Comparative Analysis Of Cash Flows Statement And Equity Position Of BHP Billiton And South32

Task Details

The two companies which have been considered here for analysis is BHP Billition and the South 32. South 32 is a company dealing in mining and metallurgy industry. It is also listed in London and in Johannesberg Stock exchanges and employs more than 15000 people. It is one of the chief producers of mica, nickel, zinc, lead, thermal coal, coking coal, aluminium, alumina, silver, etc. off late the company has been in the growing phase (Arnott, et al., 2017).

On the other hand, BHP Billition is one of the largest companies in Australia and is engaged in mining and metal and petroleum industry. It is listed on a a number of Stock exchanges over the world namely New York Stock exchange, London and Johannesberg Stock Exchange and Financial Times Stock Exchange 100. In terms of mining, this is the largest in world and in terms of revenue, it ranks 3^rd in Australia. It has customers over the globe and gives employement to more than 65000 people.

Owner’s Equity

i. The owners’ capital which is also known as the own capital represents the capital of the shareholders of the company. This is high cost and high risk and therefore higher returns are expected out of it. On the other hand, debt or the loan capital comes at lower cost and low risk is involved and hence the returns are only in the form of interest (Carlin, 2011). The equity has got many components like the share capital –equity and preference, retained earnings, dividend, net profit, and various other reserves, all these belong to equity shareholders, all of which has been defined below:

a. Share capital: The capital of the company is divided in small denominations or parts whicha are known as shares, alltgether it is called the share capital. It is traded in market and its holders are called the shareholders. For BHP, the balance of share capital remained constant during 3 years whereas South 32 made a buy back of equity shares in 2017, which led to the decrease in equity shares balance.

b. Treasury Shares: These are mainly preferential shares which belongs to employees as part of dividend reinvestment plan or ESOP. For BHP Billiton, the balanace of the treasury shares has declined indicating less of issues and more of buy back by ESOP trusts of the company. For South32, it has remained constant (Clarke, 2013).

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c. Reserves: The reserves is the sum total of the profit earned in the past by the company, it includes comprehensive income, unexercised awards by the employees, employee share awards forfeited, etc. For South 32, it has been more or less constant for last 3 year and for BHP the same has declined in 2017 due to loss in comprehensive income section and the awards given.

(Amt in US$M)
South 32 – Owner’s Equity
Particulars	2015	2016	2017
Share Capital	14,958	14,958	14,747
Treasury Shares	–	(3)	(26)
Reserves	(3,557)	(3,555)	(3,503)
Retained Earnings	(365)	(1,977)	(982)
Total attributable to equity shares	11,036	9,423	10,236
Non-controlling interest	(1)	(1)	(1)
Total Equity	11,035	9,422	10,235

(Amt in US$M)
BHP Billiton – Owner’s Equity
Particulars	2015	2016	2017
Share Capital	BHP Billiton Ltd.	1,186	1,186	1,186
	BHP Billiton Plc.	1,057	1,057	1,057
Treasury Shares	BHP Billiton Ltd.	(19)	(7)	(2)
	BHP Billiton Plc.	(57)	(26)	(1)
Reserves		2,557	2,538	2,400
Retained Earnings		60,044	49,542	52,618
Total attributable to equity shares		64,768	54,290	57,258
Non-controlling interest		5,777	5,781	5,468
Total Equity		70,545	60,071	62,726

d. Retained earnings: These are the cumulative earnings of the past years for the company out of which the dividend sitribution is being done. For South32, th same has been negative throughout as went further negative in 2016 because of comprehensive losses which are recovered partially in 2017, the company paid dividends during both the years. Similarly, the BHP, the balance of retained earnings decreased and increase in 2016 and 2017 respectively due to losses and gains in respective years.

e. Non controlling interest: It is for those who have holding less than 50% in company and generally do not enjoy substantial power in decision making purposes. For both the companies, it has been same all throughout the last 3 years, with South 32 having only $ 1Mn for all the 3 years (Vieira, et al., 2017).

ii. The debt and equity position of both the companies has been shown below with the help of the comparative table and it is quite evident from the same that both the company have had a control on the debt equity ratio and not used much debt with the intention of not diluting the powers in hands of shareholders.

