Financial Reporting For A Key Resource Company

Sources of financing

Describe about the Financial Reporting for A Key Resource Company.

·        BHP Billiton

BHP Billiton, a key resource company specializes in production of commodities like copper, coal, iron ore etc. It is also involved in activities related to gas, coal, and oil. It has also gained the title of a major producer of items such as iron ore, nickel, silver etc. The company headquarters in Melbourne, Australia and its listing is on the ASX. The company targets on a long-term basis to own low-cost assets that are diversifiable by market and geographical locations. For such purposes, it satisfies the needs and expectations of customers through its growth and resources. The sales initiated through Houston and Singapore but are sold throughout the globe. Incorporated in 1885, it hires nearly 123,800 employees and contractors diversified to more than 130 locations, for such motives. BHP’s position is a clear-cut sign of its significant contribution towards achievement of economic growth (BHP Billiton, 2015).

Rio Tinto is a leader in the field mining and mineral processing. It aims to offer strong returns to its shareholders through an effective portfolio. It is headquartered in UK and employs more than 60000 people in its workforce. Established in 1873, its listing is on the ASX and is operative in 40 countries as a whole. With an international presence, it can provide a proper prowess in the right time. On a whole, it pursues an effective portfolio that assists it to develop globally (Rio Tinto, 2015). It aims to offer an enhanced value to customers and to be a most reliable partner.

·        BHP Billiton

The total debt accommodating liabilities that were of interest bearing nature and BHP Group issued a four part Global Bond totaling to US$5 billion that consists of Senior Floating Rate Notes of US$ 500. BHP pursues US$ 6 billion commercial papers that are funded by credit facilities of US$6 billion.

The financing activities consists of liability proceeds that are interest bearing in nature, liability repayments that are also interest bearing, proceeds from debt-related instruments, ordinary share proceeds, activities of buy-back, dividend payment etc. These activities result in cash flow from financing activities (BHP Billiton, 2015).

The equity part consists of treasury shares, share capital, retained earnings, and reserves. The issued share capital consists of shares assisted by treasury, preference, and public shares.

Rio pursues powerful finance availability but not lean to banks and capital markets. It obtained Finance Plc bonds through the group in 2013. This finance limited and finance plc proceeded into an activity that resulted in a sum of US$7.5 billion as syndicate banks’ borrowers. The group entered into a bilateral agreement (bank facility).

Ratio Analysis and comparison

In order to manage obligations, Rio issued 1436542 treasury shares and 951 fresh shares. The trustees bought 842000 shares and company registrar bought 1089189 shares for satisfaction of obligations. Retained earnings, share premium account, and reserves form a significant part of the company’s share capital (Rio Tinto, 2015).

The financing activities comprised of equity dividend payment, repayment of all borrowings, interest purchase (non-controlling), proceeds extracted from further drawings, and other cash flows.

a.     Profitability Ratio

BHP Billiton

Net profit Margin	2014	2015
Net income	15224	2878
Net sales	56762	44636
	26.82076	6.44771

A significant decline in the net profit margin is observable in 2015 due to the inappropriate control of operating profit ratio and operating expenses by the company. Hence, it must consider the same.

ROTA	2014	2015
PBT	21735	8056
total assets	15413	124580
	1.410173	0.064665

The ratio of ROTA declined in 2015 as the company has not efficiently utilized its resources. Such a sign is a poor indicator and hence, company must make ways for change (Williams, 2012).

§  Net Profit Margin

Net profit Margin
	2014	2015
Net income	4285	799
Net sales	24337	17980
	17.60694	4.443826

The net profit margin of Rio Tinto also declined as it failed to sustain its operating expenses as a whole.

ROTA
	2014	2015
PBT	6092	1745
total assets	107827	101303
ROTA	0.056498	0.017226

Rio Tinto witnessed a sharp decline in its ROTA as it failed to utilize its resources properly.

Comparison

It is observable through the profitability ratio that both BHP Billiton and Rio Tinto failed to deliver a proper profitability ratio. Both the companies witnessed a decline in ROTA and the net profit margin and hence, both must make ways for change (Parrino et. al, 2012).

1. Liquidity Ratio

• Quick Ratio

Quick Ratio	2014	2015
Quick assets	16,283	12,077
Current liabilities	18,064	12,853
Quick ratio	0.901406	0.939625

BHP is approximately closer to the standard quick ratio of 1:1. An increment is observable in 2015 that depicts that BHP has enough resources to discharge its obligations (Northington, 2011).

