The BHP Billiton Ltd Company part of the BHP group an Australian Company trading its operation in the mining, metals and petroleum sector is headquartered in Melbourne. The operations of the company is done at a large scale and is the second largest company in terms of revenue in the terms of total revenue earned. The financial analysis of the company for the trend period 2016-2018 was conducted given the current macro-economic conditions and the business factors under which the company operates (Pepper et al. 2015).
The financial analysis includes the usage and evaluation of the financial performance of the company by conducting a ratio analysis for the trend period. The ratio analysis is a key effective quantitate analysis tool, which is used for evaluating the financial performance of the company over a given period. The financial position for the company in the last two years have increased consistently showing the profitability and the efficiency for the company has increased consistently for the time. The increase in the profitability shows the efficiency of the company in the utilisation of the total assets of the company and the capital employed by the company (Vogel 2014).
The liquidity ratio for the company also has increased for the company in the trend period analysed for the company. The financial leverage or the gearing ratio’s for the company is still high for the company showing that the financial risk for the company is high for the given trend analysed for the company (Stone et al. 2016).
Discussion
The ratio analysis will provide us a graphical view of the performance of the company’s performance in the given time period. The four common base of ratios calculated for the company were profitability ratios, efficiency ratios, liquidity ratio and gearing ratios.
Profitability Ratio’s
Return on Assets: (Profit before interest and tax / Average total assets*): The ratio indicates the total return generated by the company on the total assets of the company. The ratio for the company has been growing from the year 2016-2018 from about -5.12% to around 13.94%. The ratio indicates that the company has increased efficiency in utilisation and producing returns over the total assets of the company (Ortea and Gallardo 2015).
Return on Equity: (Profit / Average equity): The return on equity for the company shows the total profitability for the company on the total capital employed by the company. The return on equity for the company has shown a consistent growth from the year 2016 where the return was around -9.50% and was around 10.12% for the year 2017 and around 12.55% for the year 2018 (Camin et al. 2016).
Net Profit Margin: (Profit before tax / Sales): The net profit margin shows the net return for the company on the total operational work it conducts. It is the key ratio, which indicates the profitability scenario for the company. The net profitability ratio for the company was negative for the year 2016, which was around -23.48% and has shown consistent return from the year 2017 and 2018 onwards. The growth for the company in the year 2017 and 2018 was around 26.96% and 33.80% respectively (Omar et al. 2014).
Cash Expense Ratio: (Operating Expenses (excluding tax)* / Net sales): The cash expense ratio for the company shows the operating expense ratio for the company on the total operating expense ratio for the company. The cash expense ratio for the company was around 7.78% for both the year 2017 and 2018 respectively.
Cash Return on Sales: (Net Cash flows from operating activities of the company/ total sales of the company): The Company has consistently increased the consistency in the operating side of the company by increasing the operating margin of the company. The return generated from the company was around 43.89% in the year 2017 and was 42.30% for the year 2018 (Evans and Mathur 2014).
Earnings per Share: (Profit for shareholders / Number of ordinary shares): The earning per share of the company shows the profitability for the company on the total number of the shares deployed. The ratio indicates the profitability of the company on a per share basis. The earning per share for the company for the year was around $216.53.
Earnings Yield: (Earnings per share/ Share Price): The earnings yield for the company shows the net return generated by the company on a per shareholder basis for the company. The earning yield for the company has been positive for the company and has shown a consistent growth for the company for the time 2018.
Efficiency Ratio’s
Asset Turnover Ratio: Average Total Assets = (Beginning of Year Total Assets + Year Ending Total Assets)/2: The asset turnover ratio for the company shows the return generated by the company from the year 2016 to the year 2018 the return increased from the year 23% to around 36%. The increased asset turnover ratio for the company shows the efficiency for the company in the total returns generated by the company and the efficiency of the company (Easton and Sommers 2018).
Cash flow return on Assets: (Net cash from operating activities / Average total assets): The return generated by the company on the total average assets of the company shows the cash flows return generated by the company assets. The return for the company was around 2% in the year 2016 and was around 11% and 38% respectively for the year 2017 and 2018 (Zainudin and Hashim 2016).
Fixed Asset Turnover Ratio: (Sales / Total non-current assets): The fixed asset turnover ratio for the company shows the total return generated by the company on the total fixed assets of the company. The return generated by the company on the total fixed assets of the company were around 28% in the year 2016 and was around 38% and 575 for the year 2017 and 2018 respectively.
Liquidity Ratio’s
Current Ratio: (Total current assets / Total current liabilities): The current ratio for the company shows the liquidity position of the company. The current ratio for the company has increased consistently from the year 2016-2018 that shows the liquidity position for the company has increased consistently from 1.44 times to around 2.51 times in the year 2018.
