Billabong International Limited.
The following case involves each team performing a detailed financial analysis of the business performance of Billabong International Limited (Billabong) for the years ended June 30, 2013-2008.The following questions will lead you through an analysis of Billabong’s business, competition, and financial performance. Annual reports for Billabong and a spreadsheet with the financial statements are available on PSU’sD2LsiteforActg495.
Before you start this project, let me discuss two common student failings. First, students get so focused on calculating in the numbers that they fail to understand the underlying business drivers behind the numbers. It is important to understand what is happening in the business. This case involves each team developing a story that interprets the numbers. Second, after you understand the business at the 1,000 foot level, step back to see the forest. Too often students fail to understand the larger picture. Overall what is going on in the business? What are its trends, how has it changed, and how has the company managed the change? Make sure that you can explain the trends and changes in the entity as a whole by analyzing the financial statements.
Company Background (10Points)
1. Review the annual report for the six year period endingJune30, 2013. Based on reading Billabong’s annual reports analyze Billabong’s business strategy in terms of
(a) the nature of its products and services and (b)the degree of geographic diversification. As best you can, determine Billabong’s strategy for creating a competitive advantage over this six year period. Finally, compare the different strategies of that Billabong & Quik silver. Which would you have expected to be more successful? Explain the reasoning behind your conclusion.
Calculate the following ratios and develop answers to the following questions for Billabong. Refer to Power Point slides and lectures that are online when determining the following information. Focus on the entire six year’s ended June 30,2013.
1. Are there any transactions that indicate poor earnings quality? Develop a table that identifies each earnings quality issues and the after tax affect on your profitability analysis. Then explain each earnings quality issue and clearly state your reasoning for each item.
2. Develop a table with the results of your quantitative analysis of both Return on Assets (including profit margin and asset turnover) and Return of Common Equity(including financing cost ratio and capital structure leverage), after adjustments for earnings quality, for each of the last six years. Use Billabong’s marginal tax rate when calculating ROA profit margin.
a. Explain the primary reason for the change in ROA profit margin over this period of time. Consider both the results of your common size income statements and the results of your geographic analysis.
b. Explain how asset turnover has changed over this period of time, including how asset turn has changed in different geographic regions.
c. Explain the trend in changes for the financing cost ratio over the last six years? Also, explain the trend in changes capital structure leverage over the last six years. Based on your evaluation of the combined effect of the financing cost ratio and the capital structure ratio,in which of the last six years did financial leverage best work to the advantage of the common shareholder? Explain the logic behind your conclusion.
d. Using the information obtained above, identify the most significant causes of change in ROCE over this period of time.
3. Develop a table with the results of your calculations of Billabong’s sustainable growth rate for each of the last six years. How has Billabong’s actual asset and revenue growth rates compared with its sustainable growth rate? How has this influenced the numbers reported in the financial statements? Explain your reasoning.
4. Write several paragraphs that summarize and explain the key trends in profitability over the last six years. This is the time to look at the forest, not just the trees. Do not skimp on this area. Calculating the numbers is not the end of the story.
Cash Flows (20Points)
Determine the following information and develop answers to the following questions for Billabong. Refer to the Power Point slides and lectures that are on line when calculating the following ratios. Focus on the six year’s ended June30, 2013.
1. Operating cash flows
a. Develop a table that summarizes your calculation of sustainable Cashflow from operations for the six years ended June30,2013. Reconcile reported operating Cashflow to your estimate of sustainable operating cash flow. Then explain each reconciling item and clearly state your reasoning for each item.
b. During the period studied, can Billabong’s sustainable Cashflow from operations cover the current portion of financing debt and dividends? Show your work.
c. Explain the underlying reasons for the changes in sustainable Cashflow from operations for the six years ended June30, 2013. (Note: This may link back to your discussion of profitability).
2. Investing Cash Flows
a. During the period studied, was Billabong able to generate sustainable free Cashflow? Explain your answer.
b. Overall develop an explanation of Billabong’s investing activities. What types of assets were acquired over the period? Did new assets improve the company’s prospects for profitability? Were significant assets sold? Were significant assets converted into different assets (e.g., investments=>plant and equip.)?