Current Ratio

Current Ratio	2014	2015
Current asset	22296	16369
Current liabilities	18064	12853
Current ratio	1.23427812	1.2735548

An enhancement of current ratio is observable in 2015 that portrays BHP is solvent and is capable of meeting its obligations with flexibility and simplicity (Needles & Powers, 2013).

• Quick Ratio

Quick ratio	2014	2015
Quick assets	16463	14349
Current liabilities	12220	11980
	1.347218	1.197746

A significant decline in the quick ratio of Rio Tinto is observable that depicts that it does not pursue enough resources. Moreover, the ratios are near to standard ratio and it will definitely assist Rio in achieving desired outcomes (Melville, 2013).

Current ratio	2014	2015
Current assets	20813	18273
Current liabilities	12220	11980

A decreased current ratio of Rio Tinto suggests that it will encounter problems in meeting the obligations. However, the decrease is less and is attributable to decline in current assets (Melville, 2013).

Comparison

In relation to liquidity ratio, it is observable that BHP is in a good position to meet its debt obligations because its quick and current ratios have increased towards standard ratios but the opposite is in Rio Tinto’s case.

Market performance

BHP

• Earnings per share

	2014	2015
EPS	249.3	120.7

A decline in the company’s EPS suggests poor company performance in relation to factor of earnings (Horngren, 2013).

• Dividend per share

Dividend per share	2014	2015
	118	124

An increment of DPS in 2015 suggests shareholder benefits because of profits made by BHP. However, other ratios have disappointed in comparison to 2014.

• DPS

DPS	2014	2015
	103.09	144.91

An increase in DPS suggests shareholder benefits due to significant profits earned by Rio in 2015 (Horngren, 2013).

• EPS

EPS	2014	2015
	238.2	43.8

A decline of EPS depicts a bad indicator for Rio Tinto, as shareholder benefits will be less. However, when it comes to profitability measurement, this can be considerable as a best indicator. It is notable that this EPS is not entirely for 2015 and hence, figures can vary (Gibson, 2010).

Both the companies have witnessed increment in DPS that indicates better scenarios for obtaining profit by them. Furthermore, such good profits imply payment to shareholders as dividend (Gibson, 2010).

The dividend enhanced and EPS declined in case of both the companies but such decline was more in Rio’s case. On a whole, BHP is better.

§  BHP

Equity ratio	2014	2015
Shareholder fund	79143	64768
total assets	151413	124580
Equity ratio	0.522696	0.519891

A decline in equity ratio of BHP is observable here and it suggests that creditors of BHP are at huge risk as its resources have burnt out towards interest payment (Libby et. al, 2011).

Debt equity ratio	2014	2015
Total liabilities	66031	54035
Shareholder equity	79143	64768
Debt equity ratio	0.83432521	0.8342854

It is observable that the company has taken no further debt from markets and continued activities from resources it pursues. In other words, a little reliance is on debt, which is a good indicator.

§  Equity ratio

Equity ratio	2014	2015
Shareholder fund	46285	42647
total assets	107827	101303
Equity ratio	0.429252	0.420985

A low equity ratio is observable that depicts efficiency of capital structure. Furthermore, it declined in 2015 that suggests high risks, thereby creating problems in taking of loans and huge sum expended for interest payment.

Debt equity ratio	2014	2015
Total liabilities	53233	50670
Shareholder equity	46285	42647
Debt equity ratio	1.150113	1.188126

An increment in debt equity ratio suggests increase in debt. Rio’s reliability on debt is high and this is an issue because lender claims will be more when debts are high (Kaplan, 2011).

Comparison

In relation to the above, the capital structure of BHP is better with equity and less reliance on debt but lower equity ratio indicates problems especially for lenders. Rio has higher debt equity ratio that signifies high reliance on debt and low equity ratio also create problems for creditors.

·        BHP Billiton

BHP pursues a powerful corporate planning that allows it to meet the challenges of the external environment, thereby facilitating in an enhanced average return (Brigham & Daves, 2012). The beginning stage rests the creation of a central case that assists in assessment of bottom up strategies. Furthermore, the designed planning of corporate procedures assists in outshining several uncertainties prevalent in the international scenario. Nevertheless, the framework supports in establishing external factors that comprises political, technical and governance. Even the compliance and governance procedures make sure that review of internal control is appropriate (BHP Billiton, 2015). Therefore, this designed framework assists in mitigating risks and providing an effective solution.

