its costs and increased its efficiency.
Basically, Billabong Limited is a globally recognized corporation that deals in both the wholesaling and retailing of accessories, snow apparel, surf and skates. From the financial report, it appears that through licensing the trademarks of the company to other universal regions, Billabong Ltd is able to generate additional revenues.
Billabong Ltd being an international corporation has numerous geographical segmentations. The organized key geographical segments comprise Europe, Australasia, America as well as other global regions. In Europe, the countries segmentation includes Netherlands, Belgium, Austria, Spain, Italy, England, France and Germany.
The segments in Australasia are Malaysia, Indonesia, Singapore, New Zealand, South Africa, Australia and Japan. Countries such as Chile, Brazil, Peru, US and Canada make up the American segment. However, the report indicates that the segmentation of other global regions entails royalties that third part operations generate. It also materializes that major acquisitions that were made in fiscal 2008, significantly contributed to the net after tax profit of $30 million and revenue of $46.9 million that the company reported in fiscal 2009.
The level of profitability is the major concern of every company since in most cases, outside investors put their money in such companies with an aim of making profits from the invested equities. From Billabong Limited financial report, it is evident that the return on equity (ROE) is unstable for the two consecutive fiscal years considered. For instance, in fiscal 2010, the returns on equities was 46.3% but declined to 44.9 % in the fiscal 2011.
The higher positive percentages show that the company is performing tremendously well with respect to the investors’ money. In contrast, returns on assets record what Billabong Limited does with the economic resources to generate extra values for the shareholders (Spires, 1999, p.260). Basically, the company generated more income from its total income in the fiscal 2010 than in the fiscal 2011. In the FY 2010, return on assets was 12.4% as compared to 6.6% in the FY 2011.
The gross profit margin percentage for Billabong Limited declined from 25.65% in the fiscal 2010 to 15.94% in the fiscal 2011. The higher percentages signify the financial well-being of this company, but lower percentages shows how the company is unable to control the inventory costs which are in return passed on to customers.
Finally, net profit margin for Billabong Limited significantly declined from 20.7% in the fiscal 2010 to 12.0% in the fiscal 2011. This basically implies that Billabong profitability after all expenses have been deducted showed some deterioration. Hence, the company’s performance in the fiscal 2010 depicted better profitability results compared to 2011.
From the profitability ratios, it is true that the profitability expressed in terms of ROE, ROA, gross profit margin and net profit margin decreased across the fiscal years under investigation except the increase in the financial leverage factor in the fiscal 2011. The declines are attributed to increased operational costs.
Efficiency ratio is regarded essential as it gauges the firm’s ability to meet its long term and long term obligations (Griffin 2009, p.51). Thus, based on the calculated financial ratios, it is true that Billabong Limited inventory turnover decreased significantly from 2.3 times to 0.85 times in the fiscal 2010 and 2011. It is worth noting that the higher turnover ratio is sign depicting that this company is trading its various products very quickly and vice versa. For instance, in the fiscal 2010, Billabong Limited was able to rotate its sales inventories 2.3 times in that single fiscal year but the sales inventories rotation rate reduced to 0.85 in the fiscal 2011.
Total asset turnover determines a company’s abilities to effectively and efficiently utilize its employed assets to earn satisfactorily good returns. The ratio basically measures the profit percentage earned per-dollar of the assets, hence a measure of Billabong Limited’s efficiency in generating profits on assets (Feroz & Raab 2003, p.52). From the calculated financial performance ratios, it is evident that the company generated increasing returns on the assets employed. However, in the fiscal 2010, the company recorded a higher growth in asset turnover of 119.28% but this declined to 110.76% in the fiscal 2011.
Finally, Billabong Limited efficiency could as well be measured in terms of assets to sales ratio. Across the periods under study, it is eminent that assets to sales ratio increased from 1.68 in the fiscal 2010 to 1.81 in the fiscal 2011. Being a measure that is used to gauge total investments in terms of sales, abnormal higher ratios signify that the company is not fully utilizing its assets or that it is not aggressive enough in its overall sales efforts.
