Financial and Economic Interpretation and Communication

1FINANCIAL AND ECONOMIC INTERPRETATION AND COMMUNICATION
Executive summary
Main purpose of the study is to analyse the most recent annual report of an ASX listed
entity for preparing the investor’s report. For this particular study BHP Billiton will be analysed.
BHO Billiton that was formed through merging Billiton Plc and BHP Ltd. In 2001 is an
international natural resource entity. It is one of the largest mining companies all over the world.
The report will cover the financial aspects like liquidity, profitability and leverage position of the
entity. Non-financial aspects those will be covered by the report are company’s core business
area, its strengths and remuneration trend.
Core business area and geographic location
Main objective of the entity is to grow potash mining business and incorporate the same
into core business. Hence, the investment by the entity in potash mining in growing and the
primary objective behind it is to divest the shale gas assets from the US. Different geographic
locations covered by its businesses are Canada, Australia, Malaysia, UK, London, England and
Chile1
Financial outcomes
BHP Billiton Ratio Analysis
Particulars 2017 2018
Profitability ratio
Net Profit Margin 18.52% 17.75%
Return on equity 10.67% 12.76%
Liquid ratio
Current Ratio 1.85 2.51
Quick Ratio 1.52 2.25
Market ratio
Price to Earnings Ratio 24.18 46.62
Cash management
Cash flow margin 0.44 0.40
Short-term debt coverage 1.40 1.26
From the most recent annual report of the entity that is for the period closed in 2018
following can be interpreted –
Profitability ratio –
 Net profit margin – it helps the investors in determining whether the entity is able to meet
its operational expenses from the income generated through revenues and whether any
amount is left for providing return to the shareholders. It can be observed from the net
profit margin for the year 2017 as well as 2018 that though the same has been reduced
from 18.52% to 17.75%, the entity is still profitable to provide return to its shareholders
which is considered as a major interest area for the investors2.
1 "A Leading Global Resources Company", BHP (Webpage, 2019) https://www.bhp.com
2 R.M., Bakker and Shepherd D.A, "Pull The Plug Or Take The Plunge: Multiple Opportunities And The Speed Of
Venturing Decisions In The Australian Mining Industry" (2019) 60(1) Academy of Management Journal

2FINANCIAL AND ECONOMIC INTERPRETATION AND COMMUNICATION
 Return on equity – it measures the dollar of profit earned by the entity with each dollar of
the equity invested by the shareholder. Looking into the ROE of the entity it can be stated
that same has been increased from 10.67% to 12.76% over the years from 2017 to 20183.
Liquidity ratio –
 Current ratio – current ratio is used to measure the ability of the entity to pay off its short
term obligation through comparing its current assets against the current liabilities.
Analysing the current ratio of BHP Billiton it can be determined that the liquidity
position of the company has been enhanced as the current ratio increased from 1.85 to
2.51 over the years from 2017 to 2018.
 Quick ratio – it is used to measure the ability to meet short term obligation however it
only considers most liquid asset or the liquid assets those are readily available in cash.
Analysing the quick ratio of the entity it can be determined that the liquidity position of
BHP Billiton has been enhanced as the quick ratio increased from 1.52 to 2.25 over the
years from 2017 to 20184.
Market ratio –
 Price to earnings ratio – it establishes the relationship between the company’s stock price
and its EPS. Higher PE ratio determines that the investors have expectation of higher
return from the investment made by them. PE ratio of the entity over the years from 2017
to 2018 has been significantly improved from 24.18 to 46.625.
Cash management ratio –
 Cash flow margin – it is used to measure the entity’s ability to convert its sales in cash.
Investors use this to analyse the earning quality of the company. Cash flow margin of the
entity as it can be seen from the calculation has been reduced from 0.44 to 0.40 over the
years from 2017 to 2018.
 Short term debt coverage – it reveals the financial position of the entity in context of its
ability in meeting the short term financial obligation with the cash available with it.
Short term debt coverage of the entity as it can be seen from the calculation has been
reduced from 1.40 to 1.26 over the years from 2017 to 20186.
Business strategy
Business strategy of the entity involves creating as well as increasing the value of the
entity and enhancing the return provided to the shareholders. Further, only those employees are
engaged by the entity who have required experience and skill to work in the mining industry7.
3 S.Z, Islam and Khandaker S, "Firm Leverage Decisions: Does Industry Matter?." (2015) 31 The North American
Journal of Economics and Finance
4 N, Muhammad et al, "The Impact Of Corporate Environmental Performance On Market Risk: The Australian
Industry Case" (2015) 132(2) Journal of business ethics
5 M.C., Ehrhardt and Brigham E.F, Corporate Finance: A Focused Approach (Cengage learning., 2016)
6 J.J, Weygandt, Kimmel P.D and Kieso D.E, Financial & Managerial Accounting. (John Wiley & Sons., 2019)
7 "A Leading Global Resources Company", BHP (Webpage, 2019) https://www.bhp.com