BILABONG Australia †financial statement analysis assignment Essay

BILABONG Australia pecuniary statement analytic thinking assignmentACCT 5910- trade abbreviation and ValuationContentsExecutive abstract3Executive summaryThe object of report is to provide a encyclopedic psycho abstract of Billabong International Limited. This report is in general ground on a expressive style analysis of Billabongs fiscal effect dimensions from 2009 to 2011, common size table of the equipoise pall and income statement and analysis of Billabongs property flows. Expect to provide a basis lowstanding of the communitys recent situation and future valuation. The alliance we opposed, as a part of the surfwear labor is Quiksilver. Billabong is a multi-brand Australian corpoproportionn that was effected by Gordon and Rena in 1973 in metal(prenominal) Coast. After decades of involution and restructu symmetryn of detonating deviceization, Billabongs shargons confuse publicly listed on the ASX. Using four-step to analysis Billabong which includin g assembly line st ordaingy analysis, invoice analysis, mo meshary dimension analysis and likely analysis that would foster a great bridge player in valuation of Billabong based on its live market situation. calling st footstepgy entangles continuous acquisitions and emerges like taking all over unbendable brand and the products in the analogous(p) gross assess income events area and expansion internationally by reaching to a greater extent than hundred countries around the world. Billabongs multi cultural origination of products featured mod and fashion captures node loyalty among targeted youth group. In golf-club to see the communitys be reading reflects its business reality. Three stairs of accounting adjustments are taken in planning for monetary analysis, fo casts and valuation. First is to recast fiscal statements. This take overs re-classifying accounts and preparing standardized remainder wheel sheet and income statement, development both rep orted statements and information from foot nones. After that is to identify accounts that should be adjusted. By analyzing nones and reports, terce accounts are likely to contain distortion information provision for provisionary debts, leased assets and liabilities and veraciousish volition. Last step is to come adjustments with accounting equation using more appropriate estimations and assumptions for the fiscal course of instruction from 2009 to 2011. The profitableness of Billabong is un permanent from fiscal analysis.However, compare with the a nonher(prenominal) competing come with, Billabong has spicyer hard roe and ROA. The ability of Billabong deal its inventories lessen as its list disorder dimension ebbd. It had a good reassure in fluidness with relative continual live proportionality and quick ratio. However, it had reducingd ability on unitize long asset and check out its debt structure. Lacking of good rig on debts structure and white thorn scene burden on debt outlay, which whitethorn lead a high financial take chances and weak solvency. From prospective analysis, Billabong whitethorn be more profitable in the future later on the reorganization, the diminish gross revenue produce whitethorn be surfaceed at first a couple of(prenominal)er grade and and therefore sum up again. The roe of the society get out be high(prenominal) than last category the federation may grant mitigate slaying in the future. And the caller may borrow or finance the impartiality for the operation or tolerateing the dividend.1. unveiling1.1 BackgroundBillabong is a known Australian company with many brands, such as Element, Kustom and Xcel. Their main products are including clothing, watches and board diverts hardware. As surfboarding became more prevalent, the company constantly spread out its scale and exported its goods to Japan, USA and Europe during the 1980s, after that Billabong achieve leader in gl ide area. In the recent ten years, Billabong had restructured its chief cityization with growing ball-shaped opportunities in the boardsports sector.1.2 Business St ordaingy summaryThe business analysis through three aspects perseverance analysis, emulous analysis and corpo ordain strategy analysis.a. diligence digestWith the expansion of world economy, surfboarding is not still a sport scarce in like manner a vitality style and that leads to high demand of surfing products. The subjugate of  theatres enters that industry pull through replace magnitude as its attractive capableness pelf and less barrier to enter into that industry. both companies permit more bargaining bureau compared with their supplier and customer as their famous brand and diversified products could encourage suppliers to restrain long term business alliance with the company and touch the unique ask of customers. Overall, the prospects of this industry are optimistic it did not shock to a fault much nether the downturn of economy. breakering is an alternate magnitudely popular and well-known culture companies postulate to continue innovation in order to satisfy customers needs.b. Competitive psychoanalysisAs number of firms in the industry keeps increasing, greater competition force firms to assimilate more market divvy up, innovate substitutes, call forth divergentiate products and be cost leaders to keep or improve their eyeshot in the industry. For ex international amperele, some of the products of Billabong and Quiksilver are inter intensifyable, consumer forget choose to buy the one with dismount determine if they have similar function, or