Financial Analysis of BHP
Added on 2022-11-30
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Running Head: Finance for Business
Finance
for
Busines
s
Student Name
University Name
Finance
for
Busines
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Student Name
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Finance for Business
Abstract
This document provides an investment recommendation to the institutional investor from
overseas that is interested in investing in the Australian market. It uses last three year
financial data to analyse the performance of BHP, a global resources company. Trend
analysis of various profitability ratios and operating efficiency ratios is done and it is found
that most of the performance ratios of BHP are improving over this period. This document
analyses the use of marketable securities for the cash management by BHP. It performs a
sensitivity analysis of net present value (NPV) regarding the capital budgeting decision of
a potential project. It is observed that NPV is most sensitive to changes in unit price and
least sensitive to changes in fixed annual costs. The document discusses the systematic
and unsystematic risks that can affect BHP’s financial performance. It is noticed that the
company faces risks due to volatility in the commodity prices but this risk is somewhat
reduced due to BHP’s product diversification. The document also discusses the dividend
policy of BHP. Based on the financial analysis it is recommended to invest in BHP as the
company’s business is progressing continuously from last few years.
Contents
Abstract
This document provides an investment recommendation to the institutional investor from
overseas that is interested in investing in the Australian market. It uses last three year
financial data to analyse the performance of BHP, a global resources company. Trend
analysis of various profitability ratios and operating efficiency ratios is done and it is found
that most of the performance ratios of BHP are improving over this period. This document
analyses the use of marketable securities for the cash management by BHP. It performs a
sensitivity analysis of net present value (NPV) regarding the capital budgeting decision of
a potential project. It is observed that NPV is most sensitive to changes in unit price and
least sensitive to changes in fixed annual costs. The document discusses the systematic
and unsystematic risks that can affect BHP’s financial performance. It is noticed that the
company faces risks due to volatility in the commodity prices but this risk is somewhat
reduced due to BHP’s product diversification. The document also discusses the dividend
policy of BHP. Based on the financial analysis it is recommended to invest in BHP as the
company’s business is progressing continuously from last few years.
Contents
Finance for Business
1) Introduction................................................................................................................... 1
2) Financial Analysis of BHP............................................................................................... 2
2.1. Description of the company........................................................................................ 2
2.2. Calculation and analysis of BHP’s performance ratios....................................................3
2.3. Cash management analysis....................................................................................... 7
2.4. Sensitivity analysis.................................................................................................... 8
2.5. Systemic risks and un-systemic risks that may affect performance of BHP......................10
2.6. Dividend pay-out ratio and dividend policy of BHP.......................................................12
3) Recommendation letter................................................................................................. 13
4) Conclusion.................................................................................................................. 14
5) References................................................................................................................ 15
6) Appendices................................................................................................................ 16
6.1 Appendix 1............................................................................................................. 16
6.2 Appendix 2............................................................................................................. 17
1) Introduction................................................................................................................... 1
2) Financial Analysis of BHP............................................................................................... 2
2.1. Description of the company........................................................................................ 2
2.2. Calculation and analysis of BHP’s performance ratios....................................................3
2.3. Cash management analysis....................................................................................... 7
2.4. Sensitivity analysis.................................................................................................... 8
2.5. Systemic risks and un-systemic risks that may affect performance of BHP......................10
2.6. Dividend pay-out ratio and dividend policy of BHP.......................................................12
3) Recommendation letter................................................................................................. 13
4) Conclusion.................................................................................................................. 14
5) References................................................................................................................ 15
6) Appendices................................................................................................................ 16
6.1 Appendix 1............................................................................................................. 16
6.2 Appendix 2............................................................................................................. 17
Running Head: Finance for Business
1) Introduction
This report analyses the financial performance of BHP Group to provide investment advice
to an institutional investor from overseas that is interested in investing in the Australian
market. BHP Group is a global resources company incorporated in 1885 with its
headquarters in Melbourne, Australia. This report does an examination of BHP’s financial
performance based on the last three years financial statements. Trend analysis of
profitability and operating ratios is performed to analyse the firm’s performance over this
period. The profitability ratios used in this report include net profit margin, operating
margin, return on equity and return on capital. The operating ratios used in this report
include inventory turnover, receivables turnover and asset turnover. This document also
analyses the use of marketable securities for the cash management by BHP. Then, it does
the sensitivity analysis of the NPV of a capital budgeting decision regarding a new product
line according to the given data. The report also discusses BHP’s systematic and
unsystematic risks such as volatility in the commodity prices, exchange rate fluctuations,
changes in government regulations and uncertainty of the potential liabilities due to the
Samarco dam failure. The report also talks about the dividend pay-out ratio and the
dividend policy of BHP. Based on the above analysis this report gives a recommendation
that whether the client should invest in BHP and it also provides the reasoning for this
investment based upon the financial performance of the company and other important
factors.
