Financial Analysis of BHP Billiton Limited: A Comprehensive Report

This report provides a comprehensive financial analysis of BHP Billiton Limited, a leading multinational mining company. It examines the company's ownership governance structure, fundamental ratios, share price trends, and factors influencing its performance. The report also calculates the company's beta value, expected rate of return using the CAPM, weighted average cost of capital (WACC), and debt ratio. Finally, it analyzes BHP Billiton's dividend policy and provides recommendations for investors.

HI5002: Finance for Business
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Contents
Introduction.................................................................................................................................................3
Questions.....................................................................................................................................................4
1. A Brief Description about company................................................................................................4
2. Ownership Governance Structure....................................................................................................4
3. Fundamental Ratios.........................................................................................................................6
4. Two graphs with description of result..............................................................................................8
5. Factors influencing the share price................................................................................................10
6. Calculation of beta values and expected rate of return using the CAPM.......................................11
7. Weighted Average Cost of Capital (WACC).................................................................................12
8. Debt Ratio......................................................................................................................................14
9. Dividend Policy.............................................................................................................................16
10. Letter of Recommendation........................................................................................................17
Conclusion.................................................................................................................................................18
References.................................................................................................................................................19
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Introduction
This report explains about the management of the various resources in the organization. The
utilization of the resources is done so that the profitability can be increased and the
accountability can be maintained within the organization. For the explanation of the whole report
the BHP Billiton has been considered so that the practical knowledge about the report can be
gained. The various ratios are calculated so that the financial position of the organization can be
gained. The factors which affect the share price of the organization are also determined. The
dividend policy of the organization is also explained so that the distribution of the profits to
shareholders can be gained. The recommendations are also provided to the organization which
can be used by the organization for attaining the profitability within the organization. To give the
practical implementation for the factors that are affecting price the graphs are depicted.
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Questions
1. A Brief Description about company
The BHP Billiton is the ASX Listed Anglo Australian multinational metal, mining and petroleum
company which have its headquarters in Melbourne, Australia (BHP Billiton, 2018). It was
founded in on 29 September 1860 and is ranked as one of the world’s largest mining company
which is based upon the capitalization of market. The products of the company are coal,
petroleum and iron ore. According to the survey of 2017 revenue of the organization was
$38.285 and about 65000 employees are working to provide the quality of products to the
customers. They are committed to the highest level of governance to create the long term
shareholders value (BHP Billiton, 2018).
2. Ownership Governance Structure
I) The shareholders with higher than 20% of the shareholdings are: One of the largest is
the bank of America Corporation who has 4.2 million shareholdings. The second is
Dimensional fund Advisor LP who have the holdings of 3.2 million. The Earnest
Partners LC reported 2.1 million shares (BHP Billiton, 2018).
The shareholders for more than 5% shareholdings are: The shareholders of the organization who
have the shareholdings of more than 5% are Neuberger Berman Group LLC has the
shareholdings of 1.9 million shares (BHP Billiton, 2018).
II) The main people who are involved in the corporate governance are:
Chairman: Ken Mackenzie
Board Members: The members of the board are:
 Jac Nasser
 Andrew Mackenzie (Non independent Director and CEO)
 Malcolm Brinded (Non Executive Director)
 Malcolm Broomhead (Independent Non- Executive Director)
 Shriti Vadera (Senior Independent Director)
 Anita Frew (Independent Non- Executive Director)
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 Lindsay Maxsted (Independent Non Executive Director)
 Wayne Murdy (Independent Non Executive Director)
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3. Fundamental Ratios
Calculation of Ratios
Sr.
No.
Particular Year 2017
$M
Year 2016
$M
1 Total Asset 117006.00
0
118953.00
0
2 Total Liability 54280.000 58882.000
3 Ordinary Equity 62726.000 60071.000
4 Net profit After Tax 6222.000 -6207.000
5 Total Current Assets 21056.000 17714.000
6 Total Current Liabilities 11366.000 12340.000
7 Inventories 3673.000 3411.000
8 Quick Asset 17383.000 14303.000
9 Debt 16321.000 26102.000
10 Net Sales 38285.000 30912.000
11 Fixed Asset 3131.000 3131.000
12 Gross profit 6222.000 -6207.000
13 EPS (Cents) 110.700 -120.000
Current Ratio = Current Asset/
Current Liability
1.85 1.44
Quick Ratio = Quick Asset/
Current Liability
1.53 1.16
Debt Equity ratio = Debt/
Equity
0.26 0.43
Inventory Turnover Ratio =
sales / Inventory
10.42 9.06
Fixed Asset Turnover Ratio =
sales / Fixed assets
12.23 9.87
Gross Profit Margin Ratio =
Gross profit / Sales
0.16 -0.20
Return On Assets = Net Income
/ Total Asset
0.33 0.26
Earnings per share 110.70 -120.00
The ratios which are calculated show the financial position of the organization. The profitability
ratios are calculated as it shows the ability of the company to earn the profits and pay to the
shareholders so that the capital can be raised and the returns can be maximized. For evaluating
the profitability ratios the gross profit ratio is shown which will show the areas of earning the
profit (BHP Billiton, 2018).
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The liquidity ratios are also calculated which will show the liquidity position of the company that
how capable the organization is to pay back its debts from the liabilities so that the company
cannot be proved to be insolvent in case of the crisis (Nautiyal and Kavidayal, 2018). The current
ratio reveals the ability of the company to pay its current liabilities from the current assets and
the quick ratio shows the ability to pay the liabilities from the quick assets (BHP Billiton, 2018).
The current ratio is has been increased from 1.44 to 1.85 which shows the positive results so that
the liabilities can be paid with that of assets (Grüninger and Kind, 2013). Same is with that of the
quick assets which are also increasing to the company has the good liquidity position (Sharif, et.
al., 2015) .
The debt to equity ratio is also calculated which will reveal the amount of the equity to that of
the debt. There are only two ways through which the organization can raise the capital which is
debt and the equity but it is necessary to maintain the balance between the both as the excess of
debt will give the negative impact in the organization (BHP Billiton, 2018). The debt to equity
ratio has been decreased from 0.43 to 0.26 which shows that the more investment is done in
debts than that of the equity which shows the good condition for the organization (Grüninger and
Kind, 2013).
The assets utilization ratios are calculated so the returns for the inventory and the assets can be
evaluated. The assets turnover ratio is calculated so as to measure the value of the company’s
revenue which will be generated from the invested assets (Grüninger and Kind, 2013). The assets
turnover ratio also showed the positive results so this can be seen that the revenue generated is
maximum according to the evaluation (BHP Billiton, 2018).
So, it can be seen that the financial health of the organization is in good condition so the
shareholders can take the decisions related to investment as the assets turnover ratio is positive
so the returns which will provided by the organization will be maximum (Grüninger and Kind,
2013).
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4. Two graphs with description of result
I) Share Price of Company for 2 Years
Image: Share Price for 2 Years
Source: Market Index, 2018
Image: The share price comparison of companies in all Ords Index
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Source: ASX, 2018
Introduction
The report explains about the share prices of the BHP Billiton Limited and the movement which
has been seen in the share prices over the years. With this the report also deals with the All Ords
Index so as to determine the correlation between all the factors of the movement in the share
prices of the organization.
Content
It can be seen from the above graphs that the share prices of the organization is fluctuating over
the years. Earlier the graph showed the negative results but during the years the prices of the
shares has been increasing in the competitive market (Grüninger and Kind, 2013). When these
Scenarios are compared with that of the All Ords Index the company showed the same results
(Frank and Shen, 2016). So, it can be stated that their exists the positive relation between the All
Ords Index and the share price of the organization as with the decrease in the All Ords Index the
share prices will also decrease and vice versa (Market Index, 2018). The change which has been
occurred in the share prices showed the positive relation between both the factors (Frank and
Shen, 2016).
Conclusion
It can be said that the share prices of the organization have the strong relation with that of the All
Ords Index and the share prices of the organization are high. But the same aspect cannot be
considered in the long run as there are various fluctuations in the share price of the organization
during the years.
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5. Factors influencing the share price
There are many factors which may impact the share price of the BHP Billiton are:
Macro Factors: The macros factors include the political, social, economical and the
technological factors that may impact the share price of the organization (Frank and Shen, 2016).
Like the change in the government policies the overall policy of the organization will be changed
which in turn will impact the share price of the organization (Frank and Shen, 2016). With that if
the inflation rate of the organization changes so the prices of the shares may increase (Nautiyal
and Kavidayal, 2018).
Impact of the Competitors: The industry wide factors means when the new supply enters into
the market with the same product so it impacts the share price of the organization (Frank and
Shen, 2016). The large new supplier of the iron ore will hit the markets and the opportunities of
the investment of the last few years. With the less demand and the more supply the prices of the
iron ore will fall which in turn will impact the share prices of the miners (Frank and Shen, 2016).
Significant Factor Changes: The significant changes in the organization may also impact the
share price of the organization (Frank and Shen, 2016). If the prices of the iron ore falls
drastically so the materials which are made of the iron ore will also fall this in turn will impact
the Australian shareholders. This fall will impact negatively the profits of the miners and will
adversely affect the share prices of BHP Billiton.
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6. Calculation of beta values and expected rate of return using the CAPM
I) The beta value of BHP Billiton is 1.34 (Reuters, 2018).
II) As per the CAPM the rate of return can be determined as =Rf + (β) (Risk Premium of
Market)
Here, The Rf= The rate of risk free
β = Beta Value
So, the rate of return = 4% + 1.34*6%
= 4% + 8.04%
= 12.04%
III) Yes, the company can be chosen as the conservative investment as the rate of return
of the organization is low (Reuters, 2018). This indicates that the low rate of return in
accordance with that above the risk free rates indicates that the share price of the
organizational is minimal (Nautiyal and Kavidayal, 2018). This can be seen that the
shareholders can easily take the investment decision as there are fewer chances to the
shareholders for bearing the losses. The company which have the less risk involved
can be chosen as a conservative investment as it will provide maximum returns
(Reuters, 2018). In the short run there will be higher returns that will be provided to
the shareholders but in the long run there may be the chances that the company may
not get the possible satisfactory returns which may increase the profitability of the
organization (Nautiyal and Kavidayal, 2018).
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7. Weighted Average Cost of Capital (WACC)
I) WACC = E x Re + D x Rd (1 – T)
V V
Here,
E = Equity
Re = Rate of Return
D = Debt
Rd= Cost of Debt
T= Rates of taxes
V= Debt + Equity
WACC= 62726x 0.1204 + 16321 (237/16321) (1-0.34)
79047
WACC= 7527.12 + 156.42
WACC=7683.54
WACC=76.83%
II) In order to satisfy the needs of the shareholders the weighted average Cost of Capital
must be recovered by the organization so that the shareholders can make the
investment decision (Finance Management, 2018). The main aim of the organization
is to provide the maximum rate of return to the shareholders. Those projects which
will provide maximum returns in the long run must be selected so that the financial
performance of the organization must be increased by rejecting the areas of the debts
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(Finance Management, 2018). The weighted average Cost of capital allows the
managers of the organization so that the maximum returns can be generated. If the
WACC cost is low so this can be seen that will be benefit for the organization which
will help in generating the maximum returns within the organization (Nautiyal and
Kavidayal, 2018). The decisions should be made by the stakeholders so that the high
investment returns can be earned with the minimal cost of capital (Finance
Management, 2018). This type of the decision is best suited for the stakeholders to
attract them to invest in the organization (Nautiyal and Kavidayal, 2018).
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8. Debt Ratio
I) The capital structure is said to be optimal when if there is the balance between the
equity and the assets of the organization (Momani and Alsharari, 2012). The company
has these two sources for generating the revenues for the organization but it is
necessary to maintain the balance so that the profitability can be attained within the
organizational structure (Momani and Alsharari, 2012).
Image: Gearing Ratio
Source: BHP Billiton, 2018
It can be seen from the above figure that the gearing ratio earlier was 30.3% which has decreased
to 20.6% in the year 2017. But it can be said the satisfactory position as the net assets of the
companies are more as compared to that of the debts. So, in case of the unforeseen activities the
liabilities will be paid off through assets (Finance Management, 2018). Therefore, the
organisation can easily attain the profits within the organizational structure as assets or the equity
is increased from the previous year to the next year and the amount of the debt has been
decreased (Selvam and Punitavati, 2012).
II) To adjust the gearing ratio the organization has increased the net assets and decreased the net
liabilities. The assets have been increased from $60071 to that of $62726 while the debts have
been decreased to $26102 to that of the $16321 (Finance Management, 2018). So, the increase in
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assets and the decrease in debts will help the organization in maintaing the gearing ratio within
the organization (Sharif, et. al., 2015).
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9. Dividend Policy
The dividend policy of all the organizations are not same that is dependent upon the nature of the
organization (Basu, 2018). The dividends are the sort of the income which is distributed by the
organization to the shareholders from the profits in respect of the allocation of the capital which
is invested by them. The dividend policy was adopted by the BHP Billiton in February 2016
which states that the minimum 50 percent of the payout will be provided to the shareholders
from the attributable profits at the end of every accounting period (Basu, 2018). The amount of
the ability to pay the attributable profit will be according with that of the framework of the
Capital allocation of each of the shareholders within the organization (BHP Billiton, 2018). The
dividends and the other distributions are provided according to the functional currency of the
organization. The BHP Billiton paid the dividends to its shareholders which are registered on the
principle register. The conversations of the currency are based upon the exchange rate of the
foreign currency before the date of recording. The process is further simplified which is aligned
to the final date of receiving the currency elections (Basu, 2018).
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10. Letter of Recommendation
The letter of Recommendation
To,
The Client,
It is recommended to the shareholders that the BHP Billiton is the suitable organization where
they can take the decision for investment as the financial health seems to be good which will
help them in maximizing the profits. The organization also shows the increase in the share price
when compared that with the All Ords Index (Basu, 2018). The performance of the organization
is also on the good condition which will help in generating the profits by capturing the market
share so that the profitability can be attained. During the previous years the losses were incurred
by the organization but the organization has tried to increase the profits this year by increasing
the equities and decreasing the debts so that the gearing ratio can be maintained. The dividend
policy is also specifically determined that the earned profits will be distributed according to the
investment of their capital within the organization. The cost of the capital is low so the
organization seems to be strong in the long run (Basu, 2018). So, the investors can make the
decisions regarding the investment so as to attain the maximum returns.
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Conclusion
From the above discussion it can be concluded by the BHP Billiton that the shareholders can
make the decision for the investment as the financial health of the organization is good which
will provide them the higher rate of returns. In order to maintain the finances in the organization
there has to be the balance between the debts and the equities of the organization so that the
negative impacts can be controlled. Various ratios are calculated so as to evaluate the financial
performance of the organization in the competitive market and determine the areas of the
improvement. The recommendations are provided which should be considered by the
shareholders so as to attain the maximum returns and the dividend policy is also determined
which will be helpful for the shareholders to take strategic decisions within the organizational
structure. Therefore, it can be said that the financial health of the organization is quite strong to
make investment decision.
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References
 Basu, C., 2018. Four Basic Types of Financial Ratios Used to Measure a Company's
Performance. Chron. [Online]. Also available at http://smallbusiness.chron.com/four-
basic-types-financial-ratios-used-measure-companys-performance-25299.html.
[Accessed on 24 May 2018] BHP Billiton, 2018. Annual Reports. [Online]. BHP Billiton. Available at:
https://www.bhp.com/-/media/documents/investors/annual-reports/2017/
bhpannualreport2017.pdf. [Accessed On 24 May 2018]
 Finance Management, 2018. Importance and Use of Weighted Average Cost of Capital
(WACC). Finance Management. [Online]. Available at
https://efinancemanagement.com/investment-decisions/importance-and-use-of-weighted-
average-cost-of-capital-wacc. [Accessed on 24 May 2018]
 Frank, M.Z. and Shen, T., 2016. Investment and the weighted average cost of capital.
Journal of Financial Economics, 119(2), pp.300-315.
 Grüninger, M.C. and Kind, A.H., 2013. WACC calculations in practice: Incorrect results
due to inconsistent assumptions-status quo and improvements. Accounting and finance
research, 2(2), p.36. Market Index, 2018. BHP Billiton Ltd Chart. [Online]. Market Index. Available at:
https://www.marketindex.com.au/asx/bhp. [Accessed On 24 May 2018]
 Momani, G.F. and Alsharari, M.A., 2012. Impact of Economic Factors on the Stock
Prices at Amman Stock Market (1992-2010). International Journal of Economics and
Finance, 4(1), p.151.
 Nautiyal, N. and Kavidayal, P.C., 2018. Analysis of Institutional Factors Affecting Share
Prices: The Case of National Stock Exchange. Global Business Review, 19(3), pp.707-
721. Reuters, 2018. BHP Billiton Ltd (BHP.AX). [Online]. Reuters. Available at:
https://www.reuters.com/finance/stocks/chart/BHP.AX. [Accessed On 24 May 2018]
 Selvam, P. and Punitavati, N., 2012. A FUNDAMENTAL STUDY ON LONG-TERM
INVESTMENT DECISION. International Journal of Management Research and
Reviews, 2(1), p.13.
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 Sharif, T., Purohit, H. and Pillai, R., 2015. Analysis of Factors Affecting Share Prices:
The Case of Bahrain Stock Exchange. International Journal of Economics and Finance,
7(3), p.207.
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