Financial Ratio Analysis of BHP Billiton and Rio Tinto

This report provides a comparative view of BHP Billiton and Rio Tinto for the financial year ended 2017. Financial ratios have been considered to analyse the financial performance of both companies. The report includes analysis of return on assets, return on ordinary equity, profit margin, current ratio, and inventory turnover.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
Introduction: 3
Company Overview 3
BHP Billiton 3
Rio Tinto: 4
Financial Ratio Analysis: 4
Return on Assets: 4
Return on Ordinary Equity: 6
Profit Margin: 7
Current Ratio: 9
Inventory Turnover: 10
Debt Ratio: 12
Equity Ratio 13
Debt and Equity Financing Structure: 14
BHP Billiton 14
Rio Tinto: 16
Conclusion: 17
References: 18
Appendix: 21
BHP Billiton Financial Statements: 21
Income Statement: 21

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Comprehensive Income Statement: 22
Balance Sheet: 23
Cash Flow Statements: 24
Statement of Changes in Equity: 25
Rio Tinto Financial Statements: 26
Income Statements: 26
Comprehensive Income Statement: 27
Cash Flow Statement: 28
Balance Sheet: 29
Statement of Changes in Equity: 30

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Introduction:
Financial accounting is defined as the field in bookkeeping that is associated with the
summary, examination and reporting of the financial transaction relating to the business.
Financial accounting involves preparing the financial statement so that it is available for
public consumption (Henderson et al., 2015). Companies generally makes the use of
standardized guidelines, transactions to record, summarized and present the same in the
financial report or the financial statement particularly the income statement or the balance
sheet. The financial statement is helpful in offering the information that is needed for making
a sound economic decision.
The current business report is based on analysing the financial performance of two
businesses that are listed on the ASX stock exchange. The report would be providing a
comparative view of BHP Billiton and Rio Tinto for the financial year ended 2017. To
analyse the comparative performance of BHP Billiton and Rio Tinto financial ratios has been
considered here so that a detailed understanding of the financial performance for both the
companies is obtained.
Company Overview
BHP Billiton
BHP Billiton is the globally leading Resources Company. The company is involved in
extracting and processing the minerals, oil and gas with greater than 60,000 employees and
contractors that are mainly involved in Australia and Americas (Bhp.com, 2017). BHP
Billiton produces are sold across the world with the company sales and marketing expanding
across the Singapore and Houston, US. BHP Billiton worldwide headquarters is located in
Melbourne, Australia. BHP Billiton functions under the structure of Dual Listed Company

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with the two parent companies namely the BHP Billiton Ltd and BHP Billiton Plc operating
as the single economic entity.
BHP Billiton was founded in 1885 in the mining town of Broken Hill in New South
Wales. During the year 2017, BHP is ranked as the world’s largest mining company in
respect of its market capitalization and third largest company of Melbourne in terms of
revenue that almost increased between 2004 and 2012.
Rio Tinto:
Rio Tinto Group is the Anglo-Australian international and one of the world’s largest
company engaged in mining. For over 145 years, Rio Tinto has been ground-breaking to the
production of materials necessary to the progress of humans (Riotinto.com, 2017). The
minerals and metals helps in making the modern life work. Rio Tinto Group is the dual listed
company trading on both the London stock exchange and the Australian stock exchange. The
company has created portfolio and it is constantly optimising which offers the company with
the competitive advantage.
Rio Tinto Group makes investment in the assets to develop the suit of high quality
expandable assets which is positioned for decades of premium production. With more than
47,000 workforces, Rio Tinto Group has the common code of conduct with the identical set
of morals, protection, collaboration, reliability and brilliance. Rio Tinto continues to pioneer
its progress for the better future. The company looks for ways so that it makes its trade robust
by driving more production and performance from the coalmine to market.
Financial Ratio Analysis:
Return on Assets:
The return on assets ratio is generally called as the return on total assets that are
profitability to measure the net profits that is produced by the total assets through the period

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by associating the net income with the average total assets. Alternatively, the return on assets
evaluates how effectively a business manages its assets to generate incomes during a
particular period (Khan, 2015). As the assets of the company forms the sole purpose of
generating the revenues and producing profits, the ratio is helpful to administration and
investors to understand how well a company can convert the investment in assets and profits.
Year 2017 2017
Particulars BHP Billiton Rio Tinto
Net Income 6222 8851
Average Total Assets 117979.5 92494.5
Return on Assets 5.27 9.57
BHP Billiton Rio Tinto
0.00
2.00
4.00
6.00
8.00
10.00
12.00
5.27
9.57
Return on Assets
Return on Assets
2017
Axis Title
Figure 1: Figure representing Return on Assets
Source: (As Created by Author)
In the financial year of 2017, BHP Billiton reported return on Assets of 5.27. On the
other Rio Tinto’s return on assets for 2017 stood more superior at 9.57. BHP Billiton has
modest and varied portfolio of tier one assets across the world with the lower cost choices for
the prospective growth and construction of value. This enables BHP Billiton to apply its
values and culture which emphasises on safety and productivity. BHP Billiton employs

