BILABONG Australia †financial statement analysis assignment Essay

BILABONG Australia fiscal argument epitome assignmentACCT 5910-Business compend and Valuation circumscribeExecutive summary3Executive summaryThe purpose of draw is to provide a comprehensive analytic thinking of Billabong International Limited. This report is mainly found on a trend analysis of Billabongs financial performance proportionalitys from 2009 to 2011, common size tabularize of the balance sheet and income statement and analysis of Billabongs depart flows. Expect to provide a keister understanding of the troupes novel situation and future e valuation. The telephoner we comp ard, as a part of the surfwear diligence is Quiksilver. Billabong is a multi-brand Australian attach to that was established by Gordon and Rena in 1973 in Gold Coast. After decades of involution and restructuration of hoodization, Billabongs sh atomic number 18s view publicly listed on the ASX. Using four-step to analysis Billabong which including assembly line st trampgy anal ysis, story analysis, financial ratio analysis and future analysis that would help a great deal in valuation of Billabong based on its current market situation.Business strategy includes continuous acquisitions and emerges equivalent taking over strong brand and the ingatherings in the same gross gross gross gross sales area and blowup internationally by r each(prenominal)ing much(prenominal) than coulomb countries around the world. Billabongs multicultural design of products featured new and manner captures customer loyalty among targeted youth group. In recite to ensure the high societys bank noneing information reflects its business reality. Three steps of accounting allowance accounts are applyn in preparation for financial analysis, fo reconstructs and valuation. First is to recast financial statements. This contains re-classifying accounts and preparing alike(p) balance sheet and income statement, using both account statements and information from foot none s. After that is to identify accounts that should be adjusted. By analyzing notes and reports, three accounts are likely to containdistortion information provision for doubtful debts, leased assets and liabilities and goodwill. Last step is to go for adjustments with accounting equation using much appropriate estimations and presumptuousnesss for the fiscal year from 2009 to 2011. The favourableness of Billabong is unstable from financial analysis.However, analyse with the former(a) competing conjunction, Billabong has high(prenominal) roe and ROA. The major power of Billabong sale its inventories reduced as its roll turnover ratio lessen. It had a good control in liquidity with relative unceasing current ratio and quick ratio. However, it had decreased ability on unitize long-term asset and control its debt organise. absentminded of good control on debts structure and whitethorn organization point on debt personify, which may settlement a high financial ventur e and weak solvency. From prospective analysis, Billabong may be more than profitable in the future aft(prenominal)(prenominal) the reorganization, the decreasing sales ontogenesis may be progressed at first a few(prenominal) year and wherefore plus again. The hard roe of the society will be higher than last year the come with may cave in better performance in the future. And the company may borrow or finance the equity for the operation or paid the dividend.1. Introduction1.1 BackgroundBillabong is a famous Australian company with numerous brands, much(prenominal) as Element, Kustom and Xcel. Their main products are including clothing, watches and boardsports hardware. As glide became more prevalent, the company constantly expanded its scale and exported its goods to Japan, USA and Europe during the 1980s, afterward that Billabong achieve leader in surfing area. In the recent ex years, Billabong had restructured its hoodization with growing world(prenominal) opp ortunities in the boardsports sector.1.2 Business Strategy compendThe business analysis finished three aspects industry analysis, competitive analysis and corporate strategy analysis.a. Industry abstractWith the expansion of world economy, surfing is not only a sport but also a life style and that leads to high demand of surfing products. The anatomy of pisseds enters that industry conceal increasing as its attractive potential profits and slight barrier to enter into that industry. both(prenominal) companies have more bargaining post compared with their supplier and customer as their famous brand and diversified products could boost suppliers to have long term business relationship with the company and gather the unique needs of customers. Overall, the prospects of this industry are optimistic it did not coke too much under the downturn of economy. Surfing is an increasingly popular and well-known culture companies need to continuing innovation in determine to satisfy c ustomers needs.b. Competitive abridgmentAs number of firms in the industry keeps increasing, great competition force firms to earn more market lot, innovate substitutes, produce differentiate products and be cost leadership to keep or improve their lay out in the industry. For example, whatsoever of the products of Billabong and Quiksilver are similar, consumer will choose to buy the one with trim value 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 disgrace 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. flowly the group has direct company on operations and more than 50 countries. Sales are more than 100 countries under 13 different brands. The strategies expansion has been changing on with companys egress. Billabong started with exportation of products to the USA and also licensed quest after by relocated production off shore FDI is the current global expansion strategy. Billabong buys bank licenses to take control of global operations and requires the lively business.2. Accounting analysisBillabongs performance from 2009 to 2011 shown downward trends inprofitability and market performance, at that placefore, 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 statementsBecause of the divergencys 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 pro spective analysis.2.2 Accounting adjustments2.2.1 Adjustments of revenues and provision for doubtful debts As apprize be seen in appendix, PDD (6.4%) has declined since 2007. thitherfore 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 according 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 classified as run lease. Thus, we need to record leases as assets and liabilities on balance sheet to make comparison with other companies (Appendix A table (2, 3, and 4)).2.2.3 Adjustments of goodwillBy compute the proportion of goodwill in total non-current asset from 2007 to 2011, it cigaret be seen that instead of being impaired, goodwill increase substantially from 12.94% to 42. 13%. Set 12.94% as the standard level and over prized goodwill could be recognized (Appendix A table (5)). 3. financial Analysis proportionality analysis include time series and cross sectioned analysis has been performed in this case to give investors direct understanding of the companys diachronic and recent performance.3.1 Dupont Analysis represents 1Dupont (Billabong)200920102011NOPAT/Sales0.11410.12110.0989 AT1.48371.24281.4528= ROA0.16920.15040.1437Spread0.05970.09360.0945 NFL0.19930.18110.4031= Financial Leverage crystalise0.01190.01690.0381NI bound0.09940.11280.0853ROE ( ROA + Spread * NFL)0.18110.16740.1818The Dupont approach can be decomposed into items as ROA, AT and exonerate profit valuation reservewhich 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, ROE is affected by ROA and financial leverage gain. As financial leverage increases and financial leverage gain increase, then ROE is gumption up to 0.1818 (almost similar to 2009) in 2011.Moreover, the enhancement in AT and leverage ratio also strengthened 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 Management AnalysisExhibits 2 lucrativeness (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 exhibit 2, these brim ratios has increased from 2009 to 2010, and declined between 2010 and 2011. Pre-tax income margin is unstable in particular dramatically decrease from 15.23% to 9.11% in 2010 and 2011 due to revenue decreasing and expenses increasing. NI margin has been low, it had been incre ase 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 veto determine from 2009 to 2011, only EBIT margin and EBITD margin are displayed positive value for these three periods. That demonstrates Quiksilver has higher expenses on interest, tax, depreciation and amortization than revenues.Exhibits 4From exhibits 4, Billabong has highe r ROA and ROE than Quiksilver for the last three years. It must be pointed out 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 equipment casualty of ROA and ROE which dexterity 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 Management Analysis3.3.1 Working Capital Managementa. 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 meet sales demand.Exhibits 6b. Receivable Turnover RatioExhibits 6 indicates tha t Billabong operate on a course doctrine basis. As Billabong increase receivables with store benefit card, 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 liquidate its suppliers than before.d. Operating Working capital turnover ratioExhibits 7The operative capital ratio of Billabong keeps increase from 5.17 in 2009 to 6.00 in 2011 (5.59 on second-rate). Its indicates that the effectiveness ofBillabong using operative capital to obtain revenue increase. However, the average ratio of Quiksilver (3.84) is quite lower.3.3.2 long Asset ManagementExhibits 8The net long-term AT ratio of Billabong decreased from 1.63 in 2009 to 1.25 in 2011. It implies that in that loca tion 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, on that point 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 avocation 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 reason of decreased PP&E turnover ratio. We can reason out 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 10Billabong200920102011AverageQuiksilverstream Ratio2.762.101.852.242.06Quick Ratio1.991.441.0 41.491.33Cash Ratio0.910.510.300.570.46Overall, exhibits 10 illustrate the liquidity ratios of Billabong did not change much from 2009 to 2011 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 fashion 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-term 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 mesh topology debt to equity 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 12Both 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 reportage ratio is negative indicates that they may face huge stress on debt expense which may result a high financial risk and weak solvency. Exhibits 13Billabong200920102011AverageD/E0.490.360.530.46Retention roll (b=1-D/E)0.510.640.470.54ROE0.180.170.180.18Sustainable developing 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 rati o is 46%, retention rate is 54% and ROE is 18%. Thus, the growth rate is 8%.3.5 Cash Flow AnalysisExhibits 14$000200920102011 cyberspace notes (outflow)/inflow from operating activities175,685187,24724,336Net coin (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 quickly decrease to $24.336m in 2011. Large payments to suppliers and employees are the main reason advertize 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 high society has largely used its cash for purchase new subsidiary and this guide to a net cash outflow in 2011.4. Forecasts and valuation4.1 Assumptions and betBillabong 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 increase EBITDA and may further lead to a higher profit in close 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 get up 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 abnormal 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 forecasted 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 take for granted to 7.89% in 2012 due to an evident declined historical pattern. Moreover beginning net operating on the job(p) 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 acting 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 assum ptions, Billabong will have higher ROE and better performance than previous. The company may have substandard operating assets to generate operating profit with relatively lower ROA. From this, the company may borrow funds or finance equity to keep operating and pay dividends.4.2 bell 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 beta (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 numerated 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 vicarious 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 equity. 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 negat ive 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 increasing 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. Conclusion preceding(prenominal) 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. Even though, t he 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 debt 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 allay unsatisfied. From valuation, Billabongs share value still decreases with sales decrease. Therefore, we highly inspire that investors should hold their shares or do not buy it if Billabong continuously travel rapidly business as its historical model.Reference1. Billabong Investors Home. http//www.billabongbiz.com(Accessed 5 April 2012)2. vacuum-cleans company profiles Billabong International Limitedhttp//www.answers.com/topic/billabong-international-ltd(Accessed 3 May 2012)3. Hoov ers 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 Valuation 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 Significant 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 travel Out the Economic Storm Findings of SIMAs Retail Research shew 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 Analysis sidestep 1 Worksheet adjustments to B BG balance sheet and income statement ($000)Asset = Liability + ShareCap + RetEarning + Rev + Exp +Div 2009 formulation1-6,964 -6,964Deferred tax21,797 1,7972010Provision-12,306 -12,306Deferred tax3,507 3,5072011Provision-14,169 -14,169Deferred tax989 989Table 2 Worksheet adjustments to BBG balance sheet and income statement for year 2009 ($000)Current AssetsNon-Current tactual AssetsDeferred Tax Assets=Current DebtNon-Current LiabilitiesIncomeEquity Retained Earnings13153,484153,48424-29,162-29,1622-8224-8,2243545,27646-32,997-12,2794102,373102,37357-24,159-24,15968-2,280-2,2807957,824-57,824 innate202,536-10,504=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 Retained 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 Earnings162,8571-50,273-12,5842241,476241,4763-37,563-37,5634-1,017-1,017594,662-94,662Total203,913-1,01794,66296,54111,693Table 5 adjustments to BBG balance sheet and income statement ($000)Asset = Liability + ShareCap + RetEarning + Rev + Exp +Div 2009 goodwill10-16,652 -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