Ratio Analysis
This report is developed for presenting an analysis of the financial performance of Billabong International Limited, an ASX listed entity for facilitating the decision-making process of investors. Billabong International Limited is known to be a clothing retailer that is involved in producing accessories such as watches, backpack and snowboard products. The company was established in the year 1973 and since then has established itself as a major market apparel and accessories company within Australia that design its product mainly for surfing, skateboarding and snowboarding. The company at present is known to manufacture about 2,200 products that includes shorts, t-shirts, swimwear, jackets and others surfing products for both men and women. It has established its sports shops for delivering its products to the customers in about 6-countries across the world. It is recognized as one of the leading brand involved in designing of surfing apparel having about 6,000 employees (Annual Report, 2017).
It is known to be a retail company whose products reflect the idealistic lifestyle of a surfer. The products of the company at present are officially licensed in about 100 countries and it is listed since the year 2000 on the Australian Stock Exchange. The company realizes revenue mainly from Australia, North America, Europe, Japan, New Zealand, Brazil and South Africa. The company market itself on an international platform by associating with the professional athletes, junior athletes and events. The major target population of the company is young generation people and it adopts the use of sponsorship of young surfers and athletes for advertising its products to the target population section. In this context, the present report is developed for analyzing the financial performance of the company by the use of ratio analysis technique. The ratio analysis examines the profitability, efficiency, liquidity, and leverage and investment performance of the company for identifying the changes in the financial position from the year 2016 to 2017. The findings of the ratio analysis are used for providing an overall assessment of the company from the perspective of existing and potential equity investors (Annual Report, 2017).
Ratio analysis is regarded as an important tool for examining the financial performance of a company. The calculation of the pertinent ratio’s such as profitability, liquidity and others help in assessing the financial position of a company that can be used for decision-making from the perspective of an investors. The accounting ratios are also very important for examining the efficiency of a company in terms of its operations and management. They help in evaluating whether the company is able to utilize its assets effectively for generating profits (Firer, 2012). As such, the financial position of Billabong is determined with the use of ratio analysis technique. The key ratios calculated for the company are discussed as follows:
Profitability Analysis
The profitability ratio’s can be classified as financial metrics ratio’s that are used for assessing the ability of a company to generate earnings in comparison to the expenses incurred. The profitability position of the company is assessed with the use of following ratios:
Return on Equity
The return on equity (ROE) provides a major indicator of the profitability position of a company by depicting the profit realized by it in comparison to the amount of money the shareholders has invested. The formula for calculating the ratio can be described as follows:
Formula = Net Profit *100 /Average Shareholder’s equity (Koller, 2015)
As calculated from the ROE ratio of the company, its return on equity is negative for both the years that are from 2016 to 2017. The negative ROE indicates that the shareholders of the company are realizing losses instead of attaining profits. However, the ROE of the company has somewhat recovered in the year 2017 which indicates that the financial capacity of the company to realized earnings from shareholder wealth has somewhat improved.
Return on Assets (ROA) Ratio
It is a financial ratio that is used for depicting the percentage of profit realized by a company by effective utilization of its asset base. The formula for the calculation of the ratio can be depicted as follows:
Formula =EBIT *100 / Average Total Assets (Deegan, 2013)
It can be stated from the ROA ratio calculated for the years 2016 and 2017 that its capability to realize profits from asset use have declined as the ratio has turned negative in the year 2017. It indicates that the company is not able to generate revenue from its assets and is realizing financial losses.
The ratio can be described as the percentage of revenue realized by a company after meeting all its expenses. The formula for its calculation is as follows:
Formula = EBIT/ Sales or Revenue
The net profit ratio of the company has declined from the year 2016 to 2017 and has attained a negative value in the year 2017. The negative value for the ratio indicates that the business has incurred more expenses in comparison to the earnings realized during a particular period.
