Analysis Of Profitability, Efficiency, Liquidity, Gearing, And Investment Performance Of Billabong Limited

Introduction to Billabong Limited

Question:

The basic requirement is to make a general analysis of the profitability, efficiency, liquidity, gearing (leverage), and investment performance of Billabong Limited using the information available in the company’s 2013 annual report available available at the following address: Billaboing Annual Report 2013 

Students are to use the ‘Consolidated’ data in conducting their analysis.  Note that the 2013 annual report contains comparative data for the year 2012. 

Billabong International Limited (BBL) is an Australian based surfing merchandise organization listed in the Australia’s stock exchange. The company issues around 252547370 shares and for the purpose of effective business activities the company has divided the market into four main parts namely Australia, America, Europe and other countries. Initially the company gained a high NPV of $146.0 million in 2012 however the company’s sells reduced making the company’s ratios non profitable. The report shows that although the company is able to pay off the short term debts however the payment of long term debts is difficult for the company. The company also needs to improve its revenue by increasing the sales of the merchandise so that the profitability ratios can be improved.

Billabong International limited produces surfing accessories and clothing products under different brands. The company was initially founded in the year 1973 however the company became listed in the Australian Securities exchange in 2000. The company offers more than 2200 products including swim shorts, pants, jeans, swim wear, sports eyewear for men and women (Billabong Annual Report 2013, 2015). Currently recording around $ 1.34 million revenue, the company operates in about 60 countries. The report here deals in analyzing the financial position of the company with respect to calculation of the profitability, liquidity, and gearing and efficiency ratios. The report shows the comparison of the ratios between 2012 and 2013 and tries to analyze the changes in the ratios.

Profitability ratios

The profitability ratio generally helps to make comparisons between the income statement accounts and shows the company’s ability to generate profits from its operations (Al-Qaisi, 2011). The following profitability ratios will help the investors of Billabong to judge the company’s return based on investment made by the shareholders.

Ratios	2013	2012
G.P ratio	0.492735 or 49%	0.470034 or 47%
N.P ratio	62.49381%	18.95229 %
Return on assets ratio	54.36654 %	12.16427 %
Return on capital employed	2.068228	0.355936
Return on equity	1.299003	0.246109

Gross margin ratio: The GP ratio compares the gross profit against the net sales. The ratio shows the how profitably Billabong is able to sell its product and merchandise (Garrett & James III, 2013). The GP margin is higher in 2013 indicating that the company has been able to sell more of its merchandize profitably. The difference of 2% in the GP ratio shows that the overall profit from the sell has remained same over the years.

Net profit margin ratio: This ratio directly measures the percentage of sales that is made up of net income. The analysis shows that Billabong is incurring net expense or loss on the sales. Hence the revenue of 2013 has also decreased. However compared to 2012 the net loss has increased to 62%. This is because the other incomes in the year 2013 have decreased by 8%.

Return on assets: This ratio measures the effective return of the company on the investment. The ratio is an indicator for the investors planning to make further investments in the company (Kheradyar, Ibrahim & Nor, 2011). Since Billabong is experiencing net loss hence the lower return on assets in 2012 around 12% suggests that the company had incurred less amount of loss on the assets compared to 2013 where the return is 54%. The ratio shows that Billabong is not able to use its assets profitably.

Profitability ratios analysis

Return on capital employed:  This ratio shows how much profit each dollar of employed capital generates (Garrett & James III, 2013). However in Billabong the company experiences net operating loss at the end of both the years 2013 and 2012. Hence lower rate is favorable in suggesting that the loss is low and the capital is more profitably used.

Return on equity: Return on equity measures the efficiency of the company to generate profits from the shareholders money. The net loss of Billabong for the consecutive years 2013 and 2012 has made the company experience negative ROE.

Efficiency ratios

According to Yap (2013) the efficiency ratio are also known as the activity ratios and measures the utilization power of the companies in terms of their assets in order to generate income. If the companies are efficient with the resources then they are able to generate high profitable ratios.

