Billabong International Limited The following case involves each team

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)