Principles of Accounting and Finance for Financial Analysis

Question: Write about the Principles of Accounting and Finance for Financial Analysis. Answer: Background And Company Overview Financial analysis plays most important role in the organization as it allows in knowing whether the business is performing efficiently or not. Further, in the modern era the market where organizations operate is highly competitive and due to this reason every organization is interested in knowing its financial performance and in turn corrective actions are applied for performance enhancement(Babalola Abiola, 2013). The present report carried out is based on Billabong International Ltd where the organization is indulged in the practice of wholesaling and retailing of surf, stake snow, sports apparel, etc. The firm was founded in the year 1973 and is headquartered in Queensland, Australia. The organization is engaged in the practice of marketing, distribution, wholesale of different type of retail commodities as per the need and requirement of the target market(Billabong, Corporate Overview, 2017). The present study has been carried out with the motive to know the financial performance of Billabong International Ltd where ratio analysis has been carried out of 2016 and 2015 to know how to present performance of the entity has been enhanced as compared with the past. Ratio analysis of the company has been carried out where profitability, efficiency, liquidity, gearing and investing ratios has been computed. Calculating all these ratios is considered to be most significant for the business as it allows business in knowing its efficiency. The products of the company are licensed in more than 100 countries, and its services are rendered at approximately 10,000 locations worldwide(Bloomberg, 2017). The range of techniques adopted for distribution purpose involves specialized broad sports retailers along with the firms own branded retailer outlet. The main criteria undertaken by business to boost its overall performance is operating with the help of its own store that enhances sales volume along with the profitability of the company in every possible manner. In order to know the financial performance of the entity, its annual report has been accessed through which profitability and sales related information has been accessed by the business. Profitability ratios have been calculated that involves net profit, gross profit, etc. through which it is possible to know whether the present profitability level of the enterprise has been increased or not as compared with the past. Apart from this, liquidity ratios have been computed in order to know whether cash position of the enterprise is strong or not. Billabong hires approx 4000 staff members worldwide with the motive to meet with the expectations of the target market(Reuters, 2017). A major part of the revenue earned by the company is from wholly owned operations carried out in the market of Australia, North America, Europe, Japan, New Zealand, South Africa and Brazil. These are the most significant markets through which enterprise is earning revenue and has allowed recovering the major costs. The company is publicly listed on the Australian Securities Exchange. Apart from this, the market where Billabong operates is highly competitive, and in turn, many players are operating in the market. Due to this basic reason financial analysis has to be carried out by the business. By comparing the present profitability position of the business and its comparison with the past can surely provide long-term benefits to the business(Terry-Armstrong, 2014). This is the main reason due to which comparative analysis of Billabong has been carried out through ratio analysis. Apart from this, recommendations have been provided to the business on the basis of the present performance so that more effective strategies can be developed for the future and this can allow in operating efficiently. Ratio analysis is considered to be one of the most effective ways to know the present performance of the company and the actions that can be taken for enhancing future performance. Analysis Profitability Ratio 2016 2015 % change Net Margin % (2.16) 0.39 Nil Operating margin 15.00 (1.00) Nil Gross margin 50.7 52.9 (4.15) Profitability ratios help the organization in knowing the overall profits earned by conducting its overall operations in the market. For knowing profitability position of Billabong International net margin, operating and gross margin ratios have been computed through which business efficiency has been easily known in every possible manner. Net margin ratio is considered as the percentage of the revenue that remains with the business after deducting all the major expenses that involve interest, tax, operating expenses, etc(Chen, Chidambaran, Imerman, Sopranzetti, 2014). In case of Billabong International, the net margin ratio of the company has declined as compared with the past. Further, it is representing that company is not able to earn high profits by conducting the overall operations. Apart from this, the expenses are high that needs to be controlled. Negative net margin ratio is indicating that Billabong international is not able to manage its overall expenses and this is the main reason behind the decline in the profitability level. The negative ratio is not at all considered to be favorable for the enterprise, and it is the duty of management to take