Finance for Masters: Analysis of BHP Billiton and Rio Tinto

This document provides an analysis of the financial performance of BHP Billiton and Rio Tinto, including profitability ratios, return on assets, capital structure ratios, and liquidity ratios. It also discusses the operation and comparative advantages of both companies.

Running Head: FINANCE 0
Finance

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Table of Contents
Introduction................................................................................................................................2
Operation and comparative advantages.....................................................................................2
BHP Billiton...........................................................................................................................2
Rio Tinto.................................................................................................................................2
Calculation of the performance ratios........................................................................................2
Profitability ratios...................................................................................................................3
Return on Assets.....................................................................................................................4
Return on Equity.....................................................................................................................5
Capital structure (leverage) ratios..........................................................................................5
Debt to Equity Ratio...............................................................................................................5
Interest Coverage Ratio..........................................................................................................6
Liquidity ratios.......................................................................................................................6
Current Ratio..........................................................................................................................7
Quick ratio..............................................................................................................................7
Share prices movements.............................................................................................................7
BHP Billiton...........................................................................................................................7
Rio Tinto.................................................................................................................................8
Factors affecting the share price................................................................................................9
BHP Billiton...........................................................................................................................9
Rio Tinto Limited...................................................................................................................9

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Beta values.................................................................................................................................9
Dividend policies.....................................................................................................................10
Recommendation letter............................................................................................................11
Conclusion................................................................................................................................11
References................................................................................................................................12

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Introduction
The users of the financial statements are the management and the investors and in order to
fulfil the needs of the both the users the financial the statements shall be core accuracy. The
analysis of the financial statements is the most useful information which is beneficial if
comparison is made either against the years or against the company in the same industry. In
order to make the investment and the proposals in this report the proper analysis of the price
movements of the company have been disclosed the policy of the dividend as well. The
companies chosen for the purpose of the comparison is BHP Billiton and Rio Tinto (Gitman,
Juchau and Flanagan, 2015).
Operation and comparative advantages
BHP Billiton
BHP billiton known for the acquisition of the natural resources is the renowned company
registered under the Corporation Act 2001. The company is the Anglo-Australian
multinational corporation whose headquarters are presently in Melbourne. The company is
also involved in the business of the mining and petroleum. The company was founded in on
29th September 1860 and the primary role of the company is to acquire the natural resources.
On the basis of the market share and the market capitalisation the company came on the first
position as the largest mining company. BHP is listed on the London Stock Exchange and the
Australian Stock Exchange as well. There are almost 650 corporations and in the present
scenario the company is performing in more than 100 countries. The dividends listed by the
company for the shareholders are 118 US Cents and at the same time the earnings per share
of the company is more than 69.9 US cents.

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Rio Tinto
Rio Tinto on the contrary is the Anglo Australian Multinational and belongs to the largest
mining and the metal corporation. The company came into existence a bit later than the BHP
Billiton and came into the year 1873. The progress of the company was seen when the
multinational company consortium of the investors purchased a mine complex, in Huelva
Spain. Moreover the company has evolved through lot of the acquisitions and the mergers to
bring the company into the respectable position in front of the competitors. The company
deals in the production of many commodities such as aluminium, iron ore, uranium, copper
and the diamonds. Thought the company has wide range operations yet the central idea
remains within the Australia and Canada. The current revenue of the Rio Tinto is US$40.30
billion with the team of the 50000 employees. The key people associated with the company
are Simon Thompson at the position of Simon Thompson and Jean-Sebastien Jacques at the
position of CEO.
Calculation of the performance ratios
Financial ratios are the key measures that are relative with the magnitude of comparing the
two figures either on the basis of the years or either on the basis of the industry benchmarks.
There are many ratios that are used to analyse the position or the health of the business.
Further the ratios that are calculated are liquidity ratios, profitability ratios, turnover ratios.
Such tool helps in getting the comparison data and if there are any loopholes the same can be
found out using the analysis of the ratios (Faello, 2015).
Profitability ratios
The profitability ratios of the company are the ratios which are calculated by the company in
order to cater the needs of the financial statements. Profitability ratios are the class of the
financial metrics which assess the position of the business to generate the relative amount of

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the earnings against the associated expenses. A higher ratio or the value commonly suggests
that the company is generating the enough revenue to pay back the expenses and also to
provide the share to the shareholders from the earnings. Therefore the shareholders are
mostly interested in the financial statements of the company (DeFusco, et al 2015).
Calculation of
ratios
BHP
Billito
n
2016 2017 2018
Profitability
Ratios
Return on total assets
EBIT 6.48% -6.13% 8.84%
Total Assets
Rate of return on ordinary equity
Net income - preferred
dividends 1.47% -5.88% 5.14%
Average ordinary shareholders equity
Net profit margin
Net profit 4.28% -20.66% 15.38%
Sales
The net profit margin of the company aims at determining how well the companies are
operating at after the payment of the expenses and what all necessary funds are required to
pay back the contractual obligations of the company (Qian, 2017).

