Comparative Analysis Of Financial Performance Of BHP Billiton And Rio Tinto

Financial Accounting and Public Consumption

Financial accounting is defined as the field in bookkeeping that is associated with the summary, examination and reporting of the financial transaction relating to the business. Financial accounting involves preparing the financial statement so that it is available for public consumption (Henderson et al., 2015). Companies generally makes the use of standardized guidelines, transactions to record, summarized and present the same in the financial report or the financial statement particularly the income statement or the balance sheet. The financial statement is helpful in offering the information that is needed for making a sound economic decision.

The current business report is based on analysing the financial performance of two businesses that are listed on the ASX stock exchange. The report would be providing a comparative view of BHP Billiton and Rio Tinto for the financial year ended 2017. To analyse the comparative performance of BHP Billiton and Rio Tinto financial ratios has been considered here so that a detailed understanding of the financial performance for both the companies is obtained.

BHP Billiton is the globally leading Resources Company. The company is involved in extracting and processing the minerals, oil and gas with greater than 60,000 employees and contractors that are mainly involved in Australia and Americas (Bhp.com, 2017). BHP Billiton produces are sold across the world with the company sales and marketing expanding across the Singapore and Houston, US. BHP Billiton worldwide headquarters is located in Melbourne, Australia. BHP Billiton functions under the structure of Dual Listed Company with the two parent companies namely the BHP Billiton Ltd and BHP Billiton Plc operating as the single economic entity.

BHP Billiton was founded in 1885 in the mining town of Broken Hill in New South Wales. During the year 2017, BHP is ranked as the world’s largest mining company in respect of its market capitalization and third largest company of Melbourne in terms of revenue that almost increased between 2004 and 2012.  

Rio Tinto Group is the Anglo-Australian international and one of the world’s largest company engaged in mining. For over 145 years, Rio Tinto has been ground-breaking to the production of materials necessary to the progress of humans (Riotinto.com, 2017). The minerals and metals helps in making the modern life work. Rio Tinto Group is the dual listed company trading on both the London stock exchange and the Australian stock exchange. The company has created portfolio and it is constantly optimising which offers the company with the competitive advantage.

About BHP Billiton and Rio Tinto

Rio Tinto Group makes investment in the assets to develop the suit of high quality expandable assets which is positioned for decades of premium production. With more than 47,000 workforces, Rio Tinto Group has the common code of conduct with the identical set of morals, protection, collaboration, reliability and brilliance. Rio Tinto continues to pioneer its progress for the better future. The company looks for ways so that it makes its trade robust by driving more production and performance from the coalmine to market.

The return on assets ratio is generally called as the return on total assets that are profitability to measure the net profits that is produced by the total assets through the period by associating the net income with the average total assets. Alternatively, the return on assets evaluates how effectively a business manages its assets to generate incomes during a particular period (Khan, 2015). As the assets of the company forms the sole purpose of generating the revenues and producing profits, the ratio is helpful to administration and investors to understand how well a company can convert the investment in assets and profits.

Year	2017	2017
Particulars	BHP Billiton	Rio Tinto
Net Income	6222	8851
Average Total Assets	117979.5	92494.5
Return on Assets	5.27	9.57

In the financial year of 2017, BHP Billiton reported return on Assets of 5.27. On the other Rio Tinto’s return on assets for 2017 stood more superior at 9.57. BHP Billiton has modest and varied portfolio of tier one assets across the world with the lower cost choices for the prospective growth and construction of value. This enables BHP Billiton to apply its values and culture which emphasises on safety and productivity. BHP Billiton employs technology and uses disciplined investment to extract the most worth and maximum returns from its assets.

Rio Tinto’s annualized return on assets for the year stood 9.57. Rio Tinto reported a capitalized property plant and equipment of US $441 million. Additionally, the book value of assets increasingly stood US $118 million. Understandably, Rio Tinto’s return on assets as represents large investment in the capital assets with the ultimate objective of generating greater revenue and producing higher profits (Barth, 2015). On a comparative note, the return on assets of Rio Tinto’s stood stronger than BHP Billiton which implies that Rio Tinto has the better ability of generating revenues and profits from its given assets.

The return on ordinary equity or return on equity is the profitability ratio which evaluates the capability of an organization to produce profits from the stakeholders’ investment in the company (Hoskin et al., 2014). Alternatively, the return on equity evaluates the efficiency of the company to use its money from the shareholders to yield profits and enlarge the business.

Particulars	BHP Billiton	Rio Tinto
Net Income	6222	8851
Shareholder’s Equity	62726	51115
Return on Ordinary Equity	9.92	17.32

Return on Assets and Return on Equity

The return on ordinary equity for BHP Billiton during the year 2017 stood 9.92 while Rio Tinto reported a return on Equity of 17.32. The return on equity for BHP Billiton stood comparatively low than Rio Tinto because of the Samarco dam failure in 2017. The company however realised higher average prices from its equity accounting investments in 2017. The company however reported an increase of US16.8 billion which reflects an increase from the higher commodity prices from the equity accounted investments. Rio Tinto reported higher return from its shareholder’s equity to include the equity dividends that are paid to the shareholders. Rio Tinto has efficiently used its capital from the shareholders to produce profits and expand the company (Pott, 2017). This designates that the business is using the investors fund effectively compared to BHP Billiton.

