Discuss aboout the Financial analysis of BHP Bulliton.
Introduction about the BHP Billiton and Rio Tinto
BHP Billiton is one among the leading mining firms that are being operational in Australia. The company was formed in the year 2001 as result of the merger that took place between Australian Broken Hill Proprietary Company Limited (BHP) and the Anglo–Dutch Billiton plc. The headquarters of the company has been set up at Melbourne. The market capitalization of the company has been crossed the limit of $180 billion. The stock of the company has been listed in the Australian as well as in the London stock exchange. The major products that has been mined by BHP Billiton comprises of coal, manganese, nickel and silver. The employee strength of the company has crossed 29000 with total asset strength of USD $ 129 billion. BHP Billiton is a profit making company; however, in the current year the company has incurred losses amounting to $64 billion. The management of the company has given first priority to the health and safety of the employees. They have very well defined the code of ethics that need to be followed in by all the employees of the company. On the other hand, in order to create value for the company, the board of directors believes that the company should have a fair, transparent and qualitative governance system.
On the other hand, Rio Tinto has been one among the world’s largest mining company. This company although is operational in 60 countries but its major focus is in Australia and Canada. The company was started in the year 1873 which has been formed by a list of investors. The company is majorly engaged in metallic excavating and energy sector. The major products of the company include coal, diamond, aluminum, copper, iron ore and Uranium. The company at the same time been involved in concentrating iron ore and bauxite. The stock of the company has been listed in the Australian as well as in the London stock exchange. The yearly revenue of the company has crossed the mark of $47.5 billion with an annual income of $6.48 billion. The employee strength of the company has crossed 55000 with total asset strength of USD $ 92 billion. As result of changes that have been witnessed all around the globe in relation to the mining industry, the management of the company has decided to focus on the current productivity and reduction of the current cost levels. They believe that they have adopted this strategy well in advance and soon they will be bearing fruits in the coming future. The company has made projections till the year 2030 keeping in mind the growing economies like India and China and based on the same they have made their operations in line.
Financial Ratios of BHP Billiton and Rio Tinto
BHP Billiton
|
Particular |
2014 |
2015 |
2016 |
|
Revenue USD Mil |
56,762 |
44,636 |
30,912 |
|
Gross Margin % |
77.5 |
77.2 |
72 |
|
Operating Margin % |
39.9 |
19.4 |
-20.2 |
|
Earnings Per Share USD |
5.18 |
0.71 |
-2.4 |
|
Dividends USD |
2.36 |
2.48 |
1.56 |
|
Payout Ratio % * |
42.5 |
45.5 |
189.9 |
|
Profitability |
2014 |
2015 |
2016 |
|
Net Margin % |
20.58 |
4.28 |
-20.66 |
|
Asset Turnover (Average) |
0.46 |
0.32 |
0.25 |
|
Return on Assets % |
9.56 |
1.38 |
-5.24 |
|
Financial Leverage (Average) |
1.91 |
1.92 |
2.19 |
|
Return on Equity % |
18.47 |
2.65 |
-10.73 |
|
Return on Invested Capital % |
12.93 |
2.04 |
-6.19 |
|
Interest Coverage |
37.04 |
20.27 |
-7.56 |
|
Liquidity/Financial Health |
2014 |
2015 |
2016 |
|
Current Ratio |
1.23 |
1.27 |
1.44 |
|
Quick Ratio |
0.88 |
0.92 |
1.15 |
|
Financial Leverage |
1.91 |
1.92 |
2.19 |
|
Debt/Equity |
0.38 |
0.43 |
0.59 |
|
Key Ratios -> Efficiency Ratios |
|||
|
Efficiency |
2014 |
2015 |
2016 |
|
Days Sales Outstanding |
24.92 |
31.08 |
36.23 |
|
Days Inventory |
92.36 |
126.23 |
162.5 |
|
Payables Period |
113.77 |
175.92 |
269.56 |
|
Cash Conversion Cycle |
3.52 |
-18.61 |
-70.83 |
|
