MBA403 Financial Analysis: BHP Billiton Investment Wealth Report

This report provides a financial analysis of BHP Billiton for the year 2018, focusing on its suitability as an investment for potential shareholders. It examines key financial metrics such as profitability (operating and net profit margins), liquidity (current and quick ratios), cash management (cash flow ma...Read More

Running head: FINANCIAL AND ECONOMIC INTERPRETATION AND
COMMUNICATION
Financial and economic interpretation and communication
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1FINANCIAL AND ECONOMIC INTERPRETATION AND COMMUNICATION
Table of Contents
Executive summary....................................................................................................................2
Profitability................................................................................................................................2
Liquidity.....................................................................................................................................2
Market value analysis.................................................................................................................3
Conclusion and recommendation...............................................................................................3
Reference....................................................................................................................................4
Appendix....................................................................................................................................5

2FINANCIAL AND ECONOMIC INTERPRETATION AND COMMUNICATION
Executive summary
Purpose of the report is to interpret the ASX listed entity BHP Billiton’s financial
performance for the year ended 2018. The report will focus on the company’s profitability,
liquidity, cash management and market performance through investigating the additional
information regarding the entity. BHP Billiton is engaged in exploration, production,
processing and development oil, gas and mineral. The firm operates through various
segments including potash, petroleum, coal, iron ore and copper. The entity was formed
through merger of Billiton PLC and BHP Ltd. Headquarter of the entity is located in
Melbourne, Australia.
Profitability
Profitability analysis of the company measured through using the operating profit
margin and net profit margin. It evaluates the ability of the entity to generate the earnings
against the expenses and different other costs associated with the generation of earning
during the period under consideration. Operating profit determines the profit left with the
entity after paying all the expenses related to operation of the business. It is noticed that the
performance of the entity for the year closed on 30th June 2018 was satisfactory as the
revenue as been increased to $ 43,638 million from $ 28,567 million in 2016. It led to
increase in the operating profit margin from 9.82% in 2016 to 36.66% in 2018 (Ehrhardt and
Brigham 2016). On the other hand, the net profit margin measures the earnings available with
the firma after paying all the expenses related to business including the financing expenses
and tax related expenses. Looking into the net profit margin of the entity it can be stated that
the net profit has been increased from net loss amounting to $ 312 million in 2016 to $ 7744
million in 2018 (BHP 2019). It led to increase in net profit margin from -0.52% to 12.76%
over the years from 2016 to 2018. Hence, the overall profitability position of the entity over
the years from 2016 to 2018 was in increasing trend (Bakker and Shepherd 2017).
Liquidity
Liquidity analyses determine the ability of the entity to pay off its short term
obligation as and when they become due for payment with the short term assets. Short term
liquidity position of the company is the year 2018 is good and improved as compared to the
year 2016 as well as 2017. If the current ratio is considered it can be determined that the
company’s current ratio has been enhances from 1.44 in 2016 to 2.51 in 2018 (Sari, Nurlaela
and Titisari 2018). Current assets of the company increased in 2018 as compared to 2016 and
2017. If the quick ratio is considered that does not consider the assets those takes some times
in getting converted into cash like inventories is reduced in 2018 as compared to 2017. The
reason behind that is for 2017 the company’s current asset does not include any such asset
that may take time to get converted into cash (Islam and Khandaker 2015). Hence, whereas
the current ratio of the company over the years from 2016 to 2018 is in enhancing trend the
quick ratio did not have any specific trend as it increased in 2017 as compared to 2016 and
dropped in 2018. However, overall liquidity position of the entity is indicating that it is able
to meet it short term obligations efficiently (BHP 2019).
Cash management
Cash management ratios of the entity indicate the ability of the entity to convert the
sales into cash and meet its financial obligation with available cash. Both cash flow margin as

