Ratio Analysis of BHP Group Limited - Financial Health and Performance
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This report provides an analysis of the financial health and performance of BHP Group Limited through different ratios such as liquidity, profitability, solvency, etc. It also highlights the strengths and weaknesses of the company.
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TABLE OF CONTENTS: INTRODUCTION...........................................................................................................................3 Objective......................................................................................................................................3 Ways of Analysis.........................................................................................................................3 Liquidity ratio of BHP LTD.......................................................................................................4 Profitability ratio:.........................................................................................................................4 Return on equity ratio..................................................................................................................4 Return on Asset ratio...................................................................................................................5 Gross profit ratio..........................................................................................................................5 Profit margin................................................................................................................................6 Cash flow to sales ratio:...............................................................................................................6 Liquidity ratio..............................................................................................................................6 Current ratio:................................................................................................................................6 Quick ratio...................................................................................................................................7 Cash flow ratio from operating activity.......................................................................................8 Capital structure ratio...................................................................................................................9 Debt ratio.....................................................................................................................................9 Equity ratio.................................................................................................................................10 Interest coverage ratio................................................................................................................10 Conclusion.......................................................................................................................................1 References.......................................................................................................................................2 Books and Journal............................................................................................................................2
INTRODUCTION The following report focuses on recognizing the strength and weaknesses of BHP group limited. This report demonstrates ratios for this company and provides financial health of the company. In this report there are different ratios has been used such as profitability, Solvency, liquidity etc. In the entire report BHP ltd has been discussed, As this company is listed on Australian stock exchange and it deals in retailing of gas and electricity for commercial as well as residential purpose (Simamora and et.al 2019). This company deals in mining, metals and petroleum. This company has lot of customers who are enjoying the products and services offered by them. BHP LTd is committed to shape the sustainable energy of Australia. Objective The main objective behind calculating the ratios of this company is find out the strength and weakness. As ratio analysis id one of the helpful tool which provides accurate result about the competitive edge of the company. It also assists the management of the company to know the
key performance indicator and also attracts the new investor to invest in the company. Ratio analysis also help the company to know their profitability, liquidity and solvency so that management can make certain strategies in the favour of the company. Besides this, Ratio analysis is important for the perspective of investors, because after analysing the ratio of the company they can know the exact situation of profit in the company and how much liquidity is being held by BHP Ltd so that in future it can easily repay their debts and obligations. Ways of Analysis There are different methods of analysis is available which is used in this report to know the accurate profitability and situation on the company.This report provides analysis of some necessary ratios which will help the company and investors as well. It also assists about the financial health and creditability of the company and also it states about the creditworthiness of the company. Ratio analysis also improve the financial results of the company however it speaks about the trend which is going on in the market. It is being used by the manager of the company so that they can pinpoint the overall financial performance of the comp-any and create suitable strategies for the future of the company. Ratios are one of the core statement of any business and this is one of the effective way to find out the strength and weakness of BHP ltd. Liquidity ratio of BHP LTD Liquidity ratio is a part of financial metrics which is being used by the management of the company to define the ability and capacity of debtor's to pay off all the current liabilities and debt obligations without increasing external capital of the company (Lam and et.al 2019). Current ratio, quick ratio are one of the most important and useful liquidity ratio which is used by companies and investors as well. As liquidity ratio determine the ability of the company to recover all the short term obligation, so that company do not have to face any difficulty with short duration loans and obligations. Profitability ratio: Profitability ratio is used to analyse the financial metric and ability to generate different earnings which are related to revenue, operating cost, balance sheet, assets and shareholder's equity. The main objective of profitability ratio is to analyse the capacity of the company to generate profit by using assets of the company. If the profitability ratio of the company is high