Capital structure

Rio Tinto emphasizes risk dealing a relevant portion of creating and protecting value. The risk management framework identifies leaders as significant and assists in providing perfect guidance. Rio’s framework aims for such a way so that risks are controllable to a desired stage (Rio Tinto, 2015).

Findings

Both Rio Tinto and BHP belong to a similar industry but the significant part that requires explanation is the maintenance of internal policies. Both the companies choose a varied framework. Secondly, the long-term finance is observable by way of bonds. Both companies pursue varied management and therefore, they pursue varied strategic tools. Besides, the ratio analysis outcomes will be different in different scenarios (Choi & Meek, 2011).

Thirdly, the ascribable profit of BHP Billiton stood at US$ 13.8 billion and the net operating cash reported at US$ 25.4 billion. These advantageous results are attributable to the increased production and cost effectiveness measures of the company. The company received ‘A’ credit rating and its balance sheet depicted strong results too due to the fact that it invested in high return schemes. On the other hand, Rio created sustainable shareholder returns in 2014 by providing vital commodities. A powerful and operational performance is observable through the annual report. The net cash from operating activities reported at US$14.3 billion while the underlying earnings stood at US$9.3 billion.

Fourthly, Furthermore, the company at enhanced prices sold assets worth US$ 6.7 billion. The company also did an effective contribution towards the environment and communities that made it very popular. Moreover, in relation to recordable injury, the company noted a significant decline of nine percent. The significant increase of two percent in the revenues made the figure US$ 67.2 billion (BHP Billiton, 2015). On the contrary, in the case of Rio, the capex decreased to US$8.2 billion and economic contribution reported at US$230 billion. In 2014, the company had paid 204.5 US cents per share that is 15 cents higher to that of 2013. The net debt decreased from US$18055 to US$12495, thereby indicating low reliance on debt (Rio Tinto, 2015).

It is clearly observable that both companies are striving to obtain their goals but they have to encounter various difficulties for the same. Since, not all standards are sustainable; ratio analysis can result in variations in the results. Moreover, the ratios of both companies suggest that they pursue a potential to increase their position in the market through their strategies. To ensure a better performance it is important for both the companies to stress on capital structure. However, Rio needs to strengthen its balance sheet and various other ratio while BHP has strong fundamentals that can help it to attain a strong position. In the coming years both the companies can further strengthen their hold on the market as the fundamentals are strong.

References

BHP Billiton 2015,  BHP Billiton Annual Report and accounts 2015, viewed 24 September 2016, <https://www.bhpbilliton.com/~/media/bhp/documents/investors/annual-reports/2015/bhpbillitonannualreport2015.pdf>.

Brigham, E. & Daves, P 2012, Intermediate Financial Management , USA: Cengage Learning.

Carmichael, D.R. & Graham, L 2012,  Accountants Handbook, Financial Accounting and General Topics, John Wiley & Sons.

Choi, R.D. & Meek, G.K 2011,  International accounting,  Pearson .

Gibson, C 2010, Financial Reporting and Analysis: Using Financial Accounting Information, Cengage Learning.

Horngren, C 2013, Financial accounting,  Frenchs Forest, N.S.W: Pearson Australia Group.

Kaplan, R.S 2011. ‘Accounting scholarship that advances professional knowledge and practice’, The Accounting Review, vol. 86, no.2, pp. 367–383.

Libby, R., Libby, P. & Short, D 2011, Financial accounting, New York: McGraw-Hill/Irwin.

Melville, A 2013,  International Financial Reporting – A Practical Guide, Pearson, Education Limited, UK

Needles, B. & Powers, M 2013, Principles of Financial Accounting, Cengage Learning.

Series: Cengage Learning.

Northington, S 2011, Finance, New York, NY: Ferguson’s.

Parrino, R., Kidwell, D. & Bates, T 2012, Fundamentals of corporate finance, Hoboken, NJ: Wiley

Williams, J 2012,  Financial accounting, New York: McGraw-Hill/Irwin.

Rio Tinto 2015, Rio Tinto Annual Report and accounts 2015, viewed 24 September 2016, <https://www.riotinto.com/documents/150806_Rio_Tinto_delivers_first_half_underlying_earnings_of__2.9_billion.pdf>.