Receivables Turnover |
14.64 |
11.74 |
10.07 |
|
Inventory Turnover |
3.95 |
2.89 |
2.25 |
|
Fixed Assets Turnover |
0.63 |
0.44 |
0.35 |
|
Asset Turnover |
0.46 |
0.32 |
0.25 |
Rio Tinto
|
Particular |
2013 |
2014 |
2015 |
|
Revenue USD Mil |
51,171 |
47,664 |
34,829 |
|
Gross Margin % |
29.4 |
28.9 |
19.8 |
|
Operating Margin % |
14.5 |
23.8 |
10.4 |
|
Net Income USD Mil |
3,665 |
6,527 |
-866 |
|
Earnings Per Share USD |
1.97 |
3.51 |
-0.47 |
|
Dividends USD |
1.76 |
2.03 |
2.2 |
|
Payout Ratio % * |
56.7 |
132.6 |
|
|
Profitability |
2013 |
2014 |
2015 |
|
Net Margin % |
7.16 |
13.69 |
-2.49 |
|
Asset Turnover (Average) |
0.45 |
0.44 |
0.35 |
|
Return on Assets % |
3.21 |
5.96 |
-0.87 |
|
Financial Leverage (Average) |
2.42 |
2.33 |
2.45 |
|
Return on Equity % |
7.9 |
14.16 |
-2.07 |
|
Return on Invested Capital % |
6.48 |
11.3 |
-0.47 |
|
Interest Coverage |
7.91 |
15.72 |
0.03 |
|
Liquidity/Financial Health |
2013 |
2014 |
2015 |
|
Current Ratio |
1.47 |
1.73 |
1.55 |
|
Quick Ratio |
1 |
1.33 |
1.17 |
|
Financial Leverage |
2.42 |
2.33 |
2.45 |
|
Debt/Equity |
0.03 |
0.49 |
0.56 |
|
Key Ratios -> Efficiency Ratios |
|||
|
Efficiency |
2013 |
2014 |
2015 |
|
Days Sales Outstanding |
22.05 |
20.94 |
20.16 |
|
Days Inventory |
60.02 |
53.11 |
49.14 |
|
Payables Period |
62.37 |
29.95 |
33.72 |
|
Cash Conversion Cycle |
19.69 |
44.11 |
35.58 |
|
Receivables Turnover |
16.55 |
17.43 |
18.1 |
|
Inventory Turnover |
6.08 |
6.87 |
7.43 |
|
Fixed Assets Turnover |
0.7 |
0.68 |
0.54 |
|
Asset Turnover |
0.45 |
0.44 |
0.35 |
(Source: Morning star)
GP ratio
Gross and net margin ratio
The gross margin ratio of the company reflects the profit that has been earned by the company without considering the non operating expenses of the company. In the GP ratio of the BHP Billiton Company has been increasing over the period of last 7 years. There has been consistent in the ratio. On the other hand, the trend for the gross profit ratio for the Rio Tinto limited is on a downfall which is consistently decreeing. The net profit ratio gives the profitability of a company and is most sought after ratio by investors who are looking for dividend and returns. There has been some positive trend in the net profit of the company in the previous two years (i.e. 2013 and 2014) but when the same has been compared with the net profit that both the companies has earned in the last two years reflects a negative picture. There has been consistent decrease in the same making it difficult for the management to manage. The NP ratio of Rio has turned negative in the year 2015.
Current and Quick Ratio
The current ratio is used to test the market liquidity and firm’s ability to meet out the demands raised by creditors. In the case of BHP Billiton company the current ratio stands at around 127% in the year 2015. On the other hand the quick ratio keeps a track on the liquidity of the company. This ratio checks the ability of the company to meet out its short term obligations through the help of its liquid assets. The Quick ratio of the BHP Company in the year 2015 stands close to 88%. These both the ratios are consistent for the BHP Company. However, there was some downfall in the middle of the years but the same has now recovered. On the other hand, in case of Rio Tinto, the liquidity ratio of the company is relatively on a higher side as compared to the BHP limited.
For the purpose of meeting out the financial need of the company, BHP Billiton is relying on both equity and long term debt as the sources. The Long term debt of the company has been increasing consistently over the period of last 5 years. At the same time the company has short term debt which has been paid consistently by the company. In case of BHP, the management of the company relies more on the long term debt for meeting out the finance needs of the company where 90% of the finance needs are catered by the long term debt sources.