Quick Ratio: ((Cash + Trade Receivables)/ Current Liabilities): The quick ratio or the decisive test ratio for the company is the pure liquidity ratio for the company. The quick ratio for the company shows that the quick ratio for the company indicates a improving situation for the company where Cash and Trade receivable for the company has increased the company in proportion of the current assets of the company (Altman et al. 2017).
Receivables Turnover Ratio: (Profit before tax / Sales): The receivables turnover ratio for the company has increased consistently for the company from 7.64% to around 14.71% from the year 2016 to 2018.
Average Collection Period: (Average receivables x 365 / Net credit sales): The average collection period for the company has reduced for the company from the year 2016 to the year 2018 from 47.76 days to around 24.81 days reflecting efficiency of the company in the collection period for the company (Greco, Figueira and Ehrgott 2016).
Gearing Ratio’s
Debt to Equity Ratio: (Total liabilities/Total equity): The debt to equity ratio for the company shows the total debt exposure for the company in respect to the total equity of the company. The debt to equity ratio for the company was around 98.02% and has decreased from the year 2016-2018 time period to about 84.59% in the year 84.59% showing that the financial risk for the company has decreased consistently (Sujan et al. 2017).
Interest Coverage Ratio: (Earnings before interest and taxes/Interest Expenses): The interest coverage ratio for the company shows the interest burden of the company on the operating income of the company. The interest expense for the company was around -5.37% for the year 2016 and was 8.05% for the year 2017 and 10.21% for the year 2018. The interest burden for the company is a key factor for the company as the same shows the amount of debt exposure for the company and the relevant interest burden on the company.
Conclusion
The financial analysis conducted for the BHP Billiton Company shows that the company has consistently increased the performance of the company in terms of profitability ratios for the company. The liquidity ratio for the company also has increased for the company in the trend period analysed for the company. The financial leverage or the gearing ratio’s for the company is still high for the company showing that the financial risk for the company is high for the given trend analysed for the company. The profitability ratio for the company has increased consistently for the company in the trend period analysed for the company. The increase in the profitability ratio and the efficiency ratio for the company shows that the company’s financial performance has increased consistently for the company.
Reference
Altman, E.I., Iwanicz?Drozdowska, M., Laitinen, E.K. and Suvas, A., 2017. Financial Distress Prediction in an International Context: a Review and Empirical Analysis of Altman’s Z?Score Model. Journal of International Financial Management & Accounting, 28(2), pp.131-171.
Camin, F., Bontempo, L., Perini, M. and Piasentier, E., 2016. Stable isotope ratio analysis for assessing the authenticity of food of animal origin. Comprehensive Reviews in Food Science and Food Safety, 15(5), pp.868-877.
Easton, M. and Sommers, Z., 2018. Financial Statement Analysis & Valuation, 5e.
Evans, J.R. and Mathur, A., 2014. Retailing and the period leading up to the Great Recession: a model and a 25-year financial ratio analysis of US retailing. The International Review of Retail, Distribution and Consumer Research, 24(1), pp.30-58.
Greco, S., Figueira, J. and Ehrgott, M., 2016. Multiple criteria decision analysis. New York: Springer.
Omar, N., Koya, R.K., Sanusi, Z.M. and Shafie, N.A., 2014. Financial statement fraud: A case examination using Beneish Model and ratio analysis. International Journal of Trade, Economics and Finance, 5(2), p.184.
Ortea, I. and Gallardo, J.M., 2015. Investigation of production method, geographical origin and species authentication in commercially relevant shrimps using stable isotope ratio and/or multi-element analyses combined with chemometrics: An exploratory analysis. Food chemistry, 170, pp.145-153.
Pepper*, A., McIntosh, P., Fitzsimmons, R., Gebhardt, T. and Dillenbeck, E., 2015, September. The Unconventional Global Endowment: Results of BHP Billiton’s Global Assessment. In International Conference and Exhibition, Melbourne, Australia 13-16 September 2015 (pp. 283-283). Society of Exploration Geophysicists and American Association of Petroleum Geologists.
Stone, A.B., Grant, M.C., Roda, C.P., Hobson, D., Pawlik, T., Wu, C.L. and Wick, E.C., 2016. Implementation costs of an enhanced recovery after surgery program in the United States: a financial model and sensitivity analysis based on experiences at a quaternary academic medical center. Journal of the American College of Surgeons, 222(3), pp.219-225.
Sujan, M.H.K., Islam, F., Azad, M.J. and Rayhan, S.J., 2017. Financial profitability and resource use efficiency of boro rice cultivation in some selected area of Bangladesh. African Journal of Agricultural Research, 12(29), pp.2404-2411.Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.
Zainudin, E.F. and Hashim, H.A., 2016. Detecting fraudulent financial reporting using financial ratio. Journal of Financial Reporting and Accounting, 14(2), pp.266-278.
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