(Amt in US$M)
South 32 – Owner’s Equity
Particulars	2015	2016	2017
Debt	Interest bearing liabilities	682	631	644
	Other financial liabilities	–	16	–
Total Debt		682	647	644
Equity	Equity attributable to BHP shareholders	11,036	9,423	10,236
	Non-controlling interests	(1)	(1)	(1)
Total Equity		11,035	9,422	10,235
Debt Equity ratio		6%	7%	6%

(Amt in US$M)
BHP Billiton – Debt and Equity Position
Particulars	2015	2016	2017
Debt	Interest bearing liabilities	27,969	31,768	29,233
	Other financial liabilities	1,031	1,778	1,106
Total Debt		29,000	33,546	30,339
Equity	Equity attributable to BHP shareholders	64,768	54,290	57,258
	Non-controlling interests	5,777	5,781	5,468
Total Equity		70,545	60,071	62,726
Debt Equity ratio		41%	56%	48%

Cash Flow Statement

iii. The cash flow statement of both the companies BHP as well as South32 has been analysed and the brief description of each of the line items of the cash flow statement has been shown below:

a. Cash Flow from operating activity: This section covers all the cash received from the operational activity, the payment made to the creditors, the changes in the current assets and liabilities, other operating receipts and payments like dividend, interest received, taxes paid, etc. For BHP the net inflow has been on the increasing trend since 2015 and there was also net inflow on account of discontinued operations in 2015. For South32, as well, the net inflow from operating activity has been on the increasing side but the same has a scale very less than BHP (Trieu, 2017).

Owner’s Equity

b. Cash from from Investing activity: The cash flow from investing activities includes cash flow from purchase or acquisition of investments, plant, property and equipment and from sales of these investement and PPE. It also includes receipts and payments for sale and purchase of subsidiaries, company, joit ventures by company, if any. For BHP, the net inflow has been on increasing side from sale of PPE and there is a decrease in outflow for purchase of PPE over years. For South32 howvere, though the investment in PPE has decreased over years, but the company made an acquisition in 2015 during BHP demerger and outflow was $ 12734 Mn. The company’s overall investing outflow was more than $ 15000 Mn (2016: $ 454 Mn)

c. Cash flow from financing activity: Investing activity comprises of all the inflows and outflows relating to funding of the company and capital arrangement. It includes proceeds from issue of share capital or from raising of debt, money paid on buy back of shares, or the interest payment, debt repayment, etc. For South 32, debt was raised in 2017 alongwith the buy back of shares and dividend repayment in 2017. This was not so in 2016 whereas in case of BHP, the company raised debt capital majorly in 2016 which was paid back in 2017. The dividend distribution has been decreasing in the company (Fay & Negangard, 2017).

iv. The comparative analysis of the cash flow statement of both the companies has been shown below over the last 3 years.

(Amt in US$M)
South 32 – Cash Flow Analysis
Particulars	2017	2016	2015
Net operating cash flows	2,132	1,030	670
Net investing cash flows	(289)	(342)	(14,995)
Net financing cash flows	(393)	(99)	14,856
Net increase/(decrease) in cash and cash equivalents from Continuing operations	1,450	589	531
Cash and cash equivalents, net of overdrafts, at the beginning of the financial year	1,225	644	145
Foreign currency exchange rate changes on cash and cash equivalents	–	(8)	(32)
Cash and cash equivalents, net of overdrafts, at the end of the financial year	2,675	1,225	644