1
1) Introduction
This report analyses the financial performance of BHP Group to provide investment advice
to an institutional investor from overseas that is interested in investing in the Australian
market. BHP Group is a global resources company incorporated in 1885 with its
headquarters in Melbourne, Australia. This report does an examination of BHP’s financial
performance based on the last three years financial statements. Trend analysis of
profitability and operating ratios is performed to analyse the firm’s performance over this
period. The profitability ratios used in this report include net profit margin, operating
margin, return on equity and return on capital. The operating ratios used in this report
include inventory turnover, receivables turnover and asset turnover. This document also
analyses the use of marketable securities for the cash management by BHP. Then, it does
the sensitivity analysis of the NPV of a capital budgeting decision regarding a new product
line according to the given data. The report also discusses BHP’s systematic and
unsystematic risks such as volatility in the commodity prices, exchange rate fluctuations,
changes in government regulations and uncertainty of the potential liabilities due to the
Samarco dam failure. The report also talks about the dividend pay-out ratio and the
dividend policy of BHP. Based on the above analysis this report gives a recommendation
that whether the client should invest in BHP and it also provides the reasoning for this
investment based upon the financial performance of the company and other important
factors.
1
Finance for Business
2) Financial Analysis of BHP
2.1. Description of the company
BHP Group is a global resources company incorporated in 1885. The company’s
headquarters are in Melbourne, Australia. In 2001, Australian Broken Hill Proprietary
Company Limited (BHP) merged with the Anglo–Dutch Billiton Plc to form BHP Billiton a
dual-listed company, listed on both Australian Securities Exchange and London Stock
Exchange. In 2018, its parent companies BHP Billiton Limited and BHP Billiton Plc
changed their names to BHP Group Limited and BHP Group Plc respectively (BHP, n.d.).
BHP extracts and processes various commodities. The main segments of the company
are coal, copper, iron ore, and petroleum. BHP’s petroleum segment deals in the
exploration and production of oil & gas. Its copper segment deals in the mining of various
metals like copper, lead, uranium, silver, molybdenum and gold. Its iron ore segment deals
in mining of iron ore. Its coal segment deals in mining of thermal and metallurgical coal
(Reuters, n.d.).
The company has its production operations based majorly in Australia and the Americas
with approximately 60,000 employees and contractors. BHP sells its products via the direct
supply agreements with industrial customers and via global commodity exchanges. The
company sells its products worldwide with its marketing and sales led through the US and
Singapore (BHP Annual Report, 2018).
BHP’s most significant comparative advantage is the portfolio diversification (Investing
News Network, 2019). In the resource industry the companies face major risk from the
fluctuation in value of a particular commodity but the profitability of a diversified mining
company like BHP is less affected by this. BHP is a producer of various commodities like
iron ore, coal, copper etc. This provides resilience to the company’s cash flows and
provides more predictability to the company’s operations. BHP’s wide assets range has
strengthen its market position against other mining companies with a pure play model.
High debt levels in the resource industry can be fatal for the companies with a focus on
only one business line because of the high degree of volatility in the values of the
commodities. This issue further reinforces BHP’s comparative advantage because of its
product diversification strategy.