corrective actions for managing overall performance in every possible manner(Dietrich, Hess, Wanzenried, 2014). Operating margin ratio helps in knowing the effectiveness of the pricing strategy of the business. It helps in knowing the proportion of companys revenue that is left after payment of all the variable expenses such as wages, raw material, etc. Considering the case of Billabong International the operating margin ratio of the enterprise has increased in the year 2016 as compared with the past(Ehiedu, 2014). It is directly representing that adequate amount of revenue has been left with the company in the year 2016 after payment of all the variable expenses. This is a positive situation for the business as the company is able to meet its overall expenses and this in turn is having the positive impact on the overall performance of the company. The positive operating margin of the company is representing its efficiency in meeting overall expenses, and through this, it is possible to focus on key strategic options such as expansion or any other area(Heikal, Khaddafi, Ummah, 2014). So, in t his way operating margin has reflected the efficiency of the business and in order to enhance overall performance in the market, Billabong International has to keep a check on its major expenses so as to enhance revenue. Gross margin of Billabong has declined in the year 2016 as compared with the past. This ratio supports in knowing how profitably company can sell its stock over a particular period. In the year 2016 company was not able to sell its stock properly as per the targets. It is representing the inefficiency of the company that needs to be managed properly(Marin Lazr, 2016). Apart from this, the inability of the enterprise to sell the overall stock is indicating the situation of loss that needs to be managed properly. So, the decline in gross margin can be the main reason for the decline in profits also. Efficiency Ratio 2016 2015 % change Cash conversion cycle 95.30 93.44 1.99 Inventory turnover 2.91 2.70 7.77% Payable period 85.85 97.15 (11.63) Efficiency ratios allow in knowing how efficiently the organization is carrying out its overall operations and the areas where improvement is needed. Cash conversion cycle is the another ratio through which Billabong international performance can be known. This ratio helps in knowing how fast the organization converts cash on hand into inventory and accounts payable. Cash conversion cycle of Billabong International has increased in the year 2016 as compared with the past. Change of 1.99% has been witnessed in the ratio is of the company which is not at all considered to be good. Generally the lower the ratio, the better it is for the firm. It is representing that organization is taking a large amount of time to create and sell inventory(Omar, Koya, Sanusi, Shafie, Financial statement fraud: A case examination using Beneish Model and ratio analysis, 2014). The stock of Billabong International is not easily sold in the market and this is having an adverse impact on the business. Inventory turnover ratio helps in knowing the efficiency of the business and reflects how efficiently inventory is managed by the business through comparison of the cost of goods sold and with the average inventory. The ratio of Billabong International has increased in the year 2016 as compared with the past. A Higher ratio is representing ineffective buying where the company is buying all the items in bulk, but it is quite difficult for the enterprise to manage its stock properly(Prommin, Jumreornvong, Jiraporn, 2014). So, this has influenced overall profitability level of the company where the cost of managing stock has raised. Payable period helps in knowing the actual time that company takes to pay its invoices. Payable period of Billabong International has declined in the year 2016 as compared with the past. This is clearly indicating that company is taking lesser time in paying its suppliers and this is considered to be favorable for the enterprise. Apart from this, appropriate cash position is allowing an organization to do the same in every possible manner. Liquidity Ratio 2016 2015 % change Current 2.35 2.19 7.30 Quick 1.32 1.35 (2.22) Current ratio helps in knowing the ability of the company to pay back its liabilities along with its assets. This ratio is considered to be most effective in order to know the financial strength of the business and corrective actions can be taken if performance is not up to the mark. Considering the case of Billabong International, it has been found the current ratio of the business has increased, and this is representing that Billabong international is efficient enough to pay back its liabilities along with the assets. Generally, ratio under 1 represents that liabilities of the firm is more than its assets and in this situation, it becomes difficult for the enterprise to pay off its obligations(Uechi, Akutsu, Stanley, Marcus, Kenett, 2015). So, current ratio represents the efficiency of Billabong International. The quick ratio represents liquidity position of the enterprise. A quick ratio of Billabong International has declined, but there exists no high variation. It is clearly representing that enough cash is present with the company to meet all expenses and company has sound liquidity position. Gearing (Leverage) Ratio 2016 2015 % change Financial leverage 2.87 2.86 0.34 Debt/equity 1.03 0.92 11.95 Financial