(Amt in US$M)
BHP Billiton – Cash Flow Analysis
Particulars	2017	2016	2015
Net operating cash flows	16,804	10,625	19,296
Net investing cash flows	(4,161)	(7,245)	(13,154)
Net financing cash flows	(9,133)	284	(8,276)
Net increase/(decrease) in cash and cash equivalents from Continuing operations	3,510	3,664	(1,781)
Net increase in cash and cash equivalents from Discontinued operations			233
Cash and cash equivalents, net of overdrafts, at the beginning of the financial year	10,276	6,613	8,752
Cash disposed on demerger of South32			(586)
Foreign currency exchange rate changes on cash and cash equivalents	322	(1)	(5)
Cash and cash equivalents, net of overdrafts, at the end of the financial year	14,108	10,276	6,613

v. From the above analysis, we can see that the major contributor to cash inflows for South 32 has been operating activities and rest of the 2 segments have contributed to outflows. The company raised equity shares in 2015 (reason for outflow) and made the investment in entities as part of entity acquisition in 2015. The magnitude of amount has been very less as compared to BHP (Grenier, 2017). On the other hand, in case of BHP billiton, the major contributor to cash inflow has been operating activity which has been increasing and investing and financing activity contributed to outflow in 2017. Since the company acquired a lot of debt capital in 2016, the cash flow from financing activity was positive. From both the cash flow statements, it is evident that the company is focusing on repayment of old debt and reducing its balance.

BHP Billiton – Debt and Equity Position

vi. The other comprehensive income statement items’ has been shown below for both the companies:

For BHP Billition, it includes items which are reclassified later to the income statement such that income from investment which are available for sale, the income from cash flow hedges, the income from exchange rate fluctuations from foreign operations, actuarial gains and  losses. It also includes items which are non reclassified to income statement like the tax in the other comprehensive income, the remesurement gains and losses in the medical and pension schemes. On the other hand, for South 32, the other comprehensive income statement, includes items like income from “available for sale” investments, the tax benefits and the expenses which are not reclassifiable to income statement, the actuarial gains and losses, etc.

vii. The other comprehensive income statement is being prepared separately as compared to the normal income statement as this deals with all the items not relating to business activity but anciliary activities. Some of it can be later on classified to income statement when it is actually realised, some cannot be done so.  Moreover, it has also been stated as one of the requirements of the IFRS that the OCI should be shown separately as per the new accounting guidelines and therefore the same is being done (Kew & Stredwick, 2017).

viii. The comparative analysis of comprehensive income statement for both companies is shown below:

(Amt in US$M)
BHP Billiton – Comprehensive Income Statement
Particulars	2017	2016	2015
Profit/(loss) after taxation from Continuing and Discontinued operations	6,222	(6,207)	2,878
Other comprehensive income
Total items that may be reclassified subsequently to the income statement	(59)	60	(91)
Total items that will not be reclassified to the income statement	10	(37)	(45)
Total other comprehensive (loss)/income during the year	(49)	23	(136)
Total comprehensive income/(loss)	6,173	(6,184)	2,742
Attributable to non-controlling interests	332	176	973
Attributable to BHP shareholders	5,841	(6,360)	1,769
(Amt in US$M)
South 32 – Comprehensive Income Statement
Particulars	2017	2016	2015
Profit/(loss) after taxation from Continuing and Discontinued operations	1,231	(1,615)	(919)
Other comprehensive income
Total items that may be reclassified subsequently to the income statement	20	(22)	32
Total items that will not be reclassified to the income statement	7	3	2
Total other comprehensive (loss)/income during the year	27	(19)	34
Total comprehensive income/(loss)	1,258	(1,634)	(885)
Attributable to Equity shareholders	1,258	(1,634)	(885)

In the abvove comprehensive income would be considated along with the income statement, the overall income would fall and there would be less profit available for distribution.

ix. The items which forms a part of the other comprehensive income statement include hedging gains and losses, actuarial gains and losses, the income and losses on fair valuation of assets and liabilities all of which is not related to normal business operation and hence no person can be made directly responsible for the same and hence it should not be included in evaluation criteria for managers (Kim, et al., 2017).

