Fundamental Analysis of BHP Billiton and Rio Tinto

This report has conducted the fundamental analysis of two ASX listed companies, that are, BHP Billion and Rio Tinto, leading mining companies within Australia. It has been analyzed on the basis of top-down analysis that overall macro-economic factors support the