The profit margin ratio is also known as the gross profit ratio that helps in measuring the sum of net income that is produced with each dollar of sales derived by equating the net income and the net sales of the business (Warren & Jones, 2018). The profit margin ratio helps in showing the proportion of sales that remains after the business pays all the expenditure. The creditors and the shareholders makes the use of this ratio to evaluate effectiveness of the company to convert the sales into the net income (Downs, 2017). The investors under this ratio makes sure that the profits are sufficiently greater to distribute the dividends whereas the creditors want to assure that the business has the sufficient amount of profit to pay its loan back.

Particulars	BHP Billiton	Rio Tinto
Net Income	6222	8851
Net Sales	38285	40030
Profit Margin	16.25	22.11

The profit margin for BHP Billiton during the year ended 2017 stood 16.25 while the profit margin for Rio Tinto stood 22.11. BHP Billiton reported attributable profit of US $5.9 billion which also included the exception loss of US $842 million after tax. The gross margin stood relatively lower than Rio Tinto because the Samarco dam failure contributed to the exceptional loss (Elliott, 2017). Though the profits of BHP Billiton increased from the previous year figures of US $ 1.6 billion but stood relatively lower than Rio Tinto profit margin of 22.11. It can be stated that Rio Tinto manages its expenditure relatively well in proportion to its net sales.  

The current ratio can be defined s liquidity ratio that measures the efficiency of the company’s capability to pay its short term obligations in proportion to its current assets. The current ratio is regarded as the vital measures of liquidity to assess the short term liabilities that are due inside the year (Trotman & Carson, 2018). This signifies that the company has the limited time period to raise the funds to pay its liabilities. The company that has the larger amount of current assets would be more likely in the position of paying off its debts when they become due without selling the long term revenue producing assets.

Particulars	BHP Billiton	Rio Tinto
Current Assets	21056	18678
Current Liabilities	11366	11225
Current Ratio	1.85	1.66

Profit Margin Ratio

During the financial year of 2017 BHP Billiton reported the current ratio stood 1.85. On the other hand, Rio Tinto reported the current ratio of 1.66. The current ratio for Rio Tinto stood comparatively lower than the BHP Billiton (Arnold & Kyle, 2017). By gauging into the current ratio of BHP Billiton the investors and creditors can understand that the liquidity position of BHP Billiton is far more superior to Rio Tinto which signifies that the business is better capable of paying its current liabilities. Furthermore, the current ratio of BHP Billiton states that the firm’s current debt is in terms with the current assets than Rio Tinto as it more easily makes the payments of current debt.

The inventory turnover ratio is regarded as the efficiency ratio that signifies how effectively the company is managing its inventory in comparison to the cost of goods sold with the average the average inventory for the period (Kaplan & Atkinson, 2015). The inventory turnover measures the number of times the average inventory is converted or sold during the period. Alternatively, the ratio measures the number of times a company sale its total average inventory dollar amount throughout the year (Scarborough, 2016). The inventory turnover ratio is termed important because it is reliant on the two chief constituents of performance. The first element is reliant on the stock purchasing while the second component is related to sales.

Particulars	BHP Billiton	Rio Tinto
Cost of Goods Sold	9085	11432
Average Inventory	3542	151.5
Inventory Turnover Ratio	2.56	75.46

The inventory turnover for BHP Billiton and Rio Tinto is computed as cost of goods sold divided by the total inventories. The inventory turnover ratio for BHP Billiton stood 2.56 times for the financial year ended 2017 whereas Rio Tinto reported inventory turnover of 75.46 times. BHP Billiton recognizes the inventory and based on the stage of production procedure. BHP Billiton realises the inventory at the lower costs and net realisable value. The cost is ascertained primarily on the basis of average costs.

Rio Tinto average of cost is computed by referring to the level of cost during the relevant month along with the opening inventory (Langfield-Smith et al., 2017). The inventory turnover of Rio Tinto is comparatively better than BHP Billiton because the stock purchase resulted in greater sales of inventory which ultimately improved its inventory. The real cause of BHP Billiton lower inventory turnover ratio is that the first component of stock purchase is larger which amounts to accumulation of stocks and ultimately contributing to the storage costs and holding of other assets.

Current Ratio

The debt ratio is regarded as the creditworthiness ratio which measures the total liabilities of the firm as the proportion of total assets. In other words, the debt ratio represents the company’s ability of the company to pay its liabilities with its assets (Otley, 2016). Alternatively, this represents the number of assets a company should sell so that it can pay off its liabilities. The ratio assesses the financial leverage of the company (Quattrone, 2016). Corporations that have greater amount of liabilities in comparison to the assets is regarded as highly leveraged and riskier for the moneylenders.

