BILABONG Australia †financial statement analysis assignment Essay

BILABONG Australia pecuniary statement summary assignmentACCT 5910- condescension summary and ValuationContents decision maker summary3Executive summaryThe purpose of report is to provide a comprehensive analytic thinking of Billabong International restrict. This report is earlier base on a trend depth psychology of Billabongs fiscal carrying into action dimensions from 2009 to 2011, common coat table of the balance sheet and income statement and analysis of Billabongs cash flows. Expect to provide a basis understanding of the come withs recent situation and future valuation. The lodge we compared, as a part of the surfwear labor is Quiksilver. Billabong is a multi-brand Australian company that was established by Gordon and Rena in 1973 in halcyon Coast. After decades of expansion and restructu proportionalityn of bullyization, Billabongs shares have publicly listed on the ASX. Using four-step to analysis Billabong which including business scheme analysis, invoice analysis, fiscal ratio analysis and prospective analysis that would help a great report in valuation of Billabong based on its current market situation.Business st directgy includes continuous acquisitions and emerges the likes of taking everyplace strong brand and the products in the same gross gross sales area and expansion internationally by reaching more than 100 countries around the world. Billabongs multicultural design of products featured unsanded-fangled and fashion captures client loyalty among targeted y egressh group. In order to ensure the companys accounting randomness reflects its business reality. Three steps of accounting adjustments are taken in preparation for m whizztary analysis, considers and valuation. First is to recast financial statements. This contains re-classifying accounts and preparing govern balance sheet and income statement, victimization both reported statements and development from footnotes. After that is to identify accounts that s hould be adjusted. By analyzing notes and reports, trine accounts are likely to containdistortion information provision for doubtful debts, leased assets and liabilities and goodwill. Last step is to make adjustments with accounting equation using more appropriate estimations and presumptions for the fiscal year from 2009 to 2011. The goodability of Billabong is un inactive from financial analysis.However, compare with the new(prenominal) competing company, Billabong has highschooler roe and ROA. The ability of Billabong sale its inventories worseningd as its inventory dollar volume ratio decreased. It had a good concur in fluidness with relative constant current ratio and quick ratio. However, it had decreased ability on unitize semipermanent asset and control its debt structure. Lacking of good control on debts structure and whitethorn face burden on debt expense, which may result a high financial risk and imperfect solvency. From prospective analysis, Billabong may be more profitable in the future aft(prenominal) the reorganization, the decreasing sales growing may be appeared at first a couple of(prenominal) year and then emergence again. The hard roe of the company will be high than pull round year the company may have improve performance in the future. And the company may borrow or finance the truth for the operation or correcting the dividend.1. Introduction1.1 BackgroundBillabong is a famous Australian company with many brands, such as Element, Kustom and Xcel. Their main products are including clothing, watches and boardsports hardware. As surfboard became more popular, the company constantly expanded its scale and exported its goods to Japan, ground forces and Europe during the 1980s, after that Billabong achieve leader in surfing area. In the recent ten years, Billabong had restructured its capitalization with growing global opportunities in the boardsports sector.1.2 Business Strategy AnalysisThe business analysis through three aspects industry analysis, competitive analysis and corporate strategy analysis.a. Industry AnalysisWith the expansion of world economy, surfing is not only a sport but as well a life style and that leads to high demand of surfing products. The digit offirms enters that industry encumber increase as its attractive potential mesh and less barrier to enter into that industry. some(prenominal) companies have more bargaining power compared with their supplier and customer as their famous brand and diversified products could encourage suppliers to have long term business family relationship with the company and satisfy the unique needs of customers. Overall, the prospects of this industry are optimistic it did not shock likewise much under the downturn of economy. shoping is an increasingly popular and puff up-known culture companies need to move innovation in order to satisfy customers needs.b. Competitive AnalysisAs crook of firms in the industry keeps increasing, grea ter competition force firms to earn more market