The ratio is used for providing an assessment of the financial health of a company by determine the percentage of revenue realized by it after meeting the cost of goods sold. The formula for its calculation is as follows:
Return on Equity
Formula = Gross Profit/Sales or Revenue (Koller, 2015)
It can be stated from analyzing the gross profit margin of the company during the financial period 2016-2017 that the company has decreased its expense relating to the cost of goods sold as its gross profit has increased.
The efficiency ratios are used for analyzing the ability of a company to use its assets and liabilities internally in an effective manner for generating profit. The different type of efficiency ratios used for analyzing the financial position of Billabong is as follows:
Asset turnover ratio:
The asset turnover ratio measures the efficiency of a company in utilizing its assets for generating sales and can be calculated with the following formula:
Formula =Sales*100/Average total assets (Tracy, 2012)
The asset turnover ratio of the company has increased from 1.30 to 1.48 between the financial years 2016-2017. This indicates that the ability of the company to generate sales from the use of assets ahs improved. The net sales of the company have increased in comparison to the average total assets for the year 2017 as compared to that of the year 2016.
Days Inventory Ratio
The ratio provides an estimate of the number of days a company holds its inventory before it is sold. The formula for its calculation is as follows:
Formula =Average Inventory *365/Cost of Goods Sold
The inventory turnover ratio of the company has significantly increased from the year 2016 to 2017 from 126 to 131 depicting that the holding period of inventory has increased which cannot be regarded good for the company. This is because it will eventually lead to increase in the operational expenses of the company required for maintaining the inventory before it is converted into sales.
Days Debtors Ratio
The ratio provides a measurement of the effectiveness of a company to collect cash from its debtors. It is calculated by the use of following formula:
Formula =Average Trade Debtors *365/Sales (Tracy, 2012)
The ratio for the company has depicted an increasing pattern from the year 2016 to 2017 from 57 to 63. This indicates that the time-period taken by the company for collecting the cash from its debtors have increased which cannot be regarded good for its future growth and development.
Liquidity ratios help to examine the company ability to pay the short term liabilities through use of short term assets. The main purpose of liquidity analysis is to help creditors and lenders in their decision making on whether to extend the credit or debt to company. It is also use by the management to check the level of short term company have to pay the short term liabilities.
Return on Assets Ratio
Current Ratio or Working Capital Ratio
Current ratio is an indicator of company ability meets the short term obligations. This ratio checks whether company has enough resources to meet the liabilities in next 12 months.
Formula: Current Assets/Current Liabilities (Fabozzi, 2008)
The current ratio of Billabong Group was 2.29 times in year 2016 that was increased to 2.42 times in year 2017. In both the years the current ratios has crossed the ideal benchmark of 2:1. The increase in current ratio from 2016 to 2017 clearly indicates the improvement in liquidity position of Billabong in year 2017 as compared to year 2016. Billabong has current assets more than 2 times the current liabilities with major portion consist of inventory that shows company has blocked some part of its current assets in inventory and has failed to convert them into sales at proper interval of time.
Quick Asset Ratio or Acid test Ratio
It measures the short term liquidity position of the company similarly like to current ratio but it does take into account the inventory value while making calculating the quick assets. The main reason behind not considering the inventory in calculation of quick assets is its nature of not converting into cash and cash equivalents in short period of time.
Formula: Quick Assets/Current Liabilities (Papadopoulos, 2011)
The acid test ratio of Billabong was 1.38 times in year 2016 and it was 1.49 times in year 2017 that clearly shows strong liquidity performance of Billabong in both the years. However the liquidity performance has improved as acid test ratio has been increased in year 2017 as compared to year 2016.
The financial leverage ratios are also known as solvency ratios as it measures the ability of company to meet the long term liabilities as and when it fall due. The purpose of gearing ratio is to measure the long term solvency position of the company through comparing the debts of the company to its assets.
Debt to Equity Ratio
Debt equity ratio is the measure relative proportion of debt and equity capital that has been used to finance the assets of the company.