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then it provides better result to the investors and company. Every company has an aim to get high profitability ratio. Return on equity ratio This ratio is used to measure the financial performance of the company. It is calculated by dividing profit to average equity. From the below table it can be stated that the return on equity ratio is declining of this company. In the year 2018 their ratio was 0.12 while as in 2019 it reduces to 0.10 and in the year 2020 it reaches to 0.07 which clearly shows that profit is reducing and the company has to work on their equity and profitability as well. Particular2020 (AUD millions)2019 (AUD millions)2018 (AUD millions) Profitavailableto owners 0.590.911.02 Average equity8.258.398.41 Ratio0.070.10.12 Return on Asset ratio This ratio states that how effectively company is using their assets to generate profit.It is a profitability ratio which measures the overall efficiency and capabilities of the company. Return on asset ratio of this company is also not showing positive result for the company. In 2018 this company was having profit of 0.69 and in 2019 it becomes to 0.60which is showing that company need to work on their sales. Besides this. In 2020 it becomes 0.40 which is also decreasing. Particular2020 (AUD millions)2019 (AUD millions)2018 (AUD millions) Profit0.590.911.02 Average Total assets147101482114633 Ratio0.40.60.69
Gross profit ratio. This ratio represents the relationship between the profit earned by the company andthe revenue which is generated by them in the form of sales (Nuryani, and et.al 2020).But the gross profit of the company is alsonot appropriate and represents that company do not have proper sales. As the sales of the company is decreasing, in result the overall gross profit is declining. Earlier this company was doing well in the past year their gross profit ratio was around 19 but in 2020 it has been decreased and reach to 15.97. It can be possible due to decrease in the selling price of the product therefore their gross profit is declining. Particular2020 (AUD millions)2019 (AUD millions)2018 (AUD millions) Sales revenue121601324612816 Gross profit194225512527 Ratio15.9719.2519.71 Profit margin Thisis one of the most common ratio. It states about those profit which remains after sales. It also measures net income of the company which is generated in the form of revenue. Profit margin ratio showing some positive result in the favour of the company. In 2018 this company was having 0.03 as a profit margin which decreased in 2019 and becomes 0.02 but in 2020 again this ratio get increases and becomes 0.03. As this ratio shows that company has the potential to generate more income by sales. Particular2020 (AUD millions)2019 (AUD millions)2018 (AUD millions) Sales revenue121601324612816 Profit3.7b3.8b3.6b Ratio0.030.020.03 Cash flow to sales ratio: As the name suggest this ratio speaks about the ability of the company to generate cash from the sales volume (Herawati and et.al2018). It is being calculated by diving cash from operating activity to sales revenues as per this ratio company is doing good inn terms of sales as
they are generating more sales. Therefore, their cash flow to sales ratio has been increased in the year 2020 as compared to 20180and 2019. In 2018 this ratio was 16.752 on the other hand in the year 2019 it becomes 12.07 but in 20250 company gets immense growth, and they increase overall sales and the ratio becomes 17.73, This is a good symbol for the company. Particular2020 (AUD millions)2019 (AUD millions)2018 (AUD millions) Sales revenue121601324612816 Cashflowfrom operating activity 215615992143 Ratio17.7312.0716.72 Liquidity ratio Current ratio: Current ratio is one of the important ratio for every company, as this ratio states about the efficiency of the company to use their current assets so that they can repaty6 their debt and short term liabilities.Every company want to maintain current ratio which must be higher than their current liabilities.This company was having 1.62in 2020but in 2019, this company was having 2.55 and in 2018this ratio was 1.75 which states that earlier this company was more effective in repaying their debts by using their current assets. Current ratio for perspective years Formula = Current assets/ current liabilities 2020 ParticularAmount (Billion) Current assets22.25 Current liabilities13.76 Current ratio1.62 3122/2388 =1.31 2019
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ParticularAmount (Billions) Current assets26.41 Current liabilities10.37 Current ratio2.55 2018 ParticularAmount (Billions) Current assets20.14 Current liabilities11.53 Current ratio1.75 Quick ratio Current assets – inventories/ current liabilities Quick ratio is being known as an indicator, which defines the short term liquidity of the company (asalama and et.al 2017). It also measures the position and ability of the company to meet all the short term obligations by using their quick assets. This ratio helps the company to reconise their near cash assets. There for this ratio is known as acid test ratio. In 2020 the quick ratio of this company was 1.09which is less then 2019, because in the previous year the ratio was 1.33 so this is not falling in the favour of the company. In 2018 the follwing ratio was 1.4 which means company was able to generate cash from its quick assets so now the company has to work on their strategies. 2020 ParticularAmount (Billions) Quick assets14.5 Quick liabilities13.36
Quick ratio1.09 2019 ParticularAmount (Billions) Quick assets18.31 Quick liabilities13.76 Quick ratio1.33 2018 ParticularAmount (Billions) Quick assets16.01 Quick liabilities11.53 Quick ratio1.4 3690-370/2323 1.5 Cash flow ratio from operating activity This ratio is majorly concerned with the cash generated by the company from it operate activity so that management get to know the reason behind the cash inflow and out flow from operating activity. In 2018 this ratio was 0.32 while as in the year 2019 it has increased to 0.36 which means company get more cash inflow but in 2020 it remains same. So the management has to work on it, and they should work on increase the business operations. Net cash flow from operating activity / liabilities Particular2020 (billion)2019 (billion)2018 (billion) Netoperatingcash flow 18.4617.8716.83