2.2. Calculation and analysis of BHP’s performance ratios
(Calculation details are shown in appendix 1)
2) Financial Analysis of BHP
2.1. Description of the company
BHP Group is a global resources company incorporated in 1885. The company’s
headquarters are in Melbourne, Australia. In 2001, Australian Broken Hill Proprietary
Company Limited (BHP) merged with the Anglo–Dutch Billiton Plc to form BHP Billiton a
dual-listed company, listed on both Australian Securities Exchange and London Stock
Exchange. In 2018, its parent companies BHP Billiton Limited and BHP Billiton Plc
changed their names to BHP Group Limited and BHP Group Plc respectively (BHP, n.d.).
BHP extracts and processes various commodities. The main segments of the company
are coal, copper, iron ore, and petroleum. BHP’s petroleum segment deals in the
exploration and production of oil & gas. Its copper segment deals in the mining of various
metals like copper, lead, uranium, silver, molybdenum and gold. Its iron ore segment deals
in mining of iron ore. Its coal segment deals in mining of thermal and metallurgical coal
(Reuters, n.d.).
The company has its production operations based majorly in Australia and the Americas
with approximately 60,000 employees and contractors. BHP sells its products via the direct
supply agreements with industrial customers and via global commodity exchanges. The
company sells its products worldwide with its marketing and sales led through the US and
Singapore (BHP Annual Report, 2018).
BHP’s most significant comparative advantage is the portfolio diversification (Investing
News Network, 2019). In the resource industry the companies face major risk from the
fluctuation in value of a particular commodity but the profitability of a diversified mining
company like BHP is less affected by this. BHP is a producer of various commodities like
iron ore, coal, copper etc. This provides resilience to the company’s cash flows and
provides more predictability to the company’s operations. BHP’s wide assets range has
strengthen its market position against other mining companies with a pure play model.
High debt levels in the resource industry can be fatal for the companies with a focus on
only one business line because of the high degree of volatility in the values of the
commodities. This issue further reinforces BHP’s comparative advantage because of its
product diversification strategy.
2.2. Calculation and analysis of BHP’s performance ratios
(Calculation details are shown in appendix 1)
Finance for Business
Profitability/Return on investment Ratios: These ratios are used for return and margin
analysis of a company to depict its profit generating ability (Bragg, 2012). If these ratios
are moving upward that means a firm is performing well.
Years 2018 2017 2016
Cash flow from operating margin= CFO / Revenue 40% 43% 34%
Operating Profit Margin= Operating Profit /
Revenue 36% 34% 16%
EBITDA margin= EBIDTA / Revenue 50% 50% 38%
Net profitability or Net margin= Net Profit /
Revenue, where net profit from continued
operation
18% 18% -1%
Return on assets= Net Profit / Average Total
Assets, where net profit from continued operation 7% 6% -0.3%
Return on equity= Net Profit / Average Stockholder
equity, where net profit from continued operation 14% 12% -1%
Return on invested capital (ROIC)= NOPAT or
EBIT(1-tax)/ Invested capital , where (Invested
capital = Total Assets – Current Liabilities – Cash)
13% 9% 3%
Profitability/Return on investment Ratios: These ratios are used for return and margin
analysis of a company to depict its profit generating ability (Bragg, 2012). If these ratios
are moving upward that means a firm is performing well.
Years 2018 2017 2016
Cash flow from operating margin= CFO / Revenue 40% 43% 34%
Operating Profit Margin= Operating Profit /
Revenue 36% 34% 16%
EBITDA margin= EBIDTA / Revenue 50% 50% 38%
Net profitability or Net margin= Net Profit /
Revenue, where net profit from continued
operation
18% 18% -1%
Return on assets= Net Profit / Average Total
Assets, where net profit from continued operation 7% 6% -0.3%
Return on equity= Net Profit / Average Stockholder
equity, where net profit from continued operation 14% 12% -1%
Return on invested capital (ROIC)= NOPAT or
EBIT(1-tax)/ Invested capital , where (Invested
capital = Total Assets – Current Liabilities – Cash)
13% 9% 3%
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