Financial Analysis of BHP Billiton: Performance Ratios, Share Valuation and Recommendation

This report provides a financial analysis of BHP Billiton for the past two years. It evaluates company’s financial statements, its share price movements and calculates the value of stock by using Constant Dividend Growth Rate Model. It gives a brief introduction about the company selected, highlighting its core activities, competitive advantages and describing the market in which it operates. In the later part, performance ratios are been calculated which measures the financial performance of BHP from each and every aspect including solvency, profitability and others.

RUNNING HEAD: BUSINESS FINANCE
Financial analysis

Business finance 2
Contents
Introduction......................................................................................................................................3
Description of the company.............................................................................................................3
Calculation and analysis of performance ratios...............................................................................4
Short term solvency.....................................................................................................................4
Long term solvency......................................................................................................................5
Asset utilization............................................................................................................................7
Profitability ratios........................................................................................................................9
Market value ratios.....................................................................................................................10
Graphs and comparison of share price movements.......................................................................11
Share valuation..............................................................................................................................12
Recommendation and Conclusion.................................................................................................13
References......................................................................................................................................14

Business finance 3
Introduction
The report discusses about the overall financial analysis of BHP Billiton for the past two years. It
evaluates company’s financial statements, its share price movements and calculates the value of
stock by using Constant Dividend Growth Rate Model. It gives a brief introduction about the
company selected, highlighting its core activities, competitive advantages and describing the
market in which it operates. In the later part, performance ratios are been calculated which
measures the financial performance of BHP from each and every aspect including solvency,
profitability and others.
Graphical representation and comparison of past share prices as well as the evaluation of
company’s stock also contributed to the analysis in order to determine whether the company is
fundamentally financial healthy or not. In the last, a recommendation and conclusion is provided
which reflected the outcome of the analysis conducted. It provides insights about the overall
performance and position of BHP Billiton for the past two years.
Description of the company
BHP Billiton is an Anglo-Australian multinational corporation engaged in the developing and
acquiring the markets of natural resources. It is a mining, metals and Petroleum Company having
its headquarters in Melbourne. It was founded in 1885 and during last year, BHP was considered
as the largest mining company of the world with respect to its market capitalization. It operates
through four segments Petroleum, Iron Ore, Copper and Coal. It is involved in the mining,
smelting and refining of nickel, trading, marketing and providing finance and other services. It is

Business finance 4
listed on ASX and is traded with the symbol ASX: BHP. Apart from this, the company is also
listed on London Stock Exchange and New York Stock Exchange (Bloomberg. 2018).
The metals and mining sector of Australia is the largest industry by virtue of number of
companies operating in it. The sector has over 650 corporations involved in mining and
development of natural resources operating in more than 100 countries. Big giants of the industry
include Rio Tinto and BHP Billiton which majorly contributes to the success and growth of the
sector. The competitive advantage of the company is that it provides diversification of
commodities. It also has strong market position with higher capitalization. In addition, BHP has
wide range of assets and resources which make it more beneficial as compare to other firms.
Another advantage is that it aims to deliver long term value to the shareholders (ASX. 2018).
The diversification allows the firm to grow and generate high and more profits in order to meet
shareholders’ interest. Overall, BHP has improved its profitability in 2018 and maximizes its
shareholders’ value. It declared dividends worth 118 US cents and its basic EPS was 69.6 US
cents. Moreover, it has reduced its net debt to US$ 10.9 billion in financial year 2018 (BHP
Billiton. 2017).
Calculation and analysis of performance ratios
Short term solvency
 Current ratio: It is one of the liquidity ratios which reflect the potentiality of the company
in paying off its current liabilities by using its current assets. The ideal ratio is 2:1 which
means that the assets should be double of liabilities so that the obligations can be set off
easily (Saleem and Rehman, 2011).