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technology and uses disciplined investment to extract the most worth and maximum returns
from its assets.
Rio Tinto’s annualized return on assets for the year stood 9.57. Rio Tinto reported a
capitalized property plant and equipment of US $441 million. Additionally, the book value of
assets increasingly stood US $118 million. Understandably, Rio Tinto’s return on assets as
represents large investment in the capital assets with the ultimate objective of generating
greater revenue and producing higher profits (Barth, 2015). On a comparative note, the return
on assets of Rio Tinto’s stood stronger than BHP Billiton which implies that Rio Tinto has
the better ability of generating revenues and profits from its given assets.
Return on Ordinary Equity:
The return on ordinary equity or return on equity is the profitability ratio which
evaluates the capability of an organization to produce profits from the stakeholders’
investment in the company (Hoskin et al., 2014). Alternatively, the return on equity evaluates
the efficiency of the company to use its money from the shareholders to yield profits and
enlarge the business.
Particulars BHP Billiton Rio Tinto
Net Income 6222 8851
Shareholder's Equity 62726 51115
Return on Ordinary Equity 9.92 17.32

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BHP Billiton Rio Tinto
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
9.92
17.32
Return on Ordinary Equity
Return on Ordinary Equity
2017
Axis Title
Figure 2: Figure representing Return on Ordinary Equity
Source: (As Created by Author)
The return on ordinary equity for BHP Billiton during the year 2017 stood 9.92 while
Rio Tinto reported a return on Equity of 17.32. The return on equity for BHP Billiton stood
comparatively low than Rio Tinto because of the Samarco dam failure in 2017. The company
however realised higher average prices from its equity accounting investments in 2017. The
company however reported an increase of US16.8 billion which reflects an increase from the
higher commodity prices from the equity accounted investments. Rio Tinto reported higher
return from its shareholder’s equity to include the equity dividends that are paid to the
shareholders. Rio Tinto has efficiently used its capital from the shareholders to produce
profits and expand the company (Pott, 2017). This designates that the business is using the
investors fund effectively compared to BHP Billiton.
Profit Margin:
The profit margin ratio is also known as the gross profit ratio that helps in measuring
the sum of net income that is produced with each dollar of sales derived by equating the net
income and the net sales of the business (Warren & Jones, 2018). The profit margin ratio

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helps in showing the proportion of sales that remains after the business pays all the
expenditure. The creditors and the shareholders makes the use of this ratio to evaluate
effectiveness of the company to convert the sales into the net income (Downs, 2017). The
investors under this ratio makes sure that the profits are sufficiently greater to distribute the
dividends whereas the creditors want to assure that the business has the sufficient amount of
profit to pay its loan back.
Particulars BHP Billiton Rio Tinto
Net Income 6222 8851
Net Sales 38285 40030
Profit Margin 16.25 22.11
BHP Billiton Rio Tinto
0.00
5.00
10.00
15.00
20.00
25.00
16.25
22.11
Profit Margin
Profit Margin
2017
Figure 3: Figure representing Profit Margin
Source: (As Created by Author)
The profit margin for BHP Billiton during the year ended 2017 stood 16.25 while the
profit margin for Rio Tinto stood 22.11. BHP Billiton reported attributable profit of US $5.9
billion which also included the exception loss of US $842 million after tax. The gross margin
stood relatively lower than Rio Tinto because the Samarco dam failure contributed to the
exceptional loss (Elliott, 2017). Though the profits of BHP Billiton increased from the
previous year figures of US $ 1.6 billion but stood relatively lower than Rio Tinto profit

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margin of 22.11. It can be stated that Rio Tinto manages its expenditure relatively well in
proportion to its net sales.
Current Ratio:
The current ratio can be defined s liquidity ratio that measures the efficiency of the
company’s capability to pay its short term obligations in proportion to its current assets. The
current ratio is regarded as the vital measures of liquidity to assess the short term liabilities
that are due inside the year (Trotman & Carson, 2018). This signifies that the company has
the limited time period to raise the funds to pay its liabilities. The company that has the larger
amount of current assets would be more likely in the position of paying off its debts when
they become due without selling the long term revenue producing assets.
Particulars BHP Billiton Rio Tinto
Current Assets 21056 18678
Current Liabilities 11366 11225
Current Ratio 1.85 1.66
Current Ratio
1.55
1.60
1.65
1.70
1.75
1.80
1.85
1.90 1.85
1.66
Current Ratio
BHP Billiton Rio Tinto
2017
Axis Title
Figure 4: Figure representing Current Ratio
Source: (As Created by Author)

