Billabonged....A story of declining Asset Quality, Earnings Queries and Off Balance Sheet Debt

Been running the ruler over the sad story of Billabong. What a disaster. A share price that tanked from the highs of 2007 ($16 odd) to it's current price of $0.53. When you look at the chart, there is an awful lot of value destruction.

So I decided to have a look at the fundamentals to see if there were any red flags a long the way.

And as far as I can see, there were four areas that would concern me.

1. Net Margin Decline
NPAT/Revenue went from 13.7% in 2007, to 13% (2008), to 9.13% (2009), to  9.75% (2010), to 6.9% (2011). Besides the brief uptick in 2010, it's been all downhill

2. Quality of Earnings
Accruals ratio went from 12.58% in 2008 to 19.78% in 2009. It then decreased to 2.78% in 2010, but jumped again in 2011 to 15% Clearly some inconsistancies in relation to cash management.

3. Asset Quality
Using my favourite ratio of ROA, we have it at 12% in 2007, but then a steady degredation to 11% (2008), 7% in 2009, 6.5% in 2010 to a miniscule 4.9% in 2011. Lots of money going into asset purchase, but no luck squeezing profit out of them.

4. Off Balance Sheet debt. When you include the non-cancelable operating leases to reported debt, you end up with a debt/equity ratio that is trending up from 0.66 (2007) to 0.87 (2008) to 0.73 (2009) to 0.59 (2010) and getting to 0.89 (2011)

So it definitely started to go pear shaped around 2009. The big red flag in my opinion was the increase in Accruals ratio in 2009 combined with the ROA reduction..Probably would have tried to get out then in my opinion.

Still, it's all in hindsight now isn't it.