3. Financing Cashflow
a. During the period studied, what were the major sources of Billabong’s financing? Address the proportions of different types of financing over the 6 year period. Also, how was this financing used to advance the goals of the company?
b. During the period studied, how was Billabong’s financing obligations retired? Did Billabong have sufficient operating Cashflow, or free Cashflow to retire debt? What sources of cash were used to retire debt?
4. Now write one or two paragraphs that explain top three trends in terms of how cash has been provided and used by Billabong. How has the business financed itself (including operating Cashflow or free Cashflow)? What has the company invested in? Do not skimp on this area. Calculating the numbers is not the end of the story.
Operating Cycle (10Points)
Calculate the following ratios or determine the appropriate information from Billabong’s financial statements for the six years ended June30, 2013.Refer to the Power Point the slides and lectures that are online when calculating the following ratios.
1. Calculate Billabong’s gross operating cycle for each of the last six years. How has the gross operating cycle changed over this period of time? Address the specific components of the gross operating cycle.
2. Calculate Billabong’s net operating cycle for each of the last six years. How has the net operating cycle changed over this period of time? How is Billabong financing its operating cycle? Address the specific components of the net operating cycle.
3. Now write one or two paragraphs that explain the overall trends over the six year period in terms of how the company has managed its operating cycle. How has growth or decline in sales affected the operating cycle? How is company strategy reflected in its operating cycle ? Do not skimp on this area. Calculating the numbers is not the end of the story.
Liquidity and Solvency (20points)
Calculate the following ratios or determine the appropriate information from Billabong’s financial statements. Refer to the Power Point slides and lectures that are online when calculating the following ratios. Focus on the entire six year’s ended June30, 2013.
Liquidity Risk (10 of 20points)
1. Develop a table of Billabong’s financing obligations that are due in the upcoming year and the resources that are available to meet those obligations. Treat negative sustainable operating Cashflow as an obligation and positive sustainable operating Cashflow as a resource. Develop this table for each of the last six years. Has Billabong improved its liquidity?
2. Calculate Billabong’s current and quick ratios for each of the last six years. Explain the trend of changes in these ratios. Explain the changes in these ratios.
3. Write one or two paragraphs explaining your conclusion about the trends in Billabong’s liquidity risk. In general, is liquidity risk significant, moderate or low? If you determine that the company is liquid, what resources are necessary for the company retain its liquidity? How have these trends changed over time and what are the underlying reasons for your liquidity risk conclusions? Do not skimp on this area. Calculating the numbers is not the end of the story.
Solvency Risk (10of20points)
1. I would normally ask you to determine how Cashflow does from operations compares to the each of the next five years of debt maturity. However, IFRS calls for a somewhat different breakdown in how debt matures. Using the appropriate information provided develop a table within formation about how debt matures.
2. Develop a table of Billabong’s financing obligations that are due in the next five years and the resources that are available to meet those obligations. Treat negative sustainable operating Cashflow as an obligation and positive sustainable operating Cashflow as a resource. Develop this table using appropriate information and classifications about debt maturities. Explain how Billabong’s solvency has improved or deteriorated over the last six years.
3. Calculate overall debt to equity and financing debt to equity for each of the last six years. Explain the trend of changes in the company’s capital structure.
4. Write one or two paragraphs explaining your conclusion about the trends in Billabong’s solvency risk and capital structure. In general, is solvency risk significant, moderate or low? If the company has significant solvency risks, what strategies and resources are necessary for the company to mitigate these risks? How have these trends changed over time and what are the underlying reasons for your solvency risk conclusions and what influence has this had on the company’s capital structure? Do not skimp on this area. Calculating the numbers is not the end of the story.
Final Review of the Company (20points)
Now that you have an in-depth understanding of the Billabong International Limited, this the time to tie things together. Create a short summary of where the company has been, and where the company is now, that the CFO might use to kick off a strategy session for senior managers. The CFO would want to praise the good and flag the challenges that face the company. Word Limit for this final review section: 1000words or 10 power point slides. Write coherently though you may use bullet points.
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