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During the financial year of 2017 BHP Billiton reported the current ratio stood 1.85.
On the other hand, Rio Tinto reported the current ratio of 1.66. The current ratio for Rio Tinto
stood comparatively lower than the BHP Billiton (Arnold & Kyle, 2017). By gauging into the
current ratio of BHP Billiton the investors and creditors can understand that the liquidity
position of BHP Billiton is far more superior to Rio Tinto which signifies that the business is
better capable of paying its current liabilities. Furthermore, the current ratio of BHP Billiton
states that the firm’s current debt is in terms with the current assets than Rio Tinto as it more
easily makes the payments of current debt.
Inventory Turnover:
The inventory turnover ratio is regarded as the efficiency ratio that signifies how
effectively the company is managing its inventory in comparison to the cost of goods sold
with the average the average inventory for the period (Kaplan & Atkinson, 2015). The
inventory turnover measures the number of times the average inventory is converted or sold
during the period. Alternatively, the ratio measures the number of times a company sale its
total average inventory dollar amount throughout the year (Scarborough, 2016). The
inventory turnover ratio is termed important because it is reliant on the two chief constituents
of performance. The first element is reliant on the stock purchasing while the second
component is related to sales.
Particulars BHP Billiton Rio Tinto
Cost of Goods Sold 9085 11432
Average Inventory 3542 151.5
Inventory Turnover Ratio 2.56 75.46

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BHP Billiton Rio Tinto
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
2.56
75.46
Inventory Turnover Ratio
Inventory Turnover Ratio
2017
Axis Title
Figure 5: Figure representing Inventory Turnover Ratio
Source: (As Created by Author)
The inventory turnover for BHP Billiton and Rio Tinto is computed as cost of goods
sold divided by the total inventories. The inventory turnover ratio for BHP Billiton stood 2.56
times for the financial year ended 2017 whereas Rio Tinto reported inventory turnover of
75.46 times. BHP Billiton recognizes the inventory and based on the stage of production
procedure. BHP Billiton realises the inventory at the lower costs and net realisable value. The
cost is ascertained primarily on the basis of average costs.
Rio Tinto average of cost is computed by referring to the level of cost during the
relevant month along with the opening inventory (Langfield-Smith et al., 2017). The
inventory turnover of Rio Tinto is comparatively better than BHP Billiton because the stock
purchase resulted in greater sales of inventory which ultimately improved its inventory. The
real cause of BHP Billiton lower inventory turnover ratio is that the first component of stock
purchase is larger which amounts to accumulation of stocks and ultimately contributing to the
storage costs and holding of other assets.

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Debt Ratio:
The debt ratio is regarded as the creditworthiness ratio which measures the total
liabilities of the firm as the proportion of total assets. In other words, the debt ratio represents
the company’s ability of the company to pay its liabilities with its assets (Otley, 2016).
Alternatively, this represents the number of assets a company should sell so that it can pay off
its liabilities. The ratio assesses the financial leverage of the company (Quattrone, 2016).
Corporations that have greater amount of liabilities in comparison to the assets is regarded as
highly leveraged and riskier for the moneylenders.
Particulars BHP Billiton Rio Tinto
Total Liabilities 54280 44611
Total Assets 117006 95726
Debt Ratio 0.46 0.47
BHP Billiton Rio Tinto
0.46
0.47
0.47
0.46
0.47
Debt Ratio
Debt Ratio
2017
Axis Title
Figure 6: Figure representing Debt Ratio
Source: (As Created by Author)

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The debt ratio for the BHP Billiton for the financial year ended 2017 stood 0.46
whereas the debt ratio for Rio Tinto stood 0.47. BHP Billiton for the year 2017 has been bias
towards the reduction of debt. The company also indulged in the decision of execution of
share repurchase programme reflecting a strong cash position. BHP Billiton further extended
BHP average debt maturity profile to improve capital structure of company. Rio Tinto on the
other hand reported somewhat identical debt ratio as the net debt of the company reduced by
US $3.8 billion which ultimately strengthened the year ended balance sheet.
The lower debt ratio for the BHP Billiton and Rio Tinto is regarded as more
favourable. This implies that both the companies have more stable business with the higher
probability of longevity in the long run (Dekker, 2016). Furthermore, both Rio Tinto and
BHP Billiton has twice the amount of assets as the liabilities. Essentially, the creditors of
both the Rio Tinto and BHP Billiton owns half of each company’s assets while the rest is
owned by the shareholders as the remainder of the assets.
Equity Ratio
The equity ratio is regarded as the investment leverage or the creditworthiness ratio
that helps in measuring the quantity of assets which is funded by the investment of owners in
comparison to the total equity in the business to its total assets (Malmi, 2016). The equity
ratio helps in highlighting the two noteworthy financial conceptions of the solvent and
sustainable business. The first element shows that the amount of total company assets is
owned outright by the shareholders. Alternatively, if all the liabilities are paid off then the
stakeholders would end up with the remaining assets (Tappura et al., 2015). The second
element on the other hand inversely represents that how the company is leveraged with its
debt. The equity ratio represents the amount of company’s assets is financed by the investors.