x. The break up of the tax expenses for both the companies has been shown below:

(Amt in US$M)
BHP Billiton – Tax Details
Particulars	2017	2016	2015
Tax Expenses	4,100	(1,052)	3,666
Effective tax Rate	39.7%	35.8%	45.5%
Cash tax paid	(2,585)	(2,286)	(4,373)
Profit before taxation	10,322	(7,259)	8,056
Cash tax Rate	-25.0%	31.5%	-54.3%
Book tax rate	30.0%	30.0%	30.0%
Deferred tax assets	5788	6147	2861
Deferred tax liabilities	3765	4324	4542
(Amt in US$M)
South 32 – Tax details
Particulars	2017	2016	2015
Tax Expenses	393	70	528
Effective tax Rate	30.7%	36.6%	32.0%
Cash tax paid	(127)	(52)	1
Profit before taxation	1,624	(1,545)	(398)
Cash tax Rate	-7.8%	3.4%	-0.3%
Book tax rate	30.0%	30.0%	30.0%
Deferred tax assets	276	382	376
Deferred tax liabilities	518	501	554

As per the above table, tax expenses for South 32 for 2017 was $ 393 Mn and for BHP the same was $ 4100 Mn.

xi. The effective tax rate of BHP was 39.7%, 35.8% and 45.5% and for South 32 was 30.7%, 36.6% and 32% for the years 2017, 2016 and 2015 respectvely. Thus the effective tax rate has been on higher side for BHP here.

South 32 – Debt and Equity Position

xii. The accounting treatment for deferred tax has been explained in AASB 112. It occurs when the tax is calculated as per 2 different bases namely taxation base and accounting base. It basiscally arises due to temporary and permanent timing differences where is tax paid is less or more compared to actual liability thus leading to formation of deferred tax asset or liability. This is done to meet the reporting requirements of IFRS and local GAAP.

Some of the reasons are stated below:

a. Difference in depreciation calculation as per accounting and taxation base

b. Difference in period for which the revnue is booked in books, it can be different period for accounting and for taxation (Oberoi, 2018).

c. Some expenses may be allowed in accounting books but may be disallowed in taxation

xiii. There has been significant changes in the balances of deferred tax aasets and liabilities for both the companies over years. As can be seen from above table, the deferred tax asset has decreased fro South 32 over years and the deferred tax liability has remained almost same. Whereas on the other hand, for BHP, the deferred tax aaset balance has increased and the deffered tax liabilities balance has decreased over the years, since the actual tax paid has been on higher side (Lessambo, 2018).

xiv. The cash tax paid by both the companies has been shown below:

For South 32: $ 127 Mn (2017), $ 52 Mn (2016) and refund of $ 1Mn (2015)

For BHP Billiton: $ 2585 Mn (2017), $ 2286 Mn (2016) and $ 4373 Mn (2015)

xv. The cash tax rate for both companies has been shown below:

For South 32: 7.8% (2017), 3.4% (2016) and 0.3% (2015)

For BHP Billiton: 25% (2017), 31.5% (2016) and 54.3% (2015)

Here also BHP has higher cash tax rate.

xvi. The reason for the difference in the cash tax rate for both companies is that South 32 was having the deffered tax asset benefit over the years because of the losses suffered in previous years. Furthermore, the corporate tax rate is 30% which is applied on both the companies but it is just the adjustment of the deffered tax assets and liabilities which made a difference in the cash tax rate.

Conclusion

From the above discussion and analysis we can see that both the companies are compliant of rules, regulations and laws, both are profit making but South 32 is small as compared to BHP Billition which has been in industry for so long. The cash flows shows a trend that operating activities have generally resulted in cash inflows and other two (investing and financing) have resulted in outflows most of time. There has been no significant change in equity and the different aspects of taxes and why there is a difference has also been covered in the report.

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