On the other hand, in case of Rio Tinto, the story is other way round. In this case as well, the company relies on both equity and long term debt as the sources. The management of Rio Tinto Company relies more on the equity sources (common stock) meeting out the finance needs of the company where 90% of the finance needs are catered by the equity sources.
|
USD in millions (BHP Bullition) |
2012 |
2013 |
2014 |
2015 |
2016 |
|
Short-term debt |
$ 3,327 |
$ 4,872 |
$ 4,088 |
$ 2,443 |
$ 3,373 |
|
Long-term debt |
$ 24,629 |
$ 29,739 |
$ 29,036 |
$ 27,625 |
$ 31,462 |
|
Common stock |
$ 2,255 |
$ 2,255 |
$ 2,255 |
$ 2,243 |
$ 2,243 |
|
USD in millions (Rio Tinto) |
2012 |
2013 |
2014 |
2015 |
2016 |
|
Short-term debt |
$ 1,447 |
$ 2,228 |
$ 3,909 |
$ 2,684 |
$ 2,436 |
|
Long-term debt |
$ 20,357 |
$ 24,591 |
$ 1,232 |
$ 22,535 |
$ 20,812 |
|
Common stock |
$ 5,816 |
$ 46,865 |
$ 45,886 |
$ 46,285 |
$ 37,349 |
In terms of the market conditions, the Australian Mining industry has been facing huge ups and downs. This movement is majorly on account of the transition that has been taken place in China. This transition has been responsible for the huge volatility in the mining industry all across the globe. In this scenario, the mining company with long term vision and sustainability and with lucrative projects in hand will be able to manage in this industry and will be able earn profits.
By the year 2015, China along holds the consumption of 61% of the iron ore demand in the world. This shows the dependence on the country and any economic or political change is going to impact the mining companies in the entire world.
From the side of reporting frame work, BHP Billiton is required to prepare the financial statements in line with the AASB (Australian Accounting standard board) which is in compliance with the IFRS. On the other hand, the financial statement of Rio Tinto is prepared in line with the US GAAP.
Analysis and comparison of financial sources
The financial sources of both the companies are more or less similar. However, the usage and the percentage of the finance sources are different. For purpose of meeting out the financial need of the company, BHP Billiton and Rio Tinto both are relying on both equity and long term debt as the sources. In case of BHP, the management of the company relies more on the long term debt for meeting out the finance needs of the company where 90% of the finance needs are catered by the long term debt sources. On the other hand, in case of Rio Tinto, the story is other way round. In this case as well, the company relies on both equity and long term debt as the sources. The management of Rio Tinto Company relies more on the equity sources (common stock) meeting out the finance needs of the company where 90% of the finance needs are catered by the equity sources. In case of BHP Billiton, it’s been not more than 15 years. The company has more dependence on the debt sources of finance. However, the debt cost of the company is relative on a higher side. On the other hand, in case of Rio Tinto, the company has reduced the debt on a higher side by meeting the financial need by issue of common stock. However, the debt equity ratio of the company is more or less same. There has been a sudden decrease in the debt equity ratio for Rio in the year 2014 but again the same was brought in line with BHP.
|
Liquidity/Financial Health |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
|
Debt/Equity (BHP) |
0.22 |
0.38 |
0.42 |
0.38 |
0.43 |
0.59 |
|
Debt/Equity (RIO) |
0.24 |
0.39 |
0.52 |
0.03 |
0.49 |
0.56 |
For the purpose of the financial reporting framework, the financial statement of BHP and Rio both are prepared in line with the International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board. There has been no major change in the reporting framework of the companies as both are in line with the IFRS.
Conclusion
In the above case, the financial health of both the companies has been analyzed. The financial ratios of both the companies have been analyzed and watched closely. Our analysis has been done on the internal factors of the company external macroeconomic factors are not taken into account, these factors also might have significant affect financial performance of both companies. However looking at the overall financial position and performance of both the companies and when asked to make a choice then in that case, the financial position of BHP Billiton tends to be strong enough as compared to Rio TINTO in all prospects.
References
BHP Billiton Ltd, Annual Report 2015_ https://www.bhpbilliton.com/~/media/bhp/documents/investors/annual-reports/2015/bhpbillitonsustainabilityreport2015_interactive.pdf, Viewed on 29th Jan 2017
Rio Tinto.com, Basic Background of the Rio Tinto, Viewed on 29th Jan 2017, https://www.riotinto.com/aboutus/strategy-5006.aspx
Austrliamining.com, 2016, The top ten trends for mining in 2016, viewed on 29th Jan 2017, https://www.australianmining.com.au/features/top-ten-trends-mining-2016/
IP Australia, Industry analysis of Mining, viewed on 29th Jan 2017, https://www.ipaustralia.gov.au/pdfs/The_Australian_Mining_Industry_Report.pdf
Morning star, Financial analysis of BHP Bulliton, viewed on 29th Jan 2017, https://financials.morningstar.com/ratios/r.html?t=BHP
Morning star, Financial analysis of BHP Rio Tinto, viewed on 29th Jan 2017, https://financials.morningstar.com/ratios/r.html?t=RIO
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