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BHP Billiton Rio Tinto
0.53
0.54
0.54
0.54
0.53
Equity Ratio
Equity Ratio
2017
Axis Title
Figure 7: Figure representing Equity Ratio
Source: (As Created by Author)
As evident from the above computation the Equity ratio for the BHP Billiton stood
0.54 while for the Rio Tinto stood 0.53. BHP Billiton classifies the ordinary shares under
equity. As both the companies has reported higher equity ratios it represents that equity ratio
is typically favourable for the company (Wagenhofer, 2016). A higher level of investment by
the shareholders represents that both the companies is more sustainable and less risky to lend
the future loans. As both the companies have represented higher equity ratios therefore less
financing and debt service costs would be lower for both Rio Tinto and BHP Billiton.
Debt and Equity Financing Structure:
BHP Billiton
BHP Billiton is considered as highly leverage company with the debt to equity of
45.77%. This is very much common in the large cap companies because debt can be less
expensive than the alternative equity because of the large deduction in tax from interest
payments (Na & Subramaniam, 2018). As large caps companies are considered safer than the

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small companies, companies usually tend to enjoy lower cost of capital. In the situation of
BHP Billiton, the ratio of 14.39 times suggest that the interest is sufficiently covered.
Higher investment coverage is considered accountable and safe practice that
highlights why majority of the investors considers BHP Billiton is safe investment. Even
though the level of debt is considered safe, BHP Billiton level of debt is in the direction of
higher end spectrum, the cash flow of the company appears adequate to satisfy the
obligations which signifies that the debt is being used effectively (Huang et al., 2017). As
there are no concerns around the BHP Billiton liquidity requirements, this should be
considered as the optimal capital structure currently. BHP Billiton issued new level of debt
during the year 2017 and the matured debt during the year was not refinanced.
Figure 8: Debt Financing Structure of BHP Billiton
Source: (Bhp.com, 2018)
The capital structure of the company included the issue of share capital. To finance its
capital BHP Billiton issued ordinary shares at $0.50 par value that were fully paid. To finance
its capital structure BHP Billiton also issued the preference shares that had the right of
sharing preference shares at the nominal value in BHP Billiton Plc.

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Figure 9: Equity Financing Structure of BHP Billiton
Source: (Bhp.com, 2018)
Rio Tinto:
The debt and equity financing structure of Rio Tinto included the issuance of
unamortised debt of US $14 million. Rio Tinto has the access to numerous forms of debt
financing that includes the US Shelf Programme, European Debt Issuance Programme,
Commercial Paper and credit facilities. Furthermore, the debt and equity financing of the
company also included European Debt Issuance Programmes and Commercial Paper that
totalled around US $7.9 billion. The equity financing structure of the company included
issuance of equity shares to the holders of the non-controlling interest (Nguyen & Rugman,
2015). Ordinary shares were issued by the company at the incremental cost that was directly
attributable to the issue of new shares.

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Figure 10: Capital Financing Structure of Rio Tinto
(Source: Riotinto.com, 2017)
Conclusion:
On a conclusive note it can be stated that Rio Tinto has recorded better financial
performance as the for the year 2017 the net profit of the company increased by 90%. Rio
Tinto paid out the investors with the total record of US $5.2 billion in 2017. Additionally, the
ratios indicted that the gross profit margin for Rio Tinto stood relatively strong than BHP
Billiton. The underlying profits for the year 2017 stood US $8.6 billion for Rio Tinto. BHP
Billiton on the other hand reported somewhat tumultuous financial performance.
Despite reporting in 2017 the financial and operational result were strong for BHP
Billiton but Samarco Dam failure hampered the company’s performance. The return on assets
and return on the ordinary equity for BHP Billiton stood relatively lower which signifies that
the company is not sufficiently utilizing its shareholders fund to generate profit. With positive
balance sheet and positive cash flow position BHP Billiton is committed to increase and
maintain the capital by improving the value and returns for its shareholders.

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Appendix:
BHP Billiton Financial Statements:
Income Statement:

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Comprehensive Income Statement:

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Balance Sheet:

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Cash Flow Statements:

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Statement of Changes in Equity:

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Rio Tinto Financial Statements:
Income Statements:

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Comprehensive Income Statement:

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Cash Flow Statement:

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Balance Sheet:

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Statement of Changes in Equity:

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