Ratios	2013	2012
Inventory turnover ratio	0.460875	2.384379
Total asset turnover ratio	0.869951	0.641837
Working capital ratio	1.016119	1.470163
Accounts receivable turnover ratio	5.985841	4.662756
Accounts payable turnover ratio	4.800447	4.34794

Accounts receivable turnover ratio: This ratio indicates how effectively the company is able to collect its receivables in order to keep liquid cash for the business purpose (Najjar, 2013). The higher turnover ratio in 2013 indicates that the company is able to collect the cash from the customers soon and will be able to pay off the bills sooner.

Inventory turnover ratio: The ratio shows the capability of the company to control the merchandise. The ratio determines the overspending in case of inventory and also over storage of the inventory in the company premises. The low inventory turnover ratio indicates that Billabong is not able to sell its inventory and the closing amount of inventory in the god won is higher than the clearance stock. This is bad indication in terms of the liquidity of the company. If the inventory turnover ratio is not high then the company will not be able to generate liquid cash.

Total asset turnover ratio: This ratio shows how efficiently the company uses its assets in order to generate sales (Yap, 2013). The ratio for both the years are low hence it maybe concluded that Billabong is not able to use its assets effectively. The low ratio suggests that the company is not able to make any profit out of the resources.

Accounts payable turnover ratio: This ratio determines the time span of how effectively the company is able to pay off the creditors and the vendors (Wiehle et al. 2012). The ratio is 4.8 in case of 2013 and 4.3 in case of 2012 which indicates that the company is able to pay off the creditors smoothly from the cash collected from the debtors.

Working capital ratio: The working capital ratio is also known as a measurement of the liquidity of the company. The ratio measures the current assets in terms of the total current liabilities. This enables the investors to understand the liquid position of the company. The benchmark for a favorable working capital ratio is 1. Companies having a ratio of 1 are considered to be neither in a risky situation nor in a favorable situation. Billabong shows a ratio of 1.47 in 2012 which is higher than that of 2013 which is around 1.01. Hence the analysis suggests that the company is in a risky situation although the ratio is not unfavorable but the liquidity position of the company is risky (Wiehle et al. 2012).

Ratios	2013	2012
Current ratio	1.016119	1.470163
Quick ratio	0.580514	0.99064

Efficiency ratios analysis

Current ratio: The current ratio is same as the working capital ratio and suggests that the company’s liquidity position is at risk. The company would not be able to pay off the short term liabilities if the cash is reduced or spent in some other activities. The favorable current ratio is 2:1 and hence the ratio is lower than the favorable ratio hence the liquidity position of the company is risky.

Quick ratio: The quick ratio or the acid test ratio measures the liquidity of the company by showing the ability of the company to pay off its current liabilities with the help of the quick assets which includes cash and cash equivalents. The favorable quick ratio is 1:1 and the company shows a ratio lower than the favorable ratio hence it suggests that the company is not in a favorable cash position (Kheradyar, Ibrahim & Nor, 2011).

The capital gearing ratio focuses on the capital structure of the company. The ratio of Billabong shows the proportion of debt and the proportion of equity within the capital structure of the company (Najjar, 2013). The company has a gearing ratio lower than 25% hence Billabong is a low gearing company. Hence it can be suggested that the capital structure of the company is safe and cautious. The capital structure of Billabong comprises mainly of the long term borrowings. Since Billabong is not a mature company hence a low gearing ratio is favorable for the company.

Ratios	2013	2012
Capital gearing ratio	18.98582	14.96193

The investment ratios measures the value that the shareholders are expected to receive from the total investment. The PE ratio measures the future performance of the company. Billabong shows a high PE ratio in 2013 which I an indicator of positive future performance. However Wiehle et al. (2012) suggested that excessive higher PE ratio may create false hope for the investors and they would anticipate higher performance and growth in future. Hence a medium PE ratio is favorable.

Dividends yield ratio shows the dividend per share rate to the current share price. The current share price of Billabong for the purpose of calculation I assumed to be 30^th June 2012 and 30the June 2013.