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The net profit margin of the BHP Billiton was 6.48% in the year 2015 and it decreased to
exactly 100% thereafter the net profit margin increased again in the year 2017 and reached
towards the 8.84%, whereas in comparison to the BHP Billiton the Rio Tinto is performing
consistently better than the BHP Billiton (Bamiatzi Bozos, Cavusgil and Hult, 2016).
Return on Assets
The return on assets of the company determines the ability and the capacity of the company
to understand the usage of the assets against the operations of the business and the efficient
use the company makes of the same (Mensah, et al 2017).
2016 2017 2018
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
Return on total assets
BHP Billiton Rio Tinto
(Source: By Author)
Further as it can be observed form the table below the performance of the Rio Tinto is
outstanding and in terms of the return on the total assets the company is giving a return on the
assets at 17.68% to the shareholders, further the return on the equity was negative in the year
2015, and thereafter the company robustly increased its performance and produced a rate of
return on equity at 6.26% and 9.80% in the year 2017. Hence it is advised to the BHP Billiton
to improve the performance as the Rio Tinto is giving tuff competition and can grab greater
market share (Faello, 2015).

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Calculation of ratios Rio Tinto
2016 2017 2018
Profitability Ratios
Return on total assets
EBIT -0.96% 10.26% 17.68%
Total Assets
Rate of return on ordinary equity
Net income - preferred
dividends -4.74% 6.26% 9.80%
Average ordinary shareholders equity
Net profit margin
Net profit -2.49% 14.56% 21.89%
Sales
Return on Equity
The arrival of return on equity value is again the factor of estimating the money related
execution just as taking the choices based on the investigation whether to put resources into
the offer of the organization or not. The return on equity in simpler terms determines how
well the company is giving the return to its shareholders so that they can earn on the
investments made by them (Petruzzo, 2015). The return on equity on equity of the BHP
Billiton is negative in the near 2016 and it became positive by 100% at 5.14% in the year
2017, creating a condition of no loss, no gain. Whereas on the contrary the equity returns in
case of the Rio Tinto are 6.26% in the year 2016 and the same have increased by 3 % in

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terms of the percentage points at 9.80% in the year 2017. This shows that in area of the return
of equity the shareholders of the Rio Tinto are most valuable and getting higher returns in
comparisons to the shareholders of the BHP Billiton (Luo, et al 2015).
Capital structure (leverage) ratios
The capital structure ratios determine the capital portions and the segregated version of the
capital in the form of debt and equity. The capital structure is necessary ot figure out the
portion of the debt as well as the equity and their percentage weights associated with the total
value (Laas and Siegel, 2017).
Leverage Ratios
BHP
201
5
201
6
201
7
Leverage Ratios
RIO
201
5
201
6
201
7
Interest coverage
ratio
Interest coverage
ratio
EBIT
19.2
7
-
8.56
10.1
4 EBIT
-
0.97
11.6
4
28.5
8
Interest Expense Interest Expense
Debt to Equity
ratio
Debt to Equity
ratio
Debt 0.43 0.58 0.50 Debt 0.35 0.20 0.16
Equity Equity
Debt to Equity Ratio
It is core ratio related to the debt position as well as the equity position of the company.
Money related position of the organization can be determined with the help of this ratio. Such

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proportions are exceptionally valuable in figuring of long term dissolvability position of the
organization. A high D/E proportion results in the high dangers and risks which are looked by
the organization as the organization is depended upon the budgetary borrowings from the
outside sources and the situation is vice versa (Vogel, 2014). From the above analysis it can
be stated that the debt to the equity ratio of the RIO is performing better as the ratio is low to
0.16 compared to that of BHP which is just half of the 1 (Rathi and Pradhan, 2017). This indicates
that RIO is not having the contractual obligations that much as compared to the BHP and
hence RIO wins in this area.
2016 2017 2018
-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
Debt to Equity ratio
Interest coverage ratio
Interest Coverage Ratio
The interest coverage ratio is also known as the times interest ratio which determines the
capacity of the company to pay back the interest and the other financial costs within the
particular time framework. From the above analysis it can be stated that the interest coverage
ratio of the payment capacity of the RIO is more than that of BHP as it can be seen from the
graph as well where the RIO is paying 28.58 which is just the double of what BHP is paying,
10.14. Rio is a step ahead in this ratio also (Barkan, Bintliff and Whisner, 2015).