Therefore, the increase indicates that the company sells fewer products that cannot be securely covered by the assets. As shown in the efficiency calculations, Billabong Limited efficiency level as reflected by total asset turnover and inventory turnover decreased under the study period, implying that the company was unable to rotate its sales very quickly across the periods (Mott, 2008).
This ratio is normally calculated from a company’s balance sheet, and hence measures the worth of that company’s business as at a particular date. From the Billabong Limited ratio computations, it emanated that the current ratio has increased over the fiscal periods under examination.
Being a measure that most companies use to evaluate their capacities to pay the current liabilities or short term obligations when they mature, Billabong Limited current ratio slightly rose from 3.09 in the fiscal 2010 to 3.17 in the FY 2011. Thus, the company had a higher ability to pay its current liabilities or current debts when they matured without necessarily going against the future earnings (Frakes 2005, p.201).
Billabong Ltd liquidity as measured in the short term through operating cash flow ratio showed some declines as depicted by the calculated operating cash flow ratios. In the fiscal 2010, the ratio was 1.64 but decreased to 1.02 in fiscal 2011. Basically, the significant level of decline shows how the company bills are paid off. As depicted by the trend, it emanates that cash flows are extensively used to pay debts. Hence higher level depicts the company’s ability to settle down current liabilities without any difficulties.
As shown by the computed quick ratio, Billabong Limited had a greater capacity to settle down the short term obligations as they increasingly become mature from assets that are considered to be the most liquid. Hence, from the analysis of this company’s quick ratio, it is evident that it effectively manages it current economic resources despite the slump in this ratio.
From the computed quick ratio, Billabong Limited liquidity decreased from 2.3 to 2.07 in the fiscal 2010 and 2011. Nevertheless, the company is better placed since the current assets are at least two fold the level of short term debts, hence above the required or acceptable range (Holton 2006, p.17).
Gearing ratios are used in the evaluation of a firm’s leverage. High gearing implies that companies are obligated to continue servicing their debts regardless of how bad their sales are (Brigham & Houstonm, 2009). Considering Billabong Limited, the leverage ratio decreased from 0.999 to 0.997 over the fiscal 2010 and 2011. Despite the fact that higher ratios tend to offer greater returns to the shareholders, it seems more risky. Therefore, corrective measures should be implemented by Billabong Limited to ensure that its business operations continue driving into a foreseeable future.
The gearing ratio as expressed in terms of debt to equity ratio improved from the fiscal 2010 to fiscal 2011 by 0.20. The equity ratio declined in the fiscal 2010 when compared to the fiscal 2011 by 0.07. The calculated debt ratios show that debt ratio increased from 0.28 in the FY 2010 to 0.40 in the fiscal 2011 while time interest earned decreased by 1.17. Collectively, the debt ratio levels seem not to be very detrimental to this company’s operations since they are not greater than 1 (one). Savvy investors can gauge the financial health of Billabong Limited via the debt ratio to ascertain the level of risks that the company is exposed to.
Investment/ Market performance ratios
A corporation’s venture ratios review the corporate performances. There are immeasurable such basic investment-ratios that are necessary for stockholders to make all-encompassing investments judgments (Hughson et al., 2006, p.90).
The company’s price per earnings ratio decreased across the two fiscal years yet remained below the recommended levels. Despite having declined from 58.3 cents in the fiscal 2010 to 47.4 in the FY2011, these levels are still far much below the investors profit expectation turnaround. In fact, the levels show how this company stocks are relatively cheap. It is thus advisable that the company work towards boosting these levels to reach EPS which shows greater future prospects.
The market investment expectations based on Billabong Ltd earning yield and dividend yield rose by 0.012 and 1.54 from the fiscal 2010 to the FY 2011. High earnings yields depicts the company’s future profitability growth while lower earning yields shows how the company’s stock are or will be cheap in the future. Billabong Ltd price per earnings ratio remarkably declined across the period from 15.07 to 12.79 in the fiscal 2010 and 2011. This shows that the company stocks are still underperforming and does not depict any level of improvement (Feroz & Raab 2003, p.53).
Billabong Limited is evading being faced with financial turmoil that could influence its future operations. From its financial operational statements, it appears that the company takes minimum risks in carrying out the business operations as depicted by the gearing ratio levels. Conversely, from the company’s liquidity ratio, it emanates that the company is capable of servicing its short-term debts or current liabilities as they mature for its current assets.
