BILABONG Australia Financial Statement Analysis
HI5020 Corporate Accounting
BILABONG Australia Financial Statement Analysis
Out of the public company selected in Australian Securities Exchange ASX, this paper shall analyze the latest annual report of the company for the last three years. The paper shall evaluate the cash flows statement and discuss the changes in the cash flow statements for the firm over the last year while articulating the reasons behind these changes. The paper shall also provide a comprehensive evaluation and analysis of the company’s three broad categories of cash flow (operating activity, investing activities, and financing activities while conduct a comprehensive analysis and evaluation of these three years. The paper shall also evaluate the comprehensive Income Statement including the items reported. Besides, the paper shall also evaluate the corporate income tax and the tax expenses for the last financial year. This report primarily provides a trend analysis of Billabong Financials from 2013 to 2016 cash flows, income statement and balance sheet. The organization was compared to provide a basis understanding of the organization’s future valuations. As part of sufwear, Quicksilver was compared too as well. After years of restructuring and expansion capitalization, the shares of Billabong were listed publically in ASX. Comparing the current market situation and business strategy and a four step analysis, financial ratios, accounting analysis, and business strategy analysis shall be provided.
Billabong is a famous company in Australia that has many several brands like Xcel, Kustom, and Element. The main product of this company includes watches, clothes, board sport hardware. As surfing increased in popularity, the organization rapidly grew to export some of its services in Europe, USA and Japan in the late 1980s making the organization to be a leader in the surfing business (Brigham, Ehrhardt, Nason, & Gessaroli, 2016). In the recent past, Billabong had to restructure itself through capitalization with an increased growth in worldwide opportunities in the sector of board sports.
Since there is an expansion in the global economy, surfing has not only developed from a sport but also a lifestyle that has led to the development of greater demand in the surfing products. The number of organizations that enter the industry kept increasing with more attractive potential profits with less challenges and barriers in the industry (Brigham, Ehrhardt, Nason, & Gessaroli, 2016). The two companies have a bargaining power that is more compared to the customers and suppliers since their brands have become famous and the products diversified that encourages the suppliers to have relationship in business that is long term and satisfies the desires of the customers better. Generally, these prospects in this industry remain to be optimistic that does not shock much in the economic downturn.
Cash Flow from Operations
Cash flow from the operations takes in account the cash inflows that arise from the normal business operations together with the corresponding outflows of cash. There are two ways used in computing cash flow Direct Method and Indirect Method. Normally, indirect method is commonly used. Cash flow statement analyses involve evaluating the income statement first and add back non cash expenses like amortization and depreciation. Reason for adding these items back is that they are not really expensed cash but they are record (Garrett, & James III 2013). Despite the fact that the company’s Net Income in 2016 was $1,345 the operation cash flow is in line with the past. A closer look at the Cash Flow from Operation there is a charge for other countries resulting into a contribution of $1,065 million in 2016. This is not present in 2013 to 2014 an elimination of the charge into the company’s cash flow from operations is not much enticing and appealing.
Cash Flow from Investment Activities
Apart from operations, the company also invested in assets that were aimed at providing more returns. From these activities, one needs to find out the amount of cashless gain or loss that is done during that particular period taking into account while determining the net cash inflows. The investing activities Cash Inflow incorporates activities like the purchasing of long-term assets and securities or even selling them and not cash and also offers some loans. The organization cash inflow from Investing Activities stood at -670 million in 2016 and – 890 million in 2015 (Kheradyar, Ibrahim, & Nor 2011). The key capital expenditure was -710 million in 2016 as compared to 760 million in 2015. Out of the sale of company’s marketable securities and investments, the company got $620 million. Besides, the company got $220 million from the sale of one of its subsidiary.
Cash flow from financing Activities
Cash flow analysis financing activities arise from the purchase or issue of stock. Besides, borrowing and repayment of loans in the long term and short term is included under financing activities. Also, dividends payment is included in financing activities so long as it does not incorporate any accrued liabilities and accounts payable. These are not incorporated since they are not taken into consideration in the operating activities and net cash flows. The financing activities of the company remain stable for the years 2015, 2016 and 2017. The company principle repayment of debt was -9,260 in 2016 a value that remained stable in the issuances of 9,605 (Kheradyar, Ibrahim, ; Nor 2011). The company practiced a stable dividend policy of -1460 million in 2016 and -1451 in 2015. As part of the repurchase of shares program, the company purchased back its shares at regular intervals. For instance, in 2015, the company repurchased $1560 million worth of shares.
