Financial Performance Analysis of Billabong International Limited

The present report is developed for roving an analysis of the financial performance of an ASX listed entity. The company selected for the purpose is Billabong International Limited, a clothing retailer recognized as a leader in providing surfing product and accessories for both young men and women. The financial performance analysis is carried out with the use of ratio analysis technique.

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BUACC1508 ACCOUNTING AND FINANCE
ASSESSMENT TASK 2: GROUP ASSIGNMENT

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Executive Summary
The present report is developed for roving an analysis of the financial performance of an
ASX listed entity. The company selected for the purpose is Billabong International Limited, a
clothing retailer recognized as a leader in providing surfing product and accessories for both
young men and women. The financial performance analysis is carried out with the use of ratio
analysis technique. The analysis of profitability ratios has revealed that the company net profit
has declined from the year 2016 to 2017 while its efficiency and liquidity position is far better
than the profitability position. The company is also high on leverage which has subsequently
increased from the year 2016 to 2017. The earnings per share of the company is negative in both
the years from 2016-2017 and thus the company cannot be regarded as worthy of investment
from the perspective of current and potential investors. In this context, it is recommended to the
company for reducing its operational expenses on assets as compared to the sales realized from it
for improving its profitability position.

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Contents
Executive Summary.........................................................................................................................2
Background: Company Overview...................................................................................................4
Ratio Analysis..................................................................................................................................5
Profitability Analysis.......................................................................................................................5
Efficiency Analysis..........................................................................................................................7
Liquidity Analysis...........................................................................................................................9
Gearing (Leverage) Analysis.........................................................................................................10
Investment or market analysis.......................................................................................................11
Conclusion and Findings...............................................................................................................12
Recommendations..........................................................................................................................12
References......................................................................................................................................14
Appendix........................................................................................................................................16

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Background: Company Overview
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

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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
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

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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.
Net Profit Margin
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:

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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.
Gross Profit Margin
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:
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.
Efficiency Analysis
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:

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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

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from its debtors have increased which cannot be regarded good for its future growth and
development.
Liquidity Analysis
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.
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

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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.
Gearing (Leverage) Analysis
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)

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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.
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 or market analysis
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)

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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 and Findings
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.
Recommendations
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

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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).

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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.

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Appendix
Financial Information of Billabong used in calculation of financial ratios
Particulars 2015 2016 2017
$'000 $'000 $'000
Net Profit
$
(23,739.00)
$
(77,129.00)
Shareholder's Equity
$
275,185.00
$
252,890.00
$
175,244.00
Average Equity
$
264,037.50
$
214,067.00
EBIT
$
19,765.00
$
(82,838.00)
Total Assets
$
803,185.00
$
741,296.00
$
578,124.00
Average Total Assets
$
772,240.50
$
659,710.00
Sales or Revenue
$
1,075,634.00
$
979,452.00
Gross Profit
$
541,712.00
$
500,197.00
Inventory
$
186,330.00
$
182,604.00
$
162,311.00

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Average Inventory
$
184,467.00
$
172,457.50
Cost of goods sold
$
533,922.00
$
479,255.00
Accounts Receivables
$
164,504.00
$
171,644.00
$
169,325.00
Average Accounts Receivables
$
168,074.00
$
170,484.50
Current Assets
$
461,502.00
$
421,718.00
Current Liabilities
$
201,379.00
$
174,489.00
Quick assets
$
278,898.00
$
259,407.00
Total Liabilities
$
488,406.00
$
402,880.00
Interest Expenses
$
42,347.00
$
37,954.00
Weighted number of ordinary shares 197,655,647 197,700,701
Net Cash flow from the operating
activity
$
(22,103.00)
$
9,192.00
Financial Ratios of Billabong

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Ratios 2016 2017
Profitability Ratios
Return on Equity (ROE) ratio -8.99% -36.03%
Return on Assets (ROA) ratio 2.56% -12.56%
Net Profit Margin 1.84% -8.46%
Gross Profit Margin 50.36% 51.07%
Efficiency Ratios
Asset turnover ratio (times) 1.39 1.48
Days inventory ratio (days) 126.11 131.34
Days debtors ratio (days) 57.03 63.53
Liquidity Ratios
Current (or working capital ratio)
ratio 2.29 2.42
Quick asset ratio (acid test) 1.38 1.49
Gearing (Leverage) Ratio
Debt to Equity Ratio 1.93 2.30
Debt Ratio 0.66 0.70
Interest Coverage Ratio 0.47 -2.18
Investment Ratios

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Earnings per Share (EPS) $ (0.12)
$
(0.39)
Operating cash flow per share $ (0.11)
$
0.05