Financial Analysis Report on BHP

BHP
FIN600 TX YYYY
NAME: STUDENT ID:

Student name – ID FIN600 TX YYYY
Assignment – Company
Executive Summary
This document provides a comprehensive financial analysis report on BHP. The report performs
horizontal and vertical analysis of BHP’s financial statements. The document found that firms core
operations are improving as the operating margins are improving and BHP’s balance-sheet has
become more liquid. The ratio analysis is carried out using profitability ratios, efficiency ratios,
liquidity ratios and gearing ratios. The movement of the profitability ratio is mixed but its core
return and market ratios are improving. Also the efficiency, liquidity and debt ratios moved in a
positive direction in 2018 as compared to previous year. The calculations can be identified in the
appendices. The report identifies that BHP has good growth prospects and it recommends investing
in the company as the business of the company is progressing in right direction although there are
some concerns regarding decreased overall net profits in 2018 but this is due to one-time losses
from discontinued operations that should not affect the company’s future performance. The
company’s diverse product portfolio and its market position provide a unique advantage and it also
shields BHP to some extent against the commodity price risk and changing regulations.
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Student name – ID FIN600 TX YYYY
Assignment – Company
Contents
1 Introduction...................................................................................................................................3
1.1 Background and Business........................................................................................................3
2 Company Analysis........................................................................................................................5
2.1 Financial statements, Current Financial performance, economic outlook................................5
2.1.1 Horizontal Analysis:....................................................................................................................5
2.1.2 Vertical analysis.........................................................................................................................10
3 Ratio Analysis.............................................................................................................................14
3.1 Profitability and Market ratios...............................................................................................14
3.2 Efficiency ratios......................................................................................................................16
3.3 Liquidity ratios.......................................................................................................................16
3.4 Gearing ratios.........................................................................................................................17
4 Recommendations and overall assessment.................................................................................19
5 References/Bibliography.............................................................................................................22
Appendices – attached Excel Spreadsheet.........................................................................................23
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Student name – ID FIN600 TX YYYY
Assignment – Company
1 Introduction
1.1 Background and Business
BHP Group earlier known as BHP Billiton is an Australian global resources company. The
company was incorporated in 1885 with its headquarters in Melbourne, Australia. BHP Billiton was
formed in 2001 as a result of merger between Australian Broken Hill Proprietary Company and the
Anglo-Dutch Billiton to form BHP Billiton (BHP, n.d.).
BHP deals with the extraction and processing of huge number of commodities. The company
business is divided into various segments namely copper, iron ore, coal and petroleum. Exploration
and production of oil and gas come under the petroleum sector. Mining of vast range of metals:
lead, uranium, copper, lead, gold, silver and molybdenum come under the copper segment. Mining
of both types of coal, metallurgical and thermal comes under the coal segment. Lastly, the
company’s iron ore segment covers iron ore mining operations (BHP, n.d.).
BHP is one of the largest diversified commodities in terms of market capitalization. Its huge
operations provide employment to nearly 60,000 peoples. The main production operations of the
company are based in Australia and the Americas. BHP’s sales and marketing division is led
through Singapore and US and it sells the products globally on various commodity exchanges (BHP
Annual Report, 2018).
The company’s massive operations and its product portfolio diversification strengthen the
competitive position of the company (Ker, 2017). The commodity companies face significant risk
from the volatility in the prices of the commodities but this product diversification insulates BHP’s
profitability to some extent against such risk. This comparative advantage also protects the
company from the possible adverse effects of the high leverage requirement of this industry.
The company sells its products globally and the volatility in economic growth of the emerging
countries like China can dent BHP’s sales. So, it faces systematic risks from the slower global
growth rate and the negative movements in exchange rates as mentioned in the BHP annual report
(2018). The company faces unsystematic risks arising from regulatory investigations, new
regulations that may lead to prohibition of it’s certain products and court rulings. Ongoing legal
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Student name – ID FIN600 TX YYYY
Assignment – Company
proceeding regarding the Samarco dam failure is another significant risk factor because of the
uncertainties in the potential liabilities, which can change the future expectations of BHP’s profits.
The share price of BHP has increased by 16.25% year to date mainly due to the increase in Iron ore
prices. As compared to its competitors RIO and FMG, the BHP performance is lacking behind but
that may be due to the large size of the company and other one-time factors. According to Smith
(2019), the major factor that can affect the future performance of BHP’s share is the results of US-
China trade talks because China drives a huge volume of BHP’s overall sales. Following figure
shows the performance of BHP’s share price.
Source: ASX (n.d.)
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Student name – ID FIN600 TX YYYY
Assignment – Company
2 Company Analysis
2.1 Financial statements, Current Financial performance, economic
outlook
Financial analysis of the company involves evaluation of the company’s financial statements,
current business performance and overall economic conditions to determine the financial stability
and profitability of the firm for making an investment decision.
The company analysis can be done using its financial information and overall economic outlook.
Horizontal analysis is used to provide information about the change in BHP’s business operations
over time by comparing the recent period data with the previous period. Vertical analysis of income
statement and balance sheet measures the change in the impact of individual items in financial
statements relative to the total revenue and total assets respectively.
2.1.1 Horizontal Analysis:
Income statement
Horizontal Analysis
000 USD or '000 2018 2017 Year on year
change from
2016-17 to
2017-18
Year on
year
percentage
change
from 2016-
17 to 2017-
18
Revenue
Total revenue 4,38,95,000 3,65,13,000 73,82,000 20%
Cost of revenue 79,90,000 63,29,000 16,61,000 26%
Gross profit 3,59,05,000 3,01,84,000 57,21,000 19%
Operating expenses
Research development - -
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