Ratios	2013	2012
Price earnings ratio	422.56	233.8844
Dividend yield ratio	0.606543	0.235507
Earnings per share	-154	-805

The analysis of the profitability and liquidity ratios shows that the company is not in a favorable financial position. The company needs to increase the merchandize sales in order to increase the profitability level. However the company has a favorable gearing ratio and a favorable accounts payable a accounts receivable ratio which shows that the working capital cycle of Billabong is favorable.

Conclusion

The report shows the analysis of the different ratios and helps the investors to understand the profitability of the investment made in Billabong. The report further focuses on the comparison showing that the company was more profitable in 2012 in comparison to 2013. Although the company shows a high PE ratio however the PE ratio may be misleading. 

References

Journals

Al-Qaisi, K. (2011). Predicting the Profit per Share Using Financial Ratios. AJFA, 3(1). doi:10.5296/ajfa.v3i1.1027

Garrett, S., & James III, R. (2013). Financial Ratios and Perceived Household Financial Satisfaction. Journal Of Financial Therapy, 4(1). doi:10.4148/jft.v4i1.1839

Kheradyar, S., Ibrahim, I., & Nor, F. (2011). Stock Return Predictability with Financial Ratios. International Journal Of Trade, Economics And Finance, 391-396. doi:10.7763/ijtef.2011.v2.137

Najjar, N. (2013). Can Financial Ratios Reliably Measure the Performance of Banks in Bahrain?. International Journal Of Economics And Finance, 5(3). doi:10.5539/ijef.v5n3p152

Wiehle, U., Diegelmann, M., Deter, H., Schömig, P., & Rolf, M. (2012). 100 financial ratios. Wiesbaden: Cometis.

Yap, B. (2013). The Application of Principal Component Analysis in the Selection of Industry Specific Financial Ratios. BJEMT, 3(3), 242-252. doi:10.9734/bjemt/2013/4125

Websites

Billabong Annual Report 2013  (2015). Retrieved 29 January 2015, from https://Billabong Annual Report 2013 

Profitability Ratios
Ratios	Formula	2013	2012
G.P ratio	Gross profit/ Net sales	0.492735	0.470034
N.P ratio	Net expense/ net sales	62.49381	18.95229
Return on assets ratio	Net expense/Average total assets	54.36654	12.16427
Return on capital employed	Net operating loss / (Total assets – current liabilities)	2.068228	0.355936
Return on equity	Net income/Shareholder’s equity	1.299003	0.246109

Workings	2013	2012
Average total assets	1546306	2249917
Total assets – current liabilities	400247	1468426
Shareholders’ equity	647168	1112052

Efficiency ratios
Ratios	Formula	2013	2012
Inventory turnover ratio	Cost of goods sold / Average inventory	0.460875	2.384379
Total asset turnover ratio	Net sales / Average total assets	0.869951	0.641837
Working capital ratio	Current assets / current liabilities	1.016119	1.470163
Accounts receivable turnover ratio	Revenue / average accounts receivable	5.985841	4.662756
Accounts payable turnover ratio	Revenue / average accounts payable	4.800447	4.34794

Workings	2013	2012
Average inventory	1480614	320969.5
Average accounts receivable	224732	309705
Average accounts payable	280226	332129.5

Liquidity ratios
Ratios	Formula	2013	2012
Current ratio	Current assets / current liabilities	1.016119	1.470163
Quick ratio	(Total current assets – Inventory – prepaid expense)/ current liabilities	0.580514	0.99064

Workings	2013	2012
Quick ratio	355562	605720

Gearing ratios
Ratios	Formula	2013	2012
Capital gearing ratio	(Long term liabilities / capital employed)*100	18.98582	14.96193

Workings	2013	2012
Capital employed (Share capital + retained earnings + long term liabilities)	1656794	1531139

Investment ratios
Ratios	formula	2013	2012
Price earnings ratio	Market value per share / earning per share	422.56	233.8844
Dividend yield ratio	Cash dividends per share / market value per share	0.606543	0.235507
Earnings per share	net income/ average outstanding common shares	-154	-805

Workings	2013	2012
Dividend per share	0.084916	0.209602