Particulars	BHP Billiton	Rio Tinto
Total Liabilities	54280	44611
Total Assets	117006	95726
Debt Ratio	0.46	0.47

The debt ratio for the BHP Billiton for the financial year ended 2017 stood 0.46 whereas the debt ratio for Rio Tinto stood 0.47. BHP Billiton for the year 2017 has been bias towards the reduction of debt. The company also indulged in the decision of execution of share repurchase programme reflecting a strong cash position. BHP Billiton further extended BHP average debt maturity profile to improve capital structure of company. Rio Tinto on the other hand reported somewhat identical debt ratio as the net debt of the company reduced by US $3.8 billion which ultimately strengthened the year ended balance sheet.

The lower debt ratio for the BHP Billiton and Rio Tinto is regarded as more favourable. This implies that both the companies have more stable business with the higher probability of longevity in the long run (Dekker, 2016). Furthermore, both Rio Tinto and BHP Billiton has twice the amount of assets as the liabilities. Essentially, the creditors of both the Rio Tinto and BHP Billiton owns half of each company’s assets while the rest is owned by the shareholders as the remainder of the assets.      

The equity ratio is regarded as the investment leverage or the creditworthiness ratio that helps in measuring the quantity of assets which is funded by the investment of owners in comparison to the total equity in the business to its total assets (Malmi, 2016). The equity ratio helps in highlighting the two noteworthy financial conceptions of the solvent and sustainable business. The first element shows that the amount of total company assets is owned outright by the shareholders. Alternatively, if all the liabilities are paid off then the stakeholders would end up with the remaining assets (Tappura et al., 2015). The second element on the other hand inversely represents that how the company is leveraged with its debt. The equity ratio represents the amount of company’s assets is financed by the investors.

Inventory Turnover Ratio

As evident from the above computation the Equity ratio for the BHP Billiton stood 0.54 while for the Rio Tinto stood 0.53. BHP Billiton classifies the ordinary shares under equity. As both the companies has reported higher equity ratios it represents that equity ratio is typically favourable for the company (Wagenhofer, 2016). A higher level of investment by the shareholders represents that both the companies is more sustainable and less risky to lend the future loans. As both the companies have represented higher equity ratios therefore less financing and debt service costs would be lower for both Rio Tinto and BHP Billiton.

BHP Billiton is considered as highly leverage company with the debt to equity of 45.77%. This is very much common in the large cap companies because debt can be less expensive than the alternative equity because of the large deduction in tax from interest payments (Na & Subramaniam, 2018). As large caps companies are considered safer than the small companies, companies usually tend to enjoy lower cost of capital. In the situation of BHP Billiton, the ratio of 14.39 times suggest that the interest is sufficiently covered.

Higher investment coverage is considered accountable and safe practice that highlights why majority of the investors considers BHP Billiton is safe investment. Even though the level of debt is considered safe, BHP Billiton level of debt is in the direction of higher end spectrum, the cash flow of the company appears adequate to satisfy the obligations which signifies that the debt is being used effectively (Huang et al., 2017). As there are no concerns around the BHP Billiton liquidity requirements, this should be considered as the optimal capital structure currently. BHP Billiton issued new level of debt during the year 2017 and the matured debt during the year was not refinanced.   

The capital structure of the company included the issue of share capital. To finance its capital BHP Billiton issued ordinary shares at $0.50 par value that were fully paid. To finance its capital structure BHP Billiton also issued the preference shares that had the right of sharing preference shares at the nominal value in BHP Billiton Plc.

The debt and equity financing structure of Rio Tinto included the issuance of unamortised debt of US $14 million. Rio Tinto has the access to numerous forms of debt financing that includes the US Shelf Programme, European Debt Issuance Programme, Commercial Paper and credit facilities. Furthermore, the debt and equity financing of the company also included European Debt Issuance Programmes and Commercial Paper that totalled around US $7.9 billion. The equity financing structure of the company included issuance of equity shares to the holders of the non-controlling interest (Nguyen & Rugman, 2015). Ordinary shares were issued by the company at the incremental cost that was directly attributable to the issue of new shares.

Debt Ratio

Conclusion:

On a conclusive note it can be stated that Rio Tinto has recorded better financial performance as the for the year 2017 the net profit of the company increased by 90%. Rio Tinto paid out the investors with the total record of US $5.2 billion in 2017. Additionally, the ratios indicted that the gross profit margin for Rio Tinto stood relatively strong than BHP Billiton. The underlying profits for the year 2017 stood US $8.6 billion for Rio Tinto. BHP Billiton on the other hand reported somewhat tumultuous financial performance.

Despite reporting in 2017 the financial and operational result were strong for BHP Billiton but Samarco Dam failure hampered the company’s performance. The return on assets and return on the ordinary equity for BHP Billiton stood relatively lower which signifies that the company is not sufficiently utilizing its shareholders fund to generate profit. With positive balance sheet and positive cash flow position BHP Billiton is committed to increase and maintain the capital by improving the value and returns for its shareholders.

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