In spite being the best tool used by investors in establishing the performance of a company financially, cash flow has a number of disadvantages. First, it does not consider any form of growth in cash flow statements. The cash analysis statement always indicates what occurs in the past. However, the information might not indicate the right information for the investors who would like to invest in the company. For example, the company invested heavily in R;D that generated huge amount of money through the company’s ground breaking concept. Besides, cash flow can be miss-interpreted easily one would not be able to understand without the assistance of income statement plus other information’s the nature of transactions that transpired during that period of time. It is hard to know and understand from the statement of cash flow if a company is investing in more shares or paying off the debts.
Cash flow from Operating Activities
The cash flow from operating activities has increased tremendously from $178.81 to $189.35 with a quick drop in 2016 of $26.41. Many payments were made to employees and providers thrust Cash flow from the operational activities thus decreasing the hard currency cyberspace inflow and outflow from the operating activities. The organization majorly used its hard currency for the hard currency for the acquisition of new companies and acquisitions leading to an escape in hard currency in 2016. Cash Flow from investment activities had accumulated outflows from 2013 to 2016. In essence, the amount paid to the employees and suppliers were the main reasons why the Cash Flow from operating activity decreased downwards the net cash (outflow)/inflow from operational activities.
INCOME STATEMENT ANALYSIS
Income statement is normally examined using verses since it indicates the top-line amount of sales with the total sales volume. In three-year period, the Company’s income statement was a syndicated below using vertical analysis. As indicated in the income statement, the organization’s income has increased for the three years’ time. It is important to show every account as a percentage of the annual sales. The company’s salary to sales revenue is 25%. The Net Income of the company includes some non-controlling interest worth $2,485 million the Income statement contains the amount of expenditures and revenue associated with the business operations (Kheradyar, Ibrahim, ; Nor 2011). The Comprehensive Income Statement contains Sales, Revenue, Cost of Sales, Gross Profit and Net Income.
Evidently, the marketing expenses of the corporation have increased as compared to the sales amount and volume. Indeed, this is an implication that the money invested in sales was not sufficient and effective in driving the volume of sales as opposed to the years before. Similarly, the amount of salaries also increased as a percentage to the sales volume and amount. Through this vertical analysis it is evident that the product cost of the company was 30% while the sales amount was 29% this is significantly decreasing the amount of gross profit. The attributing factor to this is the production process high expenses that represent a lower price value. The vertical analysis proves that the company’s cost of goods sold are a major concern.
The gross profit margin indicates the percentage of selling price that is more than the amount of cost of goods sold. This value assesses the percentage of revenue that is made available in covering the amount of expenses apart from the cost of goods sold and how it contributes to the level of profit.
Income Statement Ratio Analysis
ROE = Net Income / Average Shareholder’s Equity
This ratio reflects of the earnings that a firm generates compared to the assets invested by the shareholders. The shareholders have persistently desired a higher amount of earnings obtained from their investments. The company’s ROE is $23,480 / ($141,080 + $113,161) / 2 = 17.9% (International Limited, 2018)
The ROE is 18% that is very close to the industrial average the ROE compares more favorable than the 2015 ROE that was 0.95%.
This is Net Income/ Average Assets that helps the management in understanding how the assets investments are converted into cash and profits. The higher the returns on assets the better for the company.
In 20 15 the organization had Return in Assets of 2552 / (751967 + 803910)/2 = 0.35%
In 2016 the Return Assets for the organization was -239922/ (761967 + 751967)/2 = -32.82%
Therefore, in 2016 the organization incurred greater loss therefore the resulting to a negative value of return on assets. The organization had the capacity of generating a net profit through reducing the amount of expenses and cost of finance.
Return on Sales: This amount is amount of Net Income / Sales value that helps in identifying if the organization has the capacity of generating the profit thus wastage in resources.
