Executive Summary of Financial Performance
A comparative review of the financial statements of Billabong International Ltd between the two financial years 2007/2008 and 2008/2009 reveal the following information:
Operating Profits
In the year 2007/2008, the consolidated profits attributable to shareholders of Billabong International Ltd were $ 176,380,000 out of which $ 28,685,000 was directly from the parent company and the rest from subsidiary segments. In the subsequent year, the consolidated profits decreased to $ 152,839,000 of which the contribution of the parent company was $ 117,873,000 (Billabong International Limited, 2008:5).
Dividends
A final dividend of 27.0 cents per share was approved for issue by the board of directors in the fiscal year 2007/2008 total dividend paid was $ 56,007,000. An interim fully franked ordinary dividend of 27.0 cents per share was also fully paid; the total interim dividend paid was also. $ 56,007,000.Conversely, a final ordinary and fully franked dividend of 28.5 cents per share was issued by the board for the financial year 2008/2009.This totaled $ 59,120,000. An interim dividend partially franked to 45% at 27.0 cents was issued; this totaled $ 56,667,000 (Billabong International Limited, 2010:10).
Earnings per Share
The year 2007/2008 saw the group record basic Earnings per Share (EPS) of 81.8 cents and a diluted EPS of 81.2 cents. In the year 2008/2009 the basic EPS was reduced to 69.2 cents, the diluted EPS was also reduced to 68.7 cents.
Total Assets
This was recorded at $ 1,625,461,000 for the year 2007/2008 and increased significantly in the subsequent year to stand at $ 2,220,512,000.
Total Equity & Liabilities
In the year 2007/2008 total liabilities were $ 795,103,000 and up $ 1,176,936,000 in the subsequent year. Total equity for 2007/2008 was $ 402,196,000 and up in 2008/2009 to $ 795,103,000.
Company Overview Profile
Located in Burleigh Heads Queensland Australia, Billabong International Ltd is engaged in the wholesaling and large-scale retailing of surf, skate, snow apparel and other accessories. It is also engaged in the key licensing of its products in regions around the world. The group was established in 1973 by Gordon and Rena Merchants.
The group has segments operating in Australasia, America and Europe and is audited by Price Waterhouse Coopers. It presents its statements in Australian currency. Its shares were listed on the Australian Stock Exchange in the year 2000.
Profitability Analysis
Profitability measures the capacity of a business enterprise to bring in revenues and sustain expansion and growth into the foreseeable future. An entity’s level of profitability is essentially based on its statement of comprehensive income. Profitability ratios include Gross Profit Margin, Operating Margin/Return on Sales, Net profit margin and Return on assets. These were as shown below for the two comparative periods:
2007/2008 2008/2009
Gross Profit Margin 18, 13 % 12.30%
Operating Margin 25% 17%
Net profit Margin 13% 9%
Return on Assets 10.85% 6.88%
Solvency Analysis
Also referred to as liquidity analysis, this measures the capability of the business to cover its obligations in terms of debts to creditors as well as other related parties. Solvency ratios indicate the firm’s chances of staying afloat by ensuring that liabilities due to related parties are adequately covered in full and in time. A business that is considered solvent is capable of not only sustaining positive cash flows but also meeting its current transactional and operational obligations (Weygandt, Kieso & Kell, 1996:45). The most significant solvency ratios are the current ratio and the quick ratio/acid test ratio
2007/2008 2008/2009
Current Ratio 1.95 0.211
Acid Test Ratio 2.10 2.48
Efficiency Analysis
It measures the stability of the firm and the degree of effectiveness that will enable the firm to continue its operations in the long run while minimizing incurred wastages and losses. This analysis is more holistic as it considers the use of the entity’s income statement, balance sheet as well as other external economic and noneconomic factors surrounding the business. The efficiency ratios include the average collection period, average payment period, stock turnover ratio and the receivables turnover ratio.
2007/2008 2008/2009
Average Collection Period 81.56 days 62.30 days
Average Payment Period 72.32 days 75.5d days
Stock Turn over Ratio 2.0 times 1.92 times
Receivables Turn Over ratio 5, 75 times 6.88 times
Investment ratios
Also known as marketing ratios, these ratios measure the actual response of investors, both potential and current, on the companies stocks and general profitability. The key ratio in this category is the Earnings per Share which has been comparatively disclosed in the executive summary of financial performance above. The EPS ratio is critical because it will influence the decisions of both current and potential investors. Potential investors will be attracted to a firm with high EPS.