Business finance 5
From the below table, it can be interpreted that the CR of BHP has increased from 1.44 to 1.85 in
last year. This was due to the proportionate change in its CAs and CLS. As its assets increased,
its liabilities reduced at the same time. This boosted up the ratio because short term debt of the
company reduced to a great extent from $4653 million to $1241 million. While on the other side,
its cash balance increased from $10,319 million to $14,153 million (BHP Billiton. 2017).
2016 2017
Current assets (A) 17714 21,056
Current Liabilities (B) 12340 11366
CR (A/B) 1.44 1.85
 Quick ratio: It also measures the financial health of the company by taking into account
the most liquid assets such as cash and marketable securities. The ideal ratio is 1:1 which
is to be maintained by every firm (Kimmel, Weygandt and Kieso, 2010).
2016 2017
Quick assets (A) 14303 17,383
Current Liabilities (B) 12340 11366
QR (A/B) 1.16 1.53
The QR of BHP has also increased from 1.16 to 1.53 in 2017. The main reason behind this was
the significant increase in the amount of its cash balance. While at the same time the short term
obligations of the company reduced to a great extent. All such fluctuations eventually boosted up
the ratio.

Business finance 6
Long term solvency
 D/E ratio: It is a financial metric used for measuring the long term solvency position of
the company. It measures the portion of firm’s debt against the amount of its equity. A
high D/E ratio indicates that firm has high financial risk and it relies more on outside
borrowings (Bragg, 2012).
In case of BHP Billiton, the ratio reduced to a great extent from 61% to 49% in the past two
years. This change occurred due to the overall increase in its owners’ equity and decrease in the
value of its total debt. Firm’s decision for repurchasing the bond program and not refinancing the
maturing group debt has contributed in the reduction of its borrowings (BHP Billiton. 2017).
2016 2017
Debt (A) 36421 30474
Equity (B) 60071 62726
D/E (A/B) 61% 49%
 Debt ratio: Another metric which determines the financial strength of the company for
longer term. It compares the total liabilities and total assets of the company against each
other. In other words, it determines the extent of company’s leverage and indicates the
amount of assets that are financed through debt (Bragg, 2012).
The DR of BHP has also shown same trend as it reduced from 50% to 46% in 2017. Reason was
the reduction in total liabilities from $58882 million to $54280 million in last year. Along with
this the assets of the company has reduced. The decline in its total financial obligations is
proportionately more than the decline in its total assets. This anyway reduced the ratio and
enhances the financial health of the company (BHP Billiton. 2017).

Business finance 7
2016 2017
Total liabilities (A) 58882 54280
Total assets (B) 118953 117006
DR (A/B) 50% 46%
 Interest coverage ratio: It shows the capability of the firm in meeting its interest expense
with its EBIT very frequently and on time. A high and improved ICR is favorable for the
entity as it shows that it is competent enough to meet its finance costs on time with its
earnings before interest and tax (Gibson, 2011).
In 2016, the ICR of BHP was -6.09 times due to the operating loss recorded by the company in
that year. However, the trend got reversed and the company reported an operating profit f
$11753 million which makes the ratio positive at 8.21 times. Despite having an increase in the
finance cost, BHP was able to meet it with high earnings in 2017 (BHP Billiton. 2017).
2016 2017
EBIT (A) -6235 11753
Interest expense (B) 1024 1431
ICR (A/B)
-
6.09 8.21
Asset utilization
 Inventory turnover ratio: It is an efficiency ratio that shows how efficiently and quickly a
company can convert its inventories into cash. It is calculated by dividing firm’s COGS
with the value of average inventory (Higgins, 2012).

Business finance 8
The ITR of BHP has reduced from 2.61 times to 2.56 times. This was due to the reduction in
both inventory and COGS of the company. The proportionate decline in the both the elements
lead to an overall fall in the ratio.
2016 2017
COGS (A) 10060 9085
Average inventory (B) 3851.5 3542
ITR (A/B) 2.61 2.56
 Debtor turnover ratio: This ratio reflects the potentiality of the firm in managing its
receivables. It shows the amount of turnover generated by the company by converting its
debtors into cash (Jenter and Lewellen, 2015).
A high ratio of BHP indicates that the firm is efficient enough in collecting cash from its debtors.
This can be reflected by the company’s increased revenue and reduced debtors. The ratio rises
from 8.27 to 12.78 last year indicating improved efficiency of BHP.
2016 2017
Total revenue (A) 30912 38285
Average debtors (B) 3738 2995.5
DTR (A/B) 8.27 12.78
 Asset turnover ratio: Another metric which shows amount of revenue generated by the
total assets of the company. A high ratio is considered to be favorable for the firm.