Formula: Total Liabilities/Total Equity (Brigham & Houston, 2012)
The debt to equity ratio of Billabong was 1.93 times in year 2016 and it was increased to 2.30 times in year 2017. It can be said that Billabong has been highly leveraged entity as major of its assets has financed through used of debt capital.
Net Profit Margin
Interest Coverage ratio
It is gearing ratio that measures company’s ability to meet the interest expenses. The lower or negative interest coverage ratio signifies company has high debt burden and there is possibility of bankruptcy of the company. High interest coverage ratio is good for company.
Formula: EBIT/Net Interest (Brealey, Myers & Marcus, 2010)
Interest coverage ratio was 0.47 times in year 2016 and it further reduced to negative 2.18 times in year 2017. The lower or negative interest coverage ratio signifies that Billabong has high debt capital and also there is chance of bankruptcy of the company.
Investment analysis aims to assist the investors as it tells the market performance of a company. This analyse provides the information on return that investors has got while investing the company shares.
Earnings per Share (EPS)
This ratio tells amount of net profit earned by the shareholders on each common equity share held by them.
Formula: Net profit attributable to shareholders / Number of equity shares (Baker & Nofsinger, 2010)
EPS of Billabong was negative in year 2016 as well as in year 2017 that indicates poor financial position of the company in the market. There was decreasing trend in this ratio that clearly signifies that future health of company was not good.
Conclusion
On the basis of overall ratio analysis of Billabong for year 2016 and year 2017 it has been revealed that overall financial performance has declined in year 2017 as compared to year 2016. Profitability analysis of Billabong for year 2016 and 2017 clearly reveals that in year 2017 Billabong has generated loss that widely impacts the profitability performance. There is no scope that signifies that profitability performance will improve in future years. Efficiency analysis is the best indicator of manager’s effectiveness to utilize the resources of the company to generate good revenue and to collect the receivables from the debtors. The efficiency analysis of Billabong clearly shows managers ineffectiveness collection of accounts receivables has increased and also the inventory takes times to convert into cost of goods sold. Liquidity performance was satisfactory as company was able to pay current liabilities as and when it arises. The gearing analysis reveals poor long term solvency position of Billabong in both the years and there is very high chance that company can opt for bankruptcy of condition does not improve in future. There was very bad information for investors as Billabong has failed to provide required returns to them.
It is recommended to the management or directors of the company on the basis of overall analyses carried out in the report that the company should take strong measure for improving its profitability position. This is necessary for creating value for the shareholders and thus ensuring its continued growth and development. This can be done by taking effective steps for reducing the operational costs and the cost of goods sold for improving the revenue realized through reduction in the operational expenses. Also, it is recommended to the current and potential equity investors that they should at present refrain themselves from investing in the company. The investors need to examine the past, present and predicted future performance of the company before taking investment decision. They need to wait and analyze its future performance before making any final investment decision (Koller, 2015).
References
Annual Report. (2017). Billabong. Retrieved September 9, 2018 from Billabong Annual Report 2017
Baker, H.K. & Nofsinger, J.R. (2010). Behavioral Finance: Investors, Corporations, and Markets. John Wiley & Sons.
Brealey, R., Myers, S.C. & Marcus, A.J. (2010). Fundamentals of Corporate Finance. Mc Graw Hill.
Brigham, F., & Houston.J. (2012). Fundamentals of financial management. Cengage Learning.
Deegan, C., (2013). Financial accounting theory. McGraw-Hill Education Australia.
Fabozzi, F. (2008). The Complete CFO Handbook: From Accounting to Accountability. John Wiley & Sons.
Firer, C. (2012). Fundamentals of Corporate Finance. McGraw-Hill Companies, Inc.
Koller, T. (2015). Valuation: Measuring and Managing the Value of Companies. John Wiley & Sons.
Papadopoulos, P. (2011). Investment Report – Fundamental Analysis/ Ratio Analysis: Comparative Approach between two FTSE 100 corporations Vodafone plc and British Telecom Group. GRIN Verlag.
Tracy, A. (2012). Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net.