Recommendations
Generally, the performance of Billabong International Ltd was better in the fiscal year 2007/2008 than in the year 2008/2009. This is because of the recorded profits which are superior in 2008/2009 and a better EPS in the same year (both basic and diluted). This poor performance in 2009 is attributed to the fact there was an increase in the cost of sales. Also, this inferior performance is a result of the debtors taking longer to repay their obligations to the entity (took an average of 82 days in 2009 compared to 62 days) in the previous year. The group should therefore invest more in more efficient debt collection strategies (Groppelli & Nikbakht, 2000:210).
From the revision of the financial statements, the amount of reported profit for the year was significantly affected by a reduction of transactions conditions at the levels of consumption. This was particularly evident in the United States market, the effects of which can only be stabilized by the diminution in value of the Australian dollar against both the US Dollar and the euro. Sales revenues which also constitute the sale of royalties to third parties was also seen to have increased significantly by about 23% this gains were however counseled out by increases in the cost of sales and operating expenses. There should therefore be deliberate efforts by the entity to reduce its cost of doing business in order to improve its profit margins.
The stability in the consolidated figure for gross margin in the two years comparatively can be attributed to a number of factors which include the strength of the purchase hedge rates which were sufficiently applied in the Australian and European markets. This was neutralized by increased product costing expenses. The other factor is the increased levels of promotional and marketing activities in the American market even within a challenging business environment. This boosted revenues more and hence should be encouraged in other markets where segments are operating. Finally, another reason that could have also caused reduced performance in the year 2008/2009 was the dilutionary effect that resulted from the acquisition of DaKine Company. The performance of this new company prior to the acquisition was not stable because of the comprehensive of distributors that were mainly third party (Birt, et al., 2008:105).
Limitations of Ratio Analysis
The reliance on the use of financial ratios to analyze the performance of a business is inadequate because of the fact that the information used is not absolute and can be subjected to computational errors as well as round-off errors. A round-up or a round down of a particular result estimate may fundamentally alter the results of a computation, especially when large figures are involved. This is however subject to the principle of materiality.
It is also likely that seasonal factors and fluctuations in the market dynamics beyond the control of the business may have a bearing on some of the computed ratios hence making the results of computation less representative. Another danger of absolute reliance on the use of financial ratios is posed by the fact that ratios are basically estimates; they are used as a means to an end rather than being considered as the ultimate end in themselves. Ratios should only be used to help give a trend and explain superficial facts but not used in any other analysis that requires precision and detail.
Ratios will not explain the effects of exogenous factors and other non-measurable (arbitrary) investor attributes like perceptions and attitudes of potential investors. It would be difficult, for instance, to employ the use of accounting ratios to bring out what the feelings of an enraged investor would be on the management and the board for failure to declare dividends or the attitudes of a manager towards a forceful take over bid of his company. Such human elements are unlikely to be clearly captured in the financial statements by the use of accounting ratios.
The use ratio analysis may also be subject to drastic changes like the changes in accounting policies or government tax regimes (Kieso, Weygandt & Warfield, and 2007:1320). The results obtained from a ratio analysis that attempts to compare two different companies operating within the same industry may be insufficient and inaccurate because of the use of different accounting policies in these firms. An example would be the firms using different terms of credit, this may bring variations in the results of ratios affecting creditors or debtors. An entity that offers a credit period of thirty days to its customers will definitely have a different result from another which offers a forty-five-day or a sixty-day credit period. A blanket comparison in the industry will however not point out these unique disparities and therefore may not give a perfect comparison in terms of performance and efficiency. It will therefore be unwise to use certain ratios as blanket comparisons across industries.
Appendix
The appendix below indicates the formulas used to arrive at the computations above.
Profitability ratios
Gross Profit Margin
Net Profit margin
Return on Sales
Return on Assets
Solvency Ratios
Current Ratio
Quick Ratio
Efficiency Ratios
Average Collection Period
Average Payment Period
Stock turn over ratio
Where COGS = Cost of Goods Sold
Receivables turn over ratio
Investment Ratios
Earnings per Share
Reference list
Billabong International Limited 2010, 2007-2008 Full Financial Report, Learning Advisers and Librarians, Sidney.
Billabong International Limited, 2008 Full Financial Report, Learning Advisers and Librarians, Sidney.
Birt, J. et al. 2008, Accounting: Business Reporting for Decision Making, Wiley, Melbourne.
Groppelli, A & Nikbakht, E 2000, Finance, 4th ed. Barron’s Educational Series, Inc., Sydney.
Kieso, D, Weygandt, J & Warfield, T 2007, Intermediate Accounting, Wiley & Sons, Hoboken, NJ.
Weygandt, J, Kieso, D & Kell, W 1996, Accounting Principles, John Wiley & Sons, Inc., Brisbane.