Business finance 9
The same trend has been observed in ATR of BHP as it increased from 0.25 to 0.32 during the
past two years. This means 32% of the total sales of BHP are made from its assets. They have
shown a noteworthy decrease in their amount which boosted up the ratio (BHP Billiton. 2017).
2016 2017
Total revenue (A) 30912 38285
Average total assets (B) 121767 117980
ATR (A/B) 0.25 0.32
Profitability ratios
 Net profit ratio: It is a performance indicator which reflects the overall profitability of the
organization. It measures the amount of net profit against the company’s total revenue for
the particular period of time (Krantz and Johnson, 2014).
The NPR of BHP has shown an upsurge in 2017 as compare to 2016. The company has incurred
a loss of $6207 million in 2016 which converted into profit of $6222 million last year. The loss
was due to the failure of Samarco dam and other global taxation matters. However, the situation
changed and BHP has improved its position in relation to profits by reporting a ratio of 16% last
year (BHP Billiton. 2017).
2016 2017
Net profit (A) -6207 6222
Total Revenue (B) 30912 38285
NPR (A/B) -20% 16%

Business finance 10
 Return on Assets: It determines the return or profits generated by the assets of the
company. Due to high profits, the ratio of BHP has improved to 5.3% from -5.2%. Also
its assets were utilized efficiently to generate more returns (Lee, Lee and Lee, 2009).
2016 2017
Net profit (A) -6207 6222
Total Assets (B) 118953 117006
ROA (A/B) -5.2% 5.3%
 Return on equity: this ratio reflects the amount of return offered by the company to its
shareholders on their capital invested in the firm. A high ROE means high profitability
and returns (Nikolai, Bazley and Jones, 2009).
Similar trend was noticed in BHP’s ROE in the past two years. In 2016, it was -10.6% which
changed to 9.4% in 2017. The reason was increased in net income as well as rise in the
shareholders’ equity of the company.
2016 2017
Net income (A) -6385 5890
Shareholders' equity (B) 60071 62726
ROE (A/B) -10.6% 9.4%
Market value ratios
 Earnings per share: It is the indicator of company’s profitability and market performance.
It shows the return made by each outstanding share of the firm. The EPS of BHP turned

Business finance 11
positive to 1.11 cents from -1.20 cents due to the profits made by the firm last year. It
shows that each outstanding share has earned profits in 2017.
2016 2017
Net income (A) -6385 5890
Number of shares (B) 5322 5323
EPS (A/B) - 1.20 1.11
 Price earnings ratio: It is also known as price multiple and the amount an investor is
willing to pay for per dollar of earnings. The P/E ratio of BHP also shows the same trend
as it increased from -22.15 to 17.25. This hike indicates that the investors are looking for
higher growth in future.
2016 2017
Market price (A) 26.58 19.09
EPS (B) - 1.20 1.11
P/E (A/B) - 22.15 17.25
Graphs and comparison of share price movements
The below graph shows the comparison between average returns of company stock with the
market returns. The data is taken for the past two years and it reflects that the trend lines of both
are not closely related. It can be seen that when the market was rising, BHP stock reported
negative returns and continues to do the same in 2015 while the market returns were positive.
However, the situation changed and in the initial months of 2016, company’s stock returns
increased and highest was reported at 22%. After that a huge decline was noticed as it falls to -