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Liquidity ratios
The liquidity ratios are the key ratios which determine the performance of the company
mainly on the basis of the efficient utilisation of the current assets so that he contractual
obligations are set off easily and the company can maintain any easy cash in hand. The
current ratio and the quick ratio of the company are the key elements of the liquidity ratio.

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Liquidity Ratios
BHP
201
6
201
7
201
8
Liquidity Ratios
Rio
201
6
201
7
201
8
Current Ratio Current Ratio
Current assets 1.27 1.39 1.84 Current assets 1.53 1.60 1.64
Current Liabilities Current Liabilities
Quick Ratio Quick Ratio
Quick assets 0.86 1.09 1.49 Quick assets 0.39 0.93 1.04
Current Liabilities Current Liabilities
Current Ratio
It is a kind of ratio which is utilized in ascertaining the liquidity of the organization. Under
this sort of ratio the investigation is done over the current assets of the organization against
the liabilities of the organization of the current nature (Summers, 2018). Such kind of ratio
helps in the examination of the liquidity position which is profited by the organization which
can be utilized for various purposes such as setting off the payment of the creditors or
clearing the debts of the company. From the table above it can be stated that the current ratio
of the company the current ratio of the BHP is sound in the year 2018 as compared to that of
the Rio Tinto and the overall trend shows that there is a slow growth in Rio Tinto than in
BHP. So BHP is performing better (Olson, 2015).
Quick ratio
Under this kind of proportion, a snappy examination of the organization shall be done to
figure out the relationship between the current liabilities and the quick of the organisation.

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The assets which are having speed can convert the cash readily and more instantly and also
improves the cash cycle of the business. In terms of the Quick ratio as well the BHP leads
against the RIO as the figure is 1.49 in the year 2018 against the figure of the Rio at 1.04
(Nikolai, Bazley and Jones, 2009).
Share prices movements
BHP Billiton
9/1/2015
11/1/2015
1/1/2016
3/1/2016
5/1/2016
7/1/2016
9/1/2016
11/1/2016
1/1/2017
3/1/2017
5/1/2017
7/1/2017
9/1/2017
11/1/2017
1/1/2018
3/1/2018
5/1/2018
7/1/2018
9/1/2018
-30%
-20%
-10%
0%
10%
20%
30%
Price Moving Calculations
S&P 200 Average return (BHP)
(Source: Yahoo Finance. 2018).
The graphical representation of the BHP Billiton reflects the cost moving approach against
the normal returns of S & P 200. As it can be observed from the trend lines of the BHP
Billiton the returns of the company never crossed the returns posed by the S&P 200 All ords
Index. Initially the organisation is performing beautiful in terms of the normal returns in the
month of the May 2016 and nevertheless the performance of the company deteriorated for a
while. The company showed a positive record and if it keeps on following the trend of the All
Ords Index it can pose great returns to the shareholders. There is a subsequent need from the

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point of view of the organisation and to include the developmental costs and try to reduce
them to increase the relative share associated with it (Newman., 2016).
Rio Tinto
9/1/2015
11/1/2015
1/1/2016
3/1/2016
5/1/2016
7/1/2016
9/1/2016
11/1/2016
1/1/2017
3/1/2017
5/1/2017
7/1/2017
9/1/2017
11/1/2017
1/1/2018
3/1/2018
5/1/2018
7/1/2018
9/1/2018
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Price Moving Average
Average return (RIO) S&P 200
(Source: Yahoo Finance. 2018).
In the outline the S&P 200 is covering the value developments of the Rio Tinto. The
organization is having an immediate connection between the S&P 200 and the Rio Tinto’s
normal return. Just in the January 2016, the organization's profits went below the positive
zone, rest apart the company on walking on parallel terms with the S&P 200 hence the
company is giving the equal competition to the competitors (Millar Hepburn, Beddington and
Allen, 2018). Further the organization exhibits the immediate relationship in light of the fact
that the normal return of the Rio Tinto as it is absolutely reliant available execution and
consequently it is absolutely following the inverse relationship of what the BHP Billiton
Company is having with the All Ords Index. Further if there should be an occurrence of the
over two situations the value development is still and static until the point when the changes