share, innovate substitutes, experience unalikeiate products and be cost leadership to keep or improve their position in the industry. For example, somewhat of the products of Billabong and Quiksilver are similar, consumer will choose to buy the one with press down price if they have similar function, or buy the one with higher price if the product is different from others. Thus, a firm could run well if it has different products and lower cost compared with rivals.c. Corporate Strategy AnalysisBillabong hires different design teams for each different region to satisfy with customers from different cultural with different traditions and tastes. Billabong is expansion through strategic takeovers during last 10 years looking increase profitability through business synergies. lively the group has direct company on operations and more than 50 countries. sales are more than 100 countries under 13 different brands. The strategies expan sion has been changing along with companys issue. Billabong started with exportation of products to the USA and also licenced follow by relocated production off shore FDI is the current global expansion strategy. Billabong buys slang licenses to take control of global operations and requires the existing business.2. accountancy analysisBillabongs performance from 2009 to 2011 shown downward(prenominal)ly trends inprofitability and market performance, on that pointfore, it is possible that manipulation exists. In order to compare Billabong with other companies, standardized format and accounting equation-based adjustments are required.2.1. Recast financial statementsBeca lend oneself of the residuums in the format of Billabongs financial statements over years and that with other organizations, standardized financial statements should be made in preparation for accounting analysis, financial analysis and prospective analysis.2.2 Accounting adjustments2.2.1 Adjustments of gross s and provision for doubtful debts As discharge be seen in appendix, PDD (6.4%) has declined since 2007. wherefore PDD should be adjusted to 6.4% for the years 2008-2011. At the end of the fiscal year, the adjustments should be made to recognize PDD check to the adjustment calculation (Appendix A table (1)).2.2.2 Adjustments of leased assets and liabilitiesAs disclosed in Billabongs financial report, it leases plant, machinery and warehouses of large dollar amount in order to maintain normal operation. Most of the leases are sort out as run lease. Thus, we need to record leases as assets and liabilities on balance sheet to make similarity with other companies (Appendix A table (2, 3, and 4)).2.2.3 Adjustments of goodwillBy calculating the proportion of goodwill in wide non-current asset from 2007 to 2011, it can be seen that instead of being impaired, goodwill increased substantially from 12.94% to 42.13%. Set 12.94% as the standard level and over ranged goodwill could be rec ognized (Appendix A table (5)). 3. Financial Analysis ratio analysis include time series and cross sectional analysis has been performed in this case to take gumption investors direct understanding of the companys historical and recent performance.3.1 Dupont Analysis delivers 1Dupont (Billabong)200920102011NOPAT/Sales0.11410.12110.0989 AT1.48371.24281.4528= ROA0.16920.15040.1437Spread0.05970.09360.0945 NFL0.19930.18110.4031= Financial Leverage Gain0.01190.01690.0381NI security deposit0.09940.11280.0853 roe ( ROA + Spread * NFL)0.18110.16740.1818The Dupont entree can be decomposed into items as ROA, AT and net profit marginwhich exists downward in 2011 compared with 2009. However, Billabong makes the new borrowings in its balance sheet and increases its financial leverage in 2011. Moreover, hard roe is affected by ROA and financial leverage gain. As financial leverage increases and financial leverage gain increase, then ROE is back up to 0.1818 (almost similar to 2009) in 2011.Mo reover, the enhancement in AT and leverage ratio also variety show the ROE. The greater AT can increase companys revenue. The higher leverage ratio reflected the lower capital cost. Consequently, high ROE of the company is represented the strong profitability in the same industry comparison, and company can increase ROE through changing the leverage by borrowing.3.2 Operating solicitude AnalysisExhibits 2Profitability (Billabong)200920102011Pre-Tax Income Margin13.25%15.23%9.11%NI Margin9.94%11.28%8.53%EBIT Margin15.23%16.39%10.58%EBITDA Margin17.51%18.78%13.06%NOPAT Margin11.41%12.11%9.89%From bring out 2, these margin ratios has increased from 2009 to 2010, and declined between 2010 and 2011. Pre- revenue enhancement income margin is unstable especially dramatically decrease from 15.23% to 9.11% in 2010 and 2011 due(p) to revenue decreasing and expenses increasing. NI margin has been low, it had been increase from 9.94% to 11.28% between 2009 and 2010, but it again fell to 8. 