In 2015, the Return on Sales was 2552/ 1057240 = 0.25
In 2014 the Return on Sales value was – 238135 / 1027472 = -24.55%
Source: International Limited, (2018)
As indicated in the results above, the organization has proved that it has improved as the value of return on sales is a good indication to the investors. The more the value of Return on Sales is an indication that the organization is continuously generating more sales revenue since the sales are increasing.
Gross Profit Margin: This is defined as the amount of Gross Profit/ Sales as a value that evaluates and measures the amount of profit that the organization has earned while it is selling the inventories. A high gross profit margin is an indication that the company is having more sales revenue able to pay and cater for its expenses (International Limited, 2018).
The Billabong Gross Profit Margin is
In 2015 the Gross Profit Margin was 560840 / 1057240 = 54.1%
In 2014, the Gross Profit Margin was 5464512/ 1038572 = 52.41%
Therefore, the amount of gross profit margin of the organization has increased because of the increased revenue facing the organization and the cost of goods sold reduction by properly procuring the raw materials (Saad, 2014).
ACCOUNTING FOR CORPORATE INCOME TAX
In the last Financial Year, the company’s tax expenses were as follow:
Income Tax Expense
Current Tax: $510,000
Deferred Tax: $65,000
Tax Expenses: $590,000
However, the organization encountered a deferred tax liability worth $80,000 in the balance sheet as the amount increases in the second year due to depreciation and tax purposes. However, this amount is not the same as the tax rate times the company’s accounting income. This is attributed to the fact that the organization has both effective tax rate and marginal tax rate where the marginal tax rate indicates the bracket that the tax level falls inside meaning that the organization did pay 25% of its net income on tax. The company had more than $6.5 billion in deferred tax assets that is adjusted out of the value of invested capital in 2015. The deferred asset is mainly attributed to the employee benefit obligations in the future recorded and not paid while it is not taxed yet (Wahlen, Baginski, & Bradshaw 2014). Without such an adjustment more than $110 billion while this adjustment bringing the invested capital lower and down to $110 billion. The DTA/DTL has artificially boosted and depressed the amount of invested capital making the stock looking undervalue. The Company had deferred tax liability $38 billion in deferred tax liability in 2013 and 25% worth of total assets. The income tax expense of the company is $120,000 but the actual tax liability is $80,000 the reported tax is $100,000 and the income tax payable is $80,000. Thus the “deferred tax liability” is $20,000 the actual tax bill is $120,000 and the tax expense is $100,000 the deferred tax asset is $20,000 known as the deferred tax asset adding the economic value of the company as an asset (Wahlen, Baginski, & Bradshaw 2014). The difference between income tax payable and income tax expense is what has been calculated what the company owes in taxes depending on the standard accounting business rules reported as an expense in the income statement based on the tax code rules. The interesting, surprising, difficult and confusing thing about the treatment of taxation is that there is a divergence for tax accounting being diverge especially the way the company is treating assets depreciation.
The report has explained and indicated an analysis of cash flow, income statement and income tax that can help the investors to understand the nature of investment and profitability made by Billabong. The report has additionally focused on the comparison of the amount of profit that the company made from 2015 to 2016 comparison. Although the organization indicates a high level of PE ratio that might be misleading.
Garrett, S., & James III, R. N. (2013). Financial ratios and perceived household financial satisfaction. Journal of Financial Therapy, 4(1), 4.
International Limited, B. (2018). Billabong International Limited – AnnualReports.com. Online Annualreports.com. Available at: http://www.annualreports.com/Company/Billabong-InternationalLimited Accessed 24 May 2018.
Kheradyar, S., Ibrahim, I., & Nor, F. M. (2011). Stock return predictability with financial ratios. International Journal of Trade, Economics and Finance, 2(5), 391.
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Brigham, E. F., Ehrhardt, M. C., Nason, R. R., & Gessaroli, J. (2016). Financial Managment: Theory and Practice, Canadian Edition. Nelson Education.
Saad, N. (2014). Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, 1069-1075.
Wahlen, J., Baginski, S., ; Bradshaw, M. (2014). Financial reporting, financial statement analysis and valuation. Nelson Education.