Business finance 12
14% in the next month. During this phase, the market was positive and stable. However, in later
half the stock returns remained positive and higher than the market. In the mid of 2017, it
became negative and while the market returns were still positive. So, overall it can be interpreted
that BHP stock is highly volatile when related to ordinaries indices.
1/06/2015
1/08/2015
1/10/2015
1/12/2015
1/02/2016
1/04/2016
1/06/2016
1/08/2016
1/10/2016
1/12/2016
1/02/2017
1/04/2017
1/06/2017
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Share price movements
Average return (BHP)
Average return (S&P)
Months
Average returns
(Source: Yahoo Finance. 2018).
Share valuation
The stock of BHP Billiton has been valued by applying Constant Dividend Growth Rate model.
The value generated was $21.60 which is lower than the current market price of the share that is
$46.19 (Yahoo Finance. 2018). As the value is lower than the trading price, it means that the
stock is overvalued. It means that the investors expect that the price will fall in future and they
can sell their shares at present to purchase them later when the price reduces. The reason for such
difference is that market has gain confidence and BHP has enough assets to generate profits in

Business finance 13
future. It indicates that the stock of BHP is performing well and investors have the opportunity to
sell it in order to book high profits.
Dividend growth rate (A) 4%
Required rate of return (B) 9%
Current share price $ 46.19
Dividend per share (C) 1.08
Value of stock [C/(B-A)] $ 21.60
Recommendation and Conclusion
From the above report, it can be concluded that the financial position of BHP Billiton has
improved in last year as compare to the situation in 2016. Its profitability, liquidity, solvency and
efficiency have increased and have made the company financially strong. With high profits, BHP
was able to provide high returns to its shareholders as well as it has reduced its overall financial
risk by paying off its short and long term debt. Overall, the company is doing well and is
fundamentally financial healthy. Investors should invest in it as it is focused on providing high
returns to its shareholders and investors.

Business finance 14
References
Bragg, S. M. (2012). Business ratios and formulas: a comprehensive guide (Vol. 577). New
Jersy: John Wiley & Sons.
Bragg, S. M. (2012). Financial analysis: a controller's guide. New Jersy: John Wiley & Sons.
Gibson, C. H. (2011). Financial reporting and analysis. USA: South-Western Cengage
Learning.
Higgins, R. C. (2012). Analysis for financial management. New York: McGraw-Hill/Irwin.
Jenter, D. and Lewellen, K. (2015). CEO preferences and acquisitions. The Journal of
Finance, 70(6), pp.2813-2852.
Kimmel, P. D., Weygandt, J. J., and Kieso, D. E. (2010). Financial accounting: tools for
business decision making. New Jersy: John Wiley & Sons.
Krantz, M., and Johnson, R. R. (2014). Investment Banking for Dummies. New Jersy: John Wiley
& Sons.
Lee, A. C., Lee, J. C., and Lee, C. F. (2009). Financial analysis, planning and forecasting:
Theory and application. Singapore: World Scientific Publishing Co Inc.
Nikolai, L. A., Bazley, J. D., and Jones, J. P. (2009). Intermediate Accounting. USA: Cengage
Learning.

Business finance 15
Saleem, Q. and Rehman, R.U. (2011). Impacts of liquidity ratios on
profitability. Interdisciplinary Journal of Research in Business, 1(7), pp.95-98.
Bloomberg (2018). Company Overview of BHP Billiton Limited. [Online]. Available at:
https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=256654 [Accessed
21 September 2018].
BHP Billiton (2017). Annual Report 2017 [Online]. Available at:
https://www.bhp.com/-/media/documents/investors/annual-reports/2017/
bhpannualreport2017.pdf [Accessed 21 September 2018].
Yahoo Finance (2018). BHP Billiton Limited (BHP). [Online]. Available at:
https://finance.yahoo.com/quote/BHP/history?
period1=1435689000&period2=1498761000&interval=1mo&filter=history&frequency=1mo
[Accessed 21 September 2018].
Yahoo Finance (2018). S&P/ASX 200 (^AXJO). [Online]. Available at:
https://finance.yahoo.com/quote/%5EAXJO/history?p=^AXJO&.tsrc=fin-srch [Accessed 21
September 2018].
ASX (2018). Metals & Mining Sector Profile. [Online]. Available at:
https://www.asx.com.au/documents/resources/00180_MetalsMiningSector_FactSheet_web.pdf
[Accessed 21 September 2018].