This coupled with its improved financial performances clearly dictates what savvy investors look for in business opportunities before making any concrete investment decisions of becoming shareholders.
Brigham, EF & Houstonm J F 2009, Fundamentals of financial management, Cengage Learning, Auckland, New Zealand.
Feroz, E & Raab, K 2003, “Financial statement analysis: A data envelopment analysis approach”, The Journal of the Operational Research Society, vol.54 no.1, pp.48-58.
Frakes, A 2005, “Introductory accounting objectives and intermediate accounting performance”, The Accounting Review, vol.52 no.1, pp. 200-210.
Griffin, M 2009, MBA fundamentals accounting and finance, Kaplan Publishing, Morristown, NJ.
Holton, G 2006, “Investor suffrage movement”, Financial Analysts Journal, vol. 62, no.6, pp.15-20.
Hughson, E, Stutzer, M &Yung, C 2006, “The Misuse of Expected Returns”, Financial Analysts Journal, vol.62 no.6, pp. 88-96.
Mott, G 2008, Accounting for non-accountants: A manual for managers and students, Kogan Page Publishers, London, UK.
Spires, E 1999, “Auditors’ evaluation of test-of-control strength”, The Accounting Review, vol.66 no.2, pp.259-276.
Appendix: Financial Ratios
|Type of ratio||2011||2010|
|Return-on-equity (ROE)=(Net income/equity)*100 %||(488,053,/1,086,153)*100 =44.9 %||(546,840/1,181,180)*100 |
|Return-on- assets (ROA)=(net-profit before interest/total assets)*100 %||(100,643/1,514,196)*100 =6.6 %||(184,718/1,495,161)*100 |
|Gross Profit margin= (Gross profit/Net sales)*100%||(133,663/838,542)*100 =15.94%||(228,521/890,952)*100 |
|Net profit margin=(Net income/Net Sales)||(100,643/838,542)*100 |
|Financial leverage factor =ROE/ROA||44.9/ 6.6= 6.8||46.3/ 12.4= 3.73%|
|Assets to Sales Ratio=(Total Assets/Net sales)||(1,514,196/838,542)=1.81||(1,495,161/890,952)=1.68|
|Total asset turnover=(revenue/average total assets)||(838,542/(1,514,196÷2))*100 =110.76%||(890,952/(1,495,161÷2)*100=119.28%|
|Inventory-turnover=sales-cost/stock||(133,663/156,537) =0.85 times||(228,521/99,179)=2.3times|
|Current ratio=current assets /current liabilities||(450,992/142,172)=3.17||(394,230/127,606)=3.09|
|Quick ratio=(Current assets-Stock)/current liabilities||(450,992-156,537)/142,172 |
|Operating Cash Flow Ratio= (cash flow from operations/liabilities)||(144,425/142,172)=1.02||(208,742/127,606)=1.64|
|Debt-to-equity ratio =(Total debt /total equity)||(613,165/1,086,153)=0.56||(425,458/1,181,180)=0.36|
|Equity ratio =(equity / assets)||(1,086,153/1,514,196) |
|Debt ratio =(total debt / total assets)||(613,165/1,514,196)=0.40||(425,458/1,495,161)=0.28|
|Leverage ratio = Fixed interest capital/ equity||(1,193,464/1,196,839) |
|Time interest earned = EBIT/ Interest paid||(133,663/33,020)=4.05||(228,521/43,803)=5.22|
Market related investment ratio
|Basic earnings per share= (Shareholders earnings/Number of shares)||(119,139,000/253,321,020/) =47.4 cents||(145,988,000/ 252,547,370/) =58.3 cents|
|Price per earnings ratio=(Price/Earnings or P/E)||(6.01/ 0.47)=12.79||(8.74/ 0.58)= 15.07|
|Earning yield=1/(P/E ratio)||1/12.79=0.078||1/15.07=0.066|
|Dividend yield = (Dividend per share/ Market price per share) *100%||0.34/6.01=5.66%||0.36/8.74=4.12%|