Buacc1508 | Finance | Financial Assessment Answer

Answer:

Background: Company Overview

Billabong is an Australia based clothing retailer company that also specializes in watches, backpacks and other accessories under the given brand names. The company was founded by Gordon and Rena Merchant in the year 1973 and started trading in the Australian Stock exchange (ASX) in the year 2000. As of 30^th June 2017, the company has a total revenue of $979,452 thousand ("Choose Your Experience | Billabong", 2018).

Financial Analysis

As mentioned earlier, the financial performance has been conducted from the viewpoints of liquidity, profitability, efficiency, leverage and investment. The subsequent sections of the report briefly analyse the financial health of the firm with reference to those financial ratios calculated in the last two year's financial data as available from the respective annual reports.

Profitability Ratios

The profitability of the business may seem to be highly unstable and the firm has been facing loss position for the last two years. In addition, it may also be observed that the loss situation has been aggravated from 2016 in the current year (i.e. from loss of 2% to 12%). The situation may be assessed to be worse if referred from the viewpoint of ROA which has decreased from negative 3% in the year 2016 to loss ROA of 21% negative in the current year. 

Particulars	2017	2016	Formula
A. Profitability Ratios
Net Profit Margin	-12%	-2%	Net Income/ Total Sales
Return on Assets (ROA)	-21%	-3%	Net Income/ Total Assets

Table 1: Profitability Ratios of Billabong

(Source: Created by author)

Such loss position clearly exhibits management’s inability to continue the business with highly inefficient cost structure. Moreover, the stiff competition in the retail clothing market has intensified the profitability crunch for the firm.

Efficiency Ratios

The operation of the business has also been not efficiently handled as may be evident from the average collection period of around two months in both the years 2016 and 2017. On the other hand, the creditor’s payment has been elongated for almost four months. In other words, the working capital of the business is positive but the collection policy and vendor management system may need to be changed in order to bring the best possible strategies for the supply chain as far as the working capital management is concerned.

Particulars	2017	2016	Formula
B. Efficiency Ratios
Average Collection Period	63	58	(Accounts Receivable/ Credit Sales)*365
Average Payment Period	115	119	(Accounts Payable/ Credit Purchases)*365
Total Asset Turnover Ratio	1.69	1.45	Total Sales/ Total Assets

Table 2: Efficiency Ratios of Billabong

(Source: Created by author)

However, the assets turnover ratio shows that the asset base of the company has been well utilized by the management. ATR of more than 1 clearly indicates the fact that the business has been able to use its one unit of an asset in order to generate more than one unit of revenue for the business.

Liquidity Ratios

As mentioned earlier, the liquidity position of the business is strong which may be corroborated by the fact that the working capital is positive. Since the current ratio is more than 2, it may be construed that the business has sufficient liquidity at its disposal which may well be utilized to pay off its short-term payment obligations. Besides, the dependence on the inventory is also not much high as the quick ratio is also more than 1 in both years under consideration. Therefore, the business may be asserted to be in a better position as far as its inventory management is concerned. 

Particulars	2017	2016	Formula
C. Liquidity Ratios
Current Ratio	2.42	2.29	Current Assets/ Current Liabilities
Quick Ratio	1.49	1.38	(Current Assets-Inventory)/ Current Liabilities

Table 3: Liquidity Ratios of Billabong

(Source: Created by author)

However, it should be noted that positive working capital does not necessarily mean a strong liquidity (Zimon, 2016). It may also mean that the collection department of the firm has been unable to collect from its customers in a timely manner. 

Gearing (Leverage) Ratios

A business's capital structure is critical to its success and the efficiency of the capital structure may best be judged by way of leverage ratios. An efficiently designed capital structure may significantly affect the liquidity and solvency of the business. On the other hand, the proper mix of debt and equity brings the immense value to the business in terms of market capitalization, leverage benefit and overall cost of capital. In the given case, the debt ratio of less than 40% for both the years shows that the company is debt-heavy. In other words, the gearing of more than 1 indicates the same fact that the management of the firm has been aggressive to grow on debt. This is the reason why the business has been keeping more debt components in its capital structure.

Particulars	2017	2016	Formula
D. Gearing Ratios
Debt Ratio	0.38	0.37	(Short-term Debt + Long-term Debt)/ Total Assets
Gearing Ratio	1.23	1.05	Fixed interest bearing borrowings/ Total Equity
Times Interest Earned Ratio	-2.18	0.47	EBIT/ Interest Costs

Table 4: Gearing Ratios of Billabong

(Source: Created by author)

However, while doing so, it may also be assessed that the interest coverage must be high for a firm intending to use the full benefit of debt leverage (Belyakov, 2017). However, in the given case, the interest coverage has been poor in 2016 (just 0.47 times) and the same has been worsened in the current year because of the loss position.

Investment Ratios

The market acceptance and position of the stock of the firm may be evaluated with reference to P/E ratio. The price of the stock of the share has been taken from the external website and the basic EPS for last two years has been considered while computing the P/E for the firm for the given period under review. The result shows that the P/E has been near to zero that clearly establishes the fact that the stock of the firm has been extremely non-attractive to the investors. In this context, it may be noted that a growing P/E indicates a growth stock and vice versa. If the P/E for last few years may appear to be negative or tending to zero, the investors will be reluctant to invest in such stock as the growth potential of the stock may seem to be limited.

Particulars	2017	2016	Formula
E. Investment Ratio
P/E Ratio	-0.03	-0.09	Price per Share/ EPS

Table 5: Investment Ratio of Billabong

(Source: Created by author)

P/E of around zero proves the fact that stock of the business has been trading in a market at a substantially lower rate ("Billabong", 2018). Moreover, the P/E in the given instance has been negative which is because of the loss position in basic EPS figure as well. It is needless to mention that such scenario is extremely unwelcome for prospective investors and they perceive such firms as volatile and non-invertible.

Conclusion and Findings

Based on the discussions and analysis performed ion the preceding section of the report, it may well be construed that the liquidity position of the business has been well managed. The profitability position of the firm has been unstable the business has been facing losses for the last two years under review. The operational efficiency has been construed to be well off in terms of inventory management through the collection period seems to be on a higher side. The reliance on debt is more and hence the interest coverage has been sizably alarming which may create long-term insolvency situation for the business. The market attractiveness of the stock of the business has been one of the lowest in the market because of its almost nil P/E with negative EPS figures.

Recommendations

The management of the business should focus on cost-cutting as the revenue of the business has been well generated as may be evident from higher asset turnover ratio. In addition, the management should put emphasis on repayment of the loan so that the interest coverage may come to a decent level the company does not suffer from the negative bottom line.  Finally, it may also be recommended that the business should also focus on strategizing its collection policy in order to smoothen the operational efficiency to a certain extent.

References

Belyakov, A. (2017). Leverage and Coverage Ratios. SSRN Electronic Journal. doi: 10.2139/ssrn.3019675

Billabong. (2018). Retrieved from https://www.marketindex.com.au/asx/bbg

Choose Your Experience | Billabong. (2018). Retrieved from https://au.billabong.com

Zimon, G. (2016). Working Capital vs. Risk of Financial Liquidity Loss. Zeszyty Naukowe Uniwersytetu Szczeci?skiego Finanse Rynki Finansowe Ubezpieczenia, 4, 311-320. doi: 10.18276/frfu.2016.4.82/1-26