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’s D2L
site for Actg 495.
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 (10 Points)
1. Review the annual report for the six year period ending June 30, 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, c o m p a r e t h e
d i ffe r e n t s tr a t e g i e s o f that Billabong & Quiksilver . which would you have expected to be more
successful ? Explain the reasoning behind your conclusion.
Profitability (20 points)
Calculate the following ratios and develop answers to the following questions for Billabong. Refer to
PowerPoint 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 (20 Points)
Determine the following information and develop answers to the following questions for Billabong. Refer to the
PowerPoint slides and lectures that are online when calculating the following ratios. Focus on the six year’s
ended June 30, 2013.
1. Operating cash flows
a. Develop a table that summarizes your calculation of sustainable cash flow from operations for the six
years ended June 30, 2013. Reconcile reported operating cash flow 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 cash flow from operations cover the current
portion of financing debt and dividends? Show your work.
c. Explain the underlying reasons for the changes in sustainable cash flow from operations for the six years
ended June 30, 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 cash flow? 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 Cash Flows
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 were Billabong’s financing obligations retired? Did Billabong have
sufficient operating cash flow, or free cash flow 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 cash flow or free cash
flow)? What has the company invested in? Do not skimp on this area. Calculating the numbers is not the
end of the story.
Operating Cycle (10 Points)
Calculate the following ratios or determine the appropriate information from Billabong’s financial statements
for the six years ended June 30, 2013. Refer to the PowerPoint 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 (20 points) Calculate the following ratios or determine the appropriate information from Billabong’s financial statements.
Refer to the PowerPoint slides and lectures that are online when calculating the following ratios. Focus on the
entire six year’s ended June 30, 2013.
Liquidity Risk (10 of 20 points) 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 cash flow as an
obligation and positive sustainable operating cash flow 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 (10 of 20 points)
1. I would normally ask you to determine how does cash flow 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 with information 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 cash flow as an
obligation and positive sustainable operating cash flow 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 (20 points)
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: 1000 words or 10
powerpoint slides . Write c oherently though you may use bullet points