Billabongs’ activities are exposed to a variety of financial risks, these include; market risk (including foreign exchange risk and cash flowinterest rate risk), credit risk and liquidity risk. To minimize potential adverse effects on the financial performance of Billabong, the overall risk management program focuses on theunpredictability of financial markets (Billabong Annual Report, 2011).
The framework is based around the following risk activities: * Risk Identification: Identify all significant foreseeable risks associated with business activities in a timely andconsistent manner; * Risk Evaluation: Evaluate risks using an agreed risk assessment criteria; * Risk Treatment/Mitigation: Develop mitigation plans for risk areas where the residual risk is greater than tolerablerisk levels; and * Risk Monitoring and Reporting: Report risk management activities and risk specific information to appropriate levelsof management in a timely manner.
Due to Billabong having several separate entities overseas, the company is exposed to currency riskdue to the fluctuations in exchange rate. Billabong has immense exposure to interest rate risk due to its borrowings and other debt obligations. Billabong’s current ratio is also essential to asses if the firm is able to meet its short term debt obligations. The current ratio can be calculated by dividing the firm’s current assets by the current liabilities. Current assets are cash and items that are expected to be turned to cash within the next year, and the current liabilities are financial obligations that are anticipated to be resolved within one year. Billabongs Current Ratio:
Current Assets = 908854 = 2.34
Current Liabilities 389208
The calculation of Billabongs current ratio of 2.34, demonstrates that Billabong is holding a large amount of liquid assets to cover any short term debt obligations. The analysis of the current ratio allows for no direct concern, as the group can cover its short term debt obligations. There are upsides to these risks which include:
* Higher than expected consumer spending in core markets of North America,Europe and Australasia * With only one-third of earnings derived in AUD, potential depreciation of the AUDincreases the value of earnings translated from USD or EUR * Higher than expected earnings contribution from recent acquisitions, as thecompany increases product offering and distribution * Improved earnings from recent brand acquisitions as the company increasesscale and cycles a full year run-rate. * Corporate activity
Billabong is party to derivative financial instruments in the normal course of business in order to hedge exposure tofluctuations in interest and foreign exchange rates in accordance with the Group’s financial risk management policies (Billabong Annual Report, 2011). The Group uses derivative financial instruments such as foreign exchange contracts and interest rate swaps tohedge certain risk exposures. Derivatives are used exclusively for hedging purposes and not for trading or speculativepurposes.Forward contracts are used to manage foreign exchange risk. The Group’s Risk Management Policy is for each region tohedge greater than 80% of forecast foreign denominated inventory purchases for the upcoming season. All hedges of projected purchases qualify as “highly probable”forecast transactions for hedge accounting purposes (Billabong Annual Report, 2011). By hedging, Billabong can potentially reduce its total risk exposure. The global market fluctuations in foreign currency and interest rates, it is advised that Billabong hedges against these risks whenever it is possible.
Analysis of Billabongs’ Dividend Policy
Dividends paid to members during the 2011 financial year were as follows: -------------------------------------------------
* Final ordinary dividend partially franked to 50% for the year ended...