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found in the BHP Billiton organization. In this way the customer should choose Rio Tinto
Limited for the purpose of the investment for the venture reason as there is an affirmation of
the profits (Acapm, 2018).
Factors affecting the share price
BHP Billiton
The tuff year for the BHP Billiton was the year 2015. The price of the BHP studied on
Tuesday and thereafter a six year low was recorded at 20% in London and the 15% on the
ASX itself. The major factor results due to the news of the disaster in Brazil which created a
huge havoc for the city. The news even stated that the Samarco mine was considered to be
closed on the permanent basis. Thereafter the prices of the BHP Billiton never went above the
All Ords Index of the S&P 200 (The Sydney Moring Herald, 2018).
The share price of the BHP Billiton displays the most of the section under the commodity
prices and the same has the great impact on the market of the mining sector in the Australia.
The safest place for the BHP would be when the accelerated prices of the commodity grows
and the company can reduce the costs (Lee Lee and Lee, 2009).
Rio Tinto Limited
The Rio announced the approval of the investment worth $3.5 billion in the Koodaideri iron
mine situated in the western suburbs of the Australia and the Rio becomes the most
technologically advanced mine and sets up as the new iron ore in Pilbara. This led to the hike
in the price and the share price went up by 2.84% and reached at $74.05. the whole
Australian mining sector made good gains and the company is focusing more towards the
exploration of the metals and the minerals (Rio Tinto, 2018).

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Beta values
The beta values of the BHP Billiton and the Rio Tinto is 1.20 and the 0.43 respectively and
the expected return of the company is 6.20% and 3.41%.
CAPM MODEL
CAPM MODEL BHP
Billiton
CAPM MODEL Rio Tinto
limited
Risk free rate of Return 5% Risk free rate of Return 1.45%
Beta 1.2 Beta 0.43
Expected return on Market 6%
Expected return on
Market 6%
Expected Return
6.20
%
Expected
Return 3.41%
Dividend policies
Dividend plays a huge role in the deciding the future earnings for the shareholders of the
company and not to forget the dividends become the sizeable part of the returns on the
investments. The past data reflects that the BHP Billiton Company is giving the yield of 2.9%
to the investors and the shareholders. As it can be seen from the annual report of the
company, currently the company is delivering the payout ratio of 71.4%, and also the
dividend is presented at 4.8%. Also in the financial year 2018 the board implemented the
dividend reinvestment plan for the implementation for declaring the final dividend. The
dividend policy of the BHP Billiton continues to raise its dividend. Further the trading on the
shares of the mines is yielding a 10% fully franked dividend. There was a sell of the oil on

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the US shores and the energy as well to one of the biggest giant BP for 10 million dollars.
Thereafter the dividend saw the upsurge at 6.3 billion with a minimum payout of $1.8 billion
(Dividens.com, 2018).
On the contrary the dividend policy of the Rio Tinto different from the BHP Billiton and
declared the 127 US Cents per share which were paid to the shareholders on 10th August
2018. At the end of the each accounting period the boards are the deciding authority of the
total level of the ordinary per share, taking into account the results of the financial year. The
total cash returns to the shareholders are expected by the board for a roundabout 30% to 40 %
(Market Watch, 2018). Though in the year 2015 the company reported the losses and axed
the dividend progressive policy yet the company later on in the year 2018 buy backs the
shares and records the annual dividend as the company reported a profit at the rate of 90% in
the year 2017. Hence the company opted for the option of the cash out dividends (Rio Tinto,
2018).
Recommendation letter
Dear Client,
This is to inform you that the performance of the RIO Tinto in comparison to the BHP
Billiton is far better as it can be seen from the entire analysis. The observation from the ratios
suggest that BHP is ahead of RIO only in case of the liquidity ratios and this reflects if the
RIO improves the liquidity position it can be ahead of BHP in all the segments. Talking about
the share price movements the RIO is performing close and next to the All Ords Index rather
than BHP whose returns are not even close, but below the positive zone at times. Also the
beta value of the Rio is low at 0.43 whereas the beta value of the BHP is 1.22 thus indicates
that BHP is having more risk in their shares and according to the dividend policy also the
shareholders of the Rio are earning quite outstanding hence it shall be recommended to the

FINANCE FOR MASTERS 18
investors to invest in the shares of Rio for acquiring long term growth and the earnings
(Krantz and Johnson, 2014).
Yours Sincerely
Investment Analyst
Conclusion
From the above examination it tends to be derived that the crucial issues and the money
related evaluation of the firms is similarly important to get an understanding of how the
association is performing from each edge. This won't simply encourage the financial experts
and the investors and the speculators in settling on the decision whether to contribute hold or
move the offers anyway they will in like manner think about any powerful advances or
changes that are to be taken by the association which will help them with having the future
and the long haul benefits.

FINANCE FOR MASTERS 19
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