53% in 2011. Billabong should reduce its operating and interest expenses to increase the margin of net income, EBIT and EBITDA. NOPAT margin clearly shows the operating performance of Billabong is unstable. Therefore, Billabong should reduce expenses to increase revenue.Exhibits 3Profitability (Quiksilver)200920102011Pre-Tax Income Margin-0.33%0.65%-1.82%NI Margin-3.70%-0.44%-0.91%EBIT Margin-0.33%7.03%2.13%EBITDA Margin2.45%9.78%4.79%NOPAT Margin-9.70%-0.34%-0.92%From comparison, Quiksilver has lower performance than Billabong just simply from profitability analysis. Because pre-tax income margin, NI margin and NOPAT margin have shown prohibit value from 2009 to 2011, only EBIT margin and EBITD margin are displayed positive value for these three periods. That indicates Quiksilver has higher expenses on interest, tax, depreciation and amortization than revenues.Exhibits 4From exhibits 4, Billabong has higher ROA and ROE than Quiksilver for the last three years. It must be pointed o ut that ROA of Quiksilver has decreased to -65.33% in 2009. Higher sales and expenses of the company can lead to lower ROE and ROA. In terms of ROA and ROE which might attributed tolower net profit margin. Moreover, compared to Quiksilver, Billabong has a relatively stable ROE and ROA from 2009 to 2011. Overall, Billabong has better performance than Quiksilver from probability ratio analysis.3.3 Investment charge Analysis3.3.1 Working Capital heeda. Inventory TurnoverExhibits 5Billabongs inventory ratio decreased from 3.08 in 2009 to 2.23 in 2011, its indicates that the ability of Billabong sale its inventories are decreasing. In contrast, Quicksilver also has decreased ratio but with higher overall level than Billabong. It implies that Quiksilver may face a problem of getting sufficient inventory to tackle sales demand.Exhibits 6b. Receivable Turnover RatioExhibits 6 indicates that Billabong operate on a course credit basis. As Billabong increase receivables with store benefit c ard, with low account receivable turnover ratio. This low ratio implies that Billabong might need to re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm.c. Payable turnover ratioPayable ratio decreased from 2.32 in 2009 to 1.77 in 2011. Its indicates that Billabong is taking longer time to pay its suppliers than before.d. Operating Working capital turnover ratioExhibits 7The working capital ratio of Billabong keeps increase from 5.17 in 2009 to 6.00 in 2011 (5.59 on fair(a)). Its indicates that the effectiveness ofBillabong using working capital to obtain revenue increase. However, the average ratio of Quiksilver (3.84) is quite lower.3.3.2 Long-Term Asset ManagementExhibits 8The net long-term AT ratio of Billabong decreased from 1.63 in 2009 to 1.25 in 2011. It implies that there is a decline trend of Billabongs long-term asset utilization. Compared with Billabong, Quiksilver have quite stable net long -term asset turnover (2.30,2.21,2.37 respectively), which indicate that Quiksilver could utilizing its resources to increase its production more efficiently.b. PP&E TurnoverExhibits 9From exhibits 9, there is a significant increase of Billabongs PP&E turnover ratio from 4.60 in 2009 to 6.41 in 2010. It implies that BBG use its PP&E efficiently during that period, however it following a critical decrease from 6.41 to 4.34 in 2011. As the sales increased by $13299 from 2009 to 2011, too much investment in plant and equipment may be the author of decreased PP&E turnover ratio. We can conclude that Billabong has been utilizing its fixed asset from 2009 to 2010 better than from 2010 to 2011.3.4Financial Management Analysis3.4.1Short-Term LiquidityExhibits 10Billabong200920102011AverageQuiksilverCurrent Ratio2.762.101.852.242.06Quick Ratio1.991.441.041.491.33Cash Ratio0.910.510.300.570.46Overall, exhibits 10 illustrate the liquidity ratios of Billabong did not change much from 2009 to 20 11 and Billabong had a good control in liquidity. From the analysis of the past three years, its indicated that the consistently falling of Billabongs current ratio is due to a higher level of liabilities relative to assets. Current ratio produces a value thats large than one means the current assets are greater than the current liabilities. Quick ratio also produces a value thats large than one implies that Billabong has very less dependency on inventory or other less current assets to liquidate short-run debt.3.4.2Debt and Long-Term Solvencya. Debt RatiosExhibits 11The value of Billabongs D/E decreased from 0.49 in 2009 to 0.36 in 2010 andthen increase to 0.53 in 2011. The reason for this change is that debt structure and policies of Billabong was changed during the three years. Similarly, as total debts change from 2009 to 2011, L/E and pass debt to righteousness had the same trend to D/E.a. Coverage RatiosBillabong200920102011AverageQuiksilverFinancial leverage ratio0.490.360 .530.460.45Interest Coverage ratio-2.34-5.33-4.41-4.03-4.59Exhibits 12 two firm have similar financial leverage ratio which means that each $1 of equity supports for $0.45 or $0.46 of total assets. The interest expense of the firm ($50840, $38367 and $50072 respectively) shows that Billabong had no good control on debts structure. Both firms interest coverage ratio is negatively charged indicates that they may face huge essay on debt expense which may result a high financial risk and weak solvency. Exhibits 13Billabong200920102011AverageD/E0.490.360.530.46Retention Rate (b=1-D/E)0.510.640.470.54ROE0.180.170.180.18Sustainable Growth Rate (g=bxROE)0.090.110.090.10Exhibit 13 shows the changes in dividend payout ratio, retention rate and ROE from 2009 to 2011, which are used to generate the sustainable growth rate. On average, dividend payout ratio is 46%, retention rate is 54% and ROE is 18%. Thus, the growth rate is 8%.3.5 Cash Flow AnalysisExhibits 14$000200920102011Net cash ( effl ux)/inflow from operating activities175,685187,24724,336Net cash (outflow)/inflow from investing actives-215,243-105,764-266,935Net cash (outflow)/inflow from financing activities249,873-192,102200,951Net (decrease)/increase in cash and cash equivalents210,315-110,619-41,648The CF from operating activities has increased from $175.685m to $187.247m, and then followed a rapidly decrease to $24.336m in 2011. Large payments to suppliers and employees are the main reason drive CF from operating activities down and further decrease net cash (outflow)/inflow from operating activities. The CF from investing activity had outflows from 2009 to 2011. As the Company has generally used its cash for purchase new subsidiary and this led to a net cash outflow in 2011.4. Forecasts and valuation4.1 Assumptions and forecastBillabong may be more profitable in the future after the reorganization as it will close underperforming stores based on the recent announcement. This would decrease expenses and i ncrease EBITDA and may further lead to a higher profit in next decade. Therefore, sales growth may appear downward sloping at first few years and then increase again. However, stable turnover ratio with approved new strategies may enhance the development of the company although the sales growth changes more than AT during the last few years.In addition, from the financial analysis, there will be a downward trend in ROAbut a rise in the financial leverage. As the result, it can be forecasted that the companys ROE may not vary obviously during next few years, which offset by the sum of ROA and financial leverage gain/loss. Therefore, some assumptions may be undertaken to forecast the performance of the company in the next decade and to estimate the PV of the company by using the aberrant earning valuation model.As the sales growth has a downward trend, the assumption for growth rate is 8.64% (average of last three years) in 2012 and it will keep constant in the future. It is forecast ed to be 9% during next 10 years as possible potential profit growth may appear after downward sales. For the NOPAT to sales ratio, it is assumed to 7.89% in 2012 due to an evident declined historical pattern. Moreover beginning net operating working capital to sales ratio might have a decreasing trend in the future based on the historical data.Thus, it is assumed to be 13.69% on average with puny decline than last year and it is believe that the change of working capital of the company is slight. As we use average method in this assumption, the beginning net operating long-term asset to sales ratio was 6.92% that also be considered as long-term rate as the change of the rate was insignificant. Ratios that we assumed based on historical (Appendix B table (1)).Overall, as the forecast under the assumptions, Billabong will have higher ROE and better performance than previous. The company may have insufficient operating assets to generate operating profit with relatively lower ROA. Fro m this, the company may borrow funds or finance equity to keep operating and pay dividends.4.2 Cost of capitalCost of capital is a critical method of evaluating companys asset, and it is using equation WACC=Vd/(Vd+Ve)*rd (1-T)+Ve/(Vd+Ve)*re, the cost of equity (re) is estimated by CAPM with a constant capital structure. Thus, it is assumed that the company has not change the capital structure. re is estimated to 16.13% in terms of the equity important (1.49), market premium (7%) and risk-free rate (5.7%) from market. The cost of debt is 6% according tohistorical YTM for the publicly traded bond. Therefore, WACC is reckon byExhibit 15Debt448,422 ($000)Equity1,109,155 ($000)Value of firm1,557,557 ($000)Cost of debt6%Cost of equity16.13%Tax rate28%WACC12.73%4.3 ValuationThe Discount Abnormal Earnings Valuation Model is a measure of determining the value of the company by abnormal earnings and discount rate. The abnormal earning is the difference between net income and change in equit y. Through forecasting the sales growth and NOPAT/sales ratio to forecast net income and working capital to sale ratio and long-term asset to sales ratio to calculate the change in equity.PV of equity is $436,567,619, which is discount by the abnormal earning each year and the number