Liabilities51.3249.0352.37 Cash flow ratio0.360.360.32 Capital structure ratio This ratio is popularly known as the combination of long term debt, short term debts and ordinary stocks of the company.Whenever any company states about capital structure ratio they talk about debt to equity ratio of the company, which describes all the risk which are associates with the borrowings of the company.In 2018 this ratio was 0.47 which has been decreased to 0.43 in the next year.Apart from this it becomes 0.36 in 2020 which shows a positive result in the favour of the company as the risk of borrowings are reducing. Particular2020 (billion)2019 (billion)2018 (billion) Total equity53.4252.4262.37 Liabilities19.1622.5429.23 Debt to equity ratio0.360.430.47 Debt ratio It is a financial ratio which describes leverage of the company. It is also defined as total debt to total assets (Purnomo, 2018).If the ratio is less then 100 then it shows that company do not have more liabilitiesso this company is not having lot of liabilities. But in 2018 this ratio was 57.79 and it has declines in 2019 and reaches to 42.11 which is a good sign in the favour of the company but in 2020 this ratio again rises to 51.71 so the company needs to control them. ParticularFormula202020192018 Total assets58.4555.4552.34 Total Liabilities30.2323.3530.25 Debt ratioTotal liabilities / Total assets×100 51.7142.1157.79
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Equity ratio It represents investment leverage and solvency which clearly states about the financed own by the owner of the company. This ratio compares owners equity with the total assets of the company. The main objective of this ratios is to know that how many assets is being owned by the owner. In 2018 56.72 part of asset was held by the owner which has increased in 2019 and becomes 56.92 but in 2020 it decreased and reaches to 54.89 which means owner do not held lot of equity of the company.If the ratio increase then it is not good for shareholders as the owner possess most of the assets of the company and in case of wind up shareholders do not get any amount recovered by selling the asset of the company.So it is very important for the company to generate more income and earning. ParticularFormula202020192018 Total assets147101482114633 Total equity807584388301 Debt ratioTotalequity/ Total assets×100 54.8956.9256.72 Interest coverage ratio It is debt and profitability ratio which is being used by the management of the company todeterminehowfrequentlycompanycanpayinterestontheiroutstandingdebtsand obligations. This ratio is very important for the perspective of creditors as they always think about the interest. A higher coverage ratio is always better for the company because it provides higher interest to creditors and therefore company can easily get good amount form borrowing and loan. It is also defines the risk of lending money to the company.In the year 20108 this company was having 124.94 which has been decreased to 100.13 in 2019. As it is not a good sign for creditors as they will get less interest.But again in 2020 company increases this ratio and becomes to 119.98 which is a very good symbol for the company to attract new creditors who will easily lend money to the company. ParticularFormula202020192018
EBIT21.0222.222.61 Total equity25.2222.2328.25 Debt ratioTotalequity/ Total assets×100 119.98100.13124.9
Debt coverage ratio This ratio is used to measure the cash flow and availability of cash by company. It also defines the availability of the cash with the company so that they can repay all the current debt and obligation of the company (Tumanggor, 2020).It also defines about the borrowing of firm and how frequently this company repay it to their creditors.Besides this it also states that how much earning is being generated by the company through its operating activity. In the year 2018 this ratio was 136 which has been increased to 171 in 2019 it shows that company has more than sufficient cash flow to repay their debts and obligation besides this in 2020 again this ratio fall down and reaches to 142 which means company is suffering from cash and it is not able to repay their debts and obligations. ParticularFormula202020192018 Noncurrent liabilities 30.7527.4829.29 Netcashflow fromoperating activity 21.5615.9921.43 Debt ratioNoncurrent liabilities/net cashfrom operating activities ×100 142171136 After calculating all the ratios it can be stated that this companyhas many strength and it is doing well in some situation but it has some weakness as well because some ratios are showing negative so that company neesds to work on such ratios. Conclusion After analysing the entire report it has been concluded that this report focuses on knowing the strength and weakness of the company. This report also describes various ratios 1
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which states the accurate position of the company. In this report liquidity ratio, profitability ratio and current ratio and quick ratio as well which represent the exact position of the company. References Books and Journal Basalama, I., Murni, S. and Sumarauw, J.S., 2017. Pengaruh Current Ratio, Der Dan Roa Terhadap Return Saham Pada Perusahaan Automotif Dan Komponen Periode 2013- 2015.Jurnal EMBA: Jurnal Riset Ekonomi, Manajemen, Bisnis dan Akuntansi.5(2). Herawati, A. and Fauzia, F.I., 2018. The Effect of Current Ratio, Debt to Equity Ratio and Return on Asset on Dividend Payout Ratio in Sub-sector Automotive and Component Listed in Indonesia Stock Exchange in Period 2012–2016.KnE Social Sciences. Lam, A.L.M.Y., 2019. An analysis of the effect between firm's performance and determinant of liquidity ratio of Revlon Incorporation in cosmetic industry. Nuryani, Y. and Sunarsi, D., 2020. The Effect of Current Ratio and Debt to Equity Ratio on DevidingGrowth.JASa(JurnalAkuntansi,AuditdanSistemInformasi Akuntansi).4(2).pp.304-312. Purnomo, A., 2018. Influence of the ratio of profit margin, financial leverage ratio, current ratio, quick ratio against the conditions and financial distress.Indonesian Journal of Business, Accounting and Management.1(1). Simamora, R.A. and Hendarjatno, H., 2019. The effects of audit client tenure, audit lag, opinion shopping, liquidity ratio, and leverage to the going concern audit opinion.Asian Journal of Accounting Research. Tumanggor, M., 2020. The Influence of Current Ratio, Quick Ratio and Net Profit Margin on Return on Assets at PT. Hero Supermarket Tbk.PINISI Discretion Review.1(1).pp.137- 146. Online BHPgroupLTD.,2021[Online]Availablethrough: <https://www.macrotrends.net/stocks/charts/BHP/bhp-group/ebitda> 2