buy the one with higher(prenominal) monetary repute if the product is different from others. Thus, a firm could run well if it has different products and unhorse cost compared with rivals.c. Corporate Strategy psychoanalysisBillabong hires different design teams for each different region to satisfy wit h customers from different cultural with different traditions and tastes. Billabong is expansion through strategical takeovers during last 10 years flavour enlarge profitability through business synergies. au whenceticly the group has direct company on operations and more than 50 countries. Sales are more than one hundred countries under 13 different brands. The strategies expansion has been changing along with companys return. Billabong started with exportation of products to the USA and withal authorize follow by relocated output signal off shore FDI is the period global expansion strategy. Billabong buys bank licenses to take keep in line of global operations and requires the existing business.2. bill analysisBillabongs performance from 2009 to 2011 shown downwardlyly leanings in profitability and market performance, therefore, it is mathematical that manipulation exists. In order to compare Billabong with other companies, standardized format and accounting e quation-based adjustments are required.2.1. Recast financial statementsBecause of the differences in the format of Billabongs financial statements over years and that with other organizations, standardized financial statements should be make in preparation for accounting analysis, financial analysis and prospective analysis.2.2 invoice adjustments2.2.1 Adjustments of revenues and provision for doubtful debts As faecal matter be seen in appendix, PDD (6.4%) has turn downd since 2007. accordingly 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 reckoning (Appendix A table (1)).2.2.2 Adjustments of leased assets and liabilitiesAs disclosed in Billabongs financial report, it leases lay out, machinery and warehouses of large dollar amount in order to maintain normal operation. most(prenominal) of the leases are classified as in operation(p) lease. Thus, we need to rec ord leases as assets and liabilities on balance sheet to make analogy with other companies (Appendix A table (2, 3, and 4)).2.2.3 Adjustments of saving graceBy calculating the proportion of grace of God in constitutional non-current asset from 2007 to 2011, it female genital organ be seen that instead of being impaired, grace incrementd substantially from 12.94% to 42.13%. Set 12.94% as the standard level and overvalued goodwill could be recognized (Appendix A table (5)). 3. pecuniary AnalysisRatio analysis include time series and cross sectioned analysis has been performed in this case to pop off investors direct understanding of the companys historic and recent performance.3.1 Dupont Analysis abuts 1Dupont (Billabong)200920102011NOPAT/Sales0.11410.12110.0989 AT1.48371.24281.4528= ROA0.16920.15040.1437 rotate0.05970.09360.0945 NFL0.19930.18110.4031= financial Leverage Gain0.01190.01690.0381NI border0.09940.11280.0853hard roe ( ROA + Spread * NFL)0.18110.16740.1818The Dup ont approach shot stern be decomposed into items as ROA, AT and net profit brinkwhich exists downward in 2011 compared with 2009. However, Billabong makes the new borrowings in its balance sheet and out offsets its financial leverage in 2011. Moreover, ROE is affected by ROA and financial leverage gain. As financial leverage developments and financial leverage gain plus, then ROE is back up to 0.1818 (almost similar to 2009) in 2011.Moreover, the enhancement in AT and leverage ratio also alter the ROE. The greater AT can increase companys revenue. The higher leverage ratio reflected the start jacket crown 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 trouble AnalysisExhibits 2Profitability (Billabong)200920102011Pre-Tax Income gross profit gross profit13.25%15.23%9.11%NI Margin9.94%11.28%8.53%EBIT Margin15.23%16.39%1 0.58%EBITDA Margin17.51%18.78%13.06%NOPAT Margin11.41%12.11%9.89%From deliver 2, these margin ratios has increased from 2009 to 2010, and declined in the midst of 2010 and 2011. Pre-tax income margin is unstable especially dramatically decrease from 15.23% to 9.11% in 2010 and 2011 due to revenue diminish 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 run and interest expenses to increase the margin of net income, EBIT and EBITDA. NOPAT margin intelligibly shows the operate 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 overturn performance than Billabong just only w hen from profitability analysis. Because pre-tax income margin, NI margin and NOPAT margin have shown ostracise value from 2009 to 2011, only EBIT margin and EBITD margin are displayed supreme 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 essential 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 legal injury of ROA and ROE which might attributed to lower net profit margin. Moreover, compared to Quiksilver, Billabong has a comparatively stable ROE and ROA from 2009 to 2011. Overall, Billabong has smash performance than Quiksilver from probability ratio analysis.3.3 Investment steering Analysis3.3.1 workings Capital directiona. Inventory TurnoverExhibits 5Billabongs enrolment rati o 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, activesilver also has decreased ratio but with higher overall level than Billabong. It implies that Quiksilver may face a problem of getting able inventory to meet sales demand.Exhibits 6b. Receivable Turnover RatioExhibits 6 indicates that Billabong operate on a acknow guidegment basis. As Billabong increase receivables with store win card, with low account receivable upset ratio. This low ratio implies that Billabong might need to re-assess its credit policies in order to ensure the timely parade of imparted credit that is not earning interest for the firm.c. Payable turnover rate ratioPayable ratio decreased from 2.32 in 2009 to 1.77 in 2011. Its indicates that Billabong is taking yearlong time to pay its suppliers than before.d. Operating Working nifty turnover ratioExhibits 7The working jacket ratio of Billabong keeps increase fr om 5.17 in 2009 to 6.00 in 2011 (5.59 on average). 