leverage helps in knowing the percentage of debt acquired by the business in order to acquire additional assets. In case of Billabong International, the financial leverage of the company has declined in the year 2016 as compared with the past. Generally high financial leverage is considered to be risky for the business. Low level of financial leverage is indicating that company has reduced the amount of debt to acquire additional assets. So, this situation is favorable for the company. But shortly it is necessary for the enterprise to reduce its dependency on debt(Van den End, 2016). Debt equity ratio of Billabong International has increased in the year 2016 as compared with 2015. This is representing that company relies more on debt which is considered to be risky. The ratio of debt is high in its capital structure, and this is indicating that company has to repay the high amount. Investment Ratios Ratio 2016 2015 % change Return on assets % (3.07) 0.53 Nil Asset turnover 1.42 1.31 8.39 Return on invested capital% 0.98 5.17 (81.04) Return on asset helps in knowing the percentage of profit that company earns in relation to the overall resources(Ehiedu, 2014). It reflects how efficient management is in utilizing assets with the motive to generate earnings. In case of Billabong International return on asset ratio of the company has declined in the year 2016 as compared with the previous year. It is indicating that company is not able to utilize its assets, and in the near future, it can create an unfavorable situation for the enterprise. Asset turnover ratio of Billabong International has increased in the year 2016 as compared with the past. The positive percentage of change 8.39 is representing that company is able to generate high sales with the help of its assets. So, this is beneficial for the firm in every possible manner. Return on invested capital of Billabong International has declined in the year 2016 as compared with the previous year, and this is reflecting that company is not able to obtain the higher return on the invested capital and this is a situation of loss to the company. Conclusion And Findings On the basis of the overall analysis, it has been found that financial performance of Billabong International is not up to the mark and improvement is needed. Profitability ratios have supported in knowing that company is not able to earn adequate profits by carrying out its overall operations in the market. The key reason behind the same can be the rise in expenditure level which needs to be managed by the company properly. Apart from this, the net margin and gross margin ratio of the firm has declined, and if this situation is not managed in the near future then it can surely bring unfavorable results for the organization. Due to decline in the profitability company will not be able to meet its overall expenses and large numbers of challenges have to be faced in the near future. Apart from this, analysis of efficiency ratios of Billabong International has shown that business is not at all efficient. Cash conversion cycle of the company is high and along with this inventory turnover ratio is also high. Therefore, these situations can have the adverse impact on the company. No doubt liquidity ratio is representing favorable results for the business where Billabong International possesses sound liquidity position. It is showing that liquid position of the enterprise can assist in obtaining long-term benefits. Apart from this, leverage ratio has shown unfavorable results where the company has the high dependency on debt as compared with the equity. This is considered to be more risk for the organization and is leading to higher expenses. At last investment ratios are also not up to the mark and improvement is needed as Billabong International is getting very less return on the invested capital and it is a situation of loss to the company. Therefore, the overall findings are that financial performance of Billabong International requires improvement and is not up to the mark. The company is not able to earn adequate profits for carrying out overall operations. Recommendations On the basis of overall results, some recommendations are there to Billabong international so that organization can enhance its financial performance in every possible manner It is recommended to business to indulge into the practice of financial planning as the present strategies of company are not at all effective. Firm has to decide well in advance in which areas investment can be done so as to obtain higher return. Apart from this, before investing in any project some techniques must be employed such as cost benefit, capital budgeting etc so that higher returns can be obtained The present financial analysis has shown that company relies on debt and due to this reason, it is required for the business to focus more on retained earnings rather than focusing on external source of finance. It will allow the company to reduce the major expenses and in turn profitability level can be enhanced easily. To enhance sales it is recommended to focus more on marketing activities so that customers can be attracted to purchase products of the company It is the duty of financial managers to identify the best possible areas where it is possible to reduce the overall cost so as to obtain higher profit margin. References Babalola, Y. A., Abiola, F. R. (2013). 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