of share outstanding is 253,321,020. For that reason, the share price is estimated to be $1.72. A reduction in the abnormal earning during the assumption periods may result in lower share value compared with currently. (Appendix B table (2)).4.4 Sensitivity analysisThe sensitivity of the share price to changes was calculated in multi-factors, such as growth rate and beta. This analysis is performed to check how susceptible the company is to the changes in key factors in the future. Firstly, the share price shows a negative relationship with the growth rate when the growth rate changes to 10%.There will be 13% dropped on the share price if the growth rate increases by 11%. Secondly, the share price is in creasing if there is a decrease on the beta of the company. If the beta changes from 1.49 to 1.2, the share price will increase to $2.34, which closes to the companys current share price. Therefore, the share price is inversely affected by the change of beta.5. ConclusionAbove analysis would help a great deal in valuation of Billabong based on its current market situation. From time series analysis, Billabong had a good control in liquidity but it need to re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for themselves, increase account payable turnover as it take longer time to pay its suppliers than before and increase interest coverage ratio to lower their financial risk and strong their solvency. hitherto though, the working capital ratio increase from 2009 to 2011, but very high working capital turnover ratio does not show good position of company because its shows company is operating with high short-term de bt obligations.From cross sectional analysis, compared with Quiksilver, Billabong needs to improve ability of inventory management, asset utilization and debt control. From prospective analysis, revenue of Billabong increased, but expenses also increases at the same trend, the performance of Billabong is assuage unsatisfied. From valuation, Billabongs share value still decreases with sales decrease. Therefore, we highly recommend that investors should hold their shares or do not buy it if Billabong continuously cart track business as its historical model.Reference1. Billabong Investors Home. http//www.billabongbiz.com(Accessed 5 April 2012)2. Hoovers company profiles Billabong International Limitedhttp//www.answers.com/topic/billabong-international-ltd(Accessed 3 May 2012)3. Hoovers company profiles Quiksilver, Inc.http//www.answers.com/topic/quiksilver-inc(Accessed 3 May 2012)4. Palepu, K. G., P. M. Healy, V. Bernard, S. Wright, M. Bradbury, P. Lee. (2010) Business Analysis and V aluation Using Financial Statements Text and Cases. Asia Pacific Edition, Cengage Learning. 5. Quiksilver Investors Home. http//www.quiksilverinc.com(Accessed 13 April 2012)6. Calif, A.V. (2011), SIMA Retail Study Confirms world-shaking Changes-Surf Industrys Footwear, Westuits and Board Categories Lead Growth in 2010. http//www.sima.com/news-information/news-detail/id/108.aspx (7 August 2011, accessed 8 May 2012)7. Calif, A.V. (2009), Surf Industry Riding Out the Economic Storm Findings of SIMAs Retail Research Show resiliency of the Surf/Skate Industry. http//www.sima.com/news-information/news-detail/id/68.aspx (7 Sep 2009, accessed 8 May 2012)8. Wikinvest. http//www.wikinvest.com(Accessed 13 April 2012)AppendixAppendix A Accounting AnalysisTable 1 Worksheet adjustments to BBG balance sheet and income statement ($000)Asset = Liability + ShareCap + RetEarning + Rev + Exp +Div 2009 prep1-6,964 -6,964Deferred tax21,797 1,7972010Provision-12,306 -12,306Deferred tax3,507 3,5072011Pr ovision-14,169 -14,169Deferred tax989 989Table 2 Worksheet adjustments to BBG balance sheet and income statement for year 2009 ($000)Current AssetsNon-Current Tangible AssetsDeferred Tax Assets=Current DebtNon-Current LiabilitiesIncomeEquity bear Earnings13153,484153,48424-29,162-29,1622-8224-8,2243545,27646-32,997-12,2794102,373102,37357-24,159-24,15968-2,280-2,2807957,824-57,824Total202,536-10,504=57,824165,0366,558-37,386Table 3 adjustments to BBG balance sheet and income statement for year 2010 ($000)Current AssetsNon-Current Tangible AssetsDeferred Tax Assets=Current DebtNon-Current LiabilitiesIncomeEquity kept up(p) Earnings162,4501-49,247-13,203299,70999,7093-38,069-38,0694-894-894558,201-58,201Total61,640-89458,201-7,73910,284Table 4 adjustments to BBG balance sheet and income statement for year 2011 ($000)Current AssetsNon-Current Tangible AssetsDeferred Tax Assets=Current DebtNon-Current LiabilitiesIncomeEquity Retained Earnings162,8571-50,273-12,5842241,476241,4763-37,5 63-37,5634-1,017-1,017594,662-94,662Total203,913-1,01794,66296,54111,693Table 5 adjustments to BBG balance sheet and income statement ($000)Asset = Liability + ShareCap + RetEarning + Rev + Exp +Div 2009Goodwill10-16,652 -16,652Deferred tax114,296 4,2962010Goodwill-30,967 -30,967Deferred tax8,826 8,8262011Goodwill-36,161 -36,161Deferred tax2,524 2,524Appendix BTable (1) assumption of the ratio