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 plus ManagementExhibits 8The net long 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 deprecative decrease from 6.41 to 4.34 in 2011. As the sales increased by $13299 from 2009 to 2011, too much investm ent in plant and equipment may be the reason 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 10Billabong200920102011AverageQuiksilver authorized Ratio2.762.101.852.242.06 busy Ratio1.991.441.041.491.33Cash Ratio0.910.510.300.570.46Overall, exhibits 10 illustrate the liquidity ratios of Billabong did not kind 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. period 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 truly less dependency on inventory or other less current assets to liq uidate 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 and then increase to 0.53 in 2011. The reason for this transpose is that debt structure and policies of Billabong was win overd during the three years. Similarly, as total debts change from 2009 to 2011, L/E and cabbage debt to integrity 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 fairness 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 proscribe indicates that they may face huge underline on debt expense which may firmness a high financial jeopardize 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 pay off the sustainable appendage 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 ( efflux)/ influx from operational 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(a) activities has increased from $175.685m to $187.247m, and then followed a speedily decrease to $24.336m in 2011. Large payments to suppliers and employees are the mai n 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 largely 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 increase 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 ROA but 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 come close the PV of the company by using the brachydactylic 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 fancied 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 assume 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 aim operating profit with relatively lower ROA. From this, the company may borrow capital 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 beta (1.49), market agiotage (7%) and risk-free rate (5.7%) from market. The cost of debt is 6% according to historical YTM for the publicly traded bond. Therefore, WACC is figure byExhibit 15Debt448,422 ($000) justice1,109,155 ($000)Value of firm1,557,557 ($000)Cost of debt6%Cost of equity16.13%Tax rate28%WACC12.73%4.3 ValuationThe Discount aberrant allowance Valuation Model is a measure of determining the value of the company by abnormal earnings and drop rate. The abnormal earning is the difference between net income and change in equity. Through call 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 section outstanding is 253,321,020. For that reason, the share outlay is estimated to be $1.72. A reduction in the abnormal earning during the assumption periods ma y result in lower share value compared with currently. (Appendix B table (2)).4.4 Sensitivity analysisThe sensitivity of the share cost to changes was work out in multi-factors, such as growth rate and beta. This analysis is performed to check how unresistant 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 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. 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. Even though, the working capital ratio increase from 2009 to 2011, but precise 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 sectioned 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 still unsatisfied. From valuation, Billabongs share value still decreases with sales decrease. Therefore, we extremely recommend that investors should hold their shares or do not buy it if Billabong continuously discharge business as its historical model. graphic symbol1. 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 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 sell 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 In dustry Riding Out the economical Storm Findings of SIMAs Retail explore Show Resiliency of the Surf/ glide 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 = financial obligation + ShareCap + RetEarning + Rev + Exp +Div 2009 cookery1-6,964 -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) accepted AssetsNon- veritable Tangible AssetsDeferred Tax Assets=Current DebtNon-Current LiabilitiesIncomeEquity Retained Earnings13153,484153,48424-29,162-29,1622-8224-8,2243545,27646-32,997-12,2794102,373102,37357-24,159-24,15968-2,280-2,2807957,824-57,824Total202,536-10,504=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 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 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