3FINANCIAL AND ECONOMIC INTERPRETATION AND COMMUNICATION
well as short-term debt coverage of the entity is indicating that the cash from operation for
the entity has been increased from $ 9840 million to $ 17,561 million over the period under
consideration (BHP 2019). However, though the cash flow margin of the entity has been
reduced in 2018 as compared to 2017, the short –term debt coverage is in enhancing trend
and increased from 0.80 to 1.26 over the period from 2016 to 2018 (Gitman, Juchau and
Flanagan 2015).
Market value analysis
Market value ratios determine the relationship among the performance of the
company with its stock price and the dividend paid by it. Stock price of the entity are in
enhancing trend and increased from $ 20.68 to $32.17 over the years from 2016 to 2018.
From the P/E ratio of the entity it can be determined that P/E ratio of the entity is in
enhancing trend and -17.23 to 46.62 over the concerned period (BHP 2019). Further, if the
dividends yield of the entity is considered it can be stated that the annual dividend payment of
the company is in increasing trend and increased from $ 0.3 to $ 1.18 over the concerned
period. Further, the dividends yields are in increasing trend and have been increased from
1.45% to 3.67% over the concerned period (Weygandt, Kimmel and Kieso 2015). Further, it
is found from the financial statement of the entity for the year closed on 30th June 2018 that
the remuneration paid by it to its executives are in enhancing trend and apart from wage
benefits they are paid non-wage benefits too. However, the remuneration level varies in
different companies and the company engages employee who have specialised knowledge
and experience in respective field. Further, the management team of the entity includes
highly experienced executives in their respective field that enable the entity to form better
strategies for business operation. However, in addition to good prospects for future the
mining industries in Australia are facing difficult scenario with regard to difficult operating
environment and unfavourable socio-political scenario (Muhammad et al. 2015).
Conclusion and recommendation
From the above discussion, it is concluded that the profitability, liquidity and market
value ratios of the entity has been improved in 2018. However, the cash management position
has been slightly deteriorated in 2018 as compared to 2017. Further from the stock price of
the entity it can be stated that the share of the company undervalued and the investors have
more expectation. However, it can be expected from a big company like BHP Billiton that it
will be able to meet the expectation of the investors. Hence, it is recommended that the
shareholders shall hold the investment to earn more in future period.

4FINANCIAL AND ECONOMIC INTERPRETATION AND COMMUNICATION
Reference
Bakker, R.M. and Shepherd, D.A., 2017. Pull the plug or take the plunge: Multiple
opportunities and the speed of venturing decisions in the Australian mining
industry. Academy of Management Journal, 60(1), pp.130-155.
BHP. 2019. BHP | A leading global resources company. [online] Available at:
https://www.bhp.com/ [Accessed 11 Feb. 2019].
Ehrhardt, M.C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage
learning.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Islam, S.Z. and Khandaker, S., 2015. Firm leverage decisions: does industry matter?. The
North American Journal of Economics and Finance, 31, pp.94-107.
Muhammad, N., Scrimgeour, F., Reddy, K. and Abidin, S., 2015. The impact of corporate
environmental performance on market risk: The Australian industry case. Journal of business
ethics, 132(2), pp.347-362.
Sari, R.K., Nurlaela, S. and Titisari, K.H., 2018, August. The Effect of Liquidity Ratio,
Profitability Ratio, Company Size, and Leverage on Bond Rating in Construction and Real
Estate Company. In Proceeding Ictess (Internasional Conference on Technology, Education
and Social Sciences).
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting.
John Wiley & Sons.

5FINANCIAL AND ECONOMIC INTERPRETATION AND COMMUNICATION
Appendix
Ratio computation
BHP Billiton Ratio Analysis
Particulars 2016 2017 2018
Operating Profit 2804 12554 15996
Revenue 28567 36135 43638
Operating Profit Margin 9.82% 34.74% 36.66%
Net Profit -312 6694 7744
Shareholder's Equity 60071 62726 60670
Net Profit margin -0.52% 10.67% 12.76%
Current Assets 17714 21056 35130
Current Liabilities 12340 11366 13989
Current Ratio 1.44 1.85 2.51
Current assets 17714 21056 35130
inventories 3411 0 11949
Current Liabilities 12340 11366 13989
Quick Ratio 1.16 1.85 1.66
Stock Price 20.68 26.6 32.17
Earnings Per Share -1.2 1.11 0.69
Price to Earnings Ratio -17.23 23.96 46.62
Annual dividend 0.3 0.83 1.18
Current stock price 20.68 26.6 32.17
Dividend yield 1.45% 3.12% 3.67%
Cash from operation 9840 15876 17561
Sales 28567 36135 43638
Cash flow margin 0.34 0.44 0.40
cash from operation 9840 15876 17561
Short-term debt 12340 11366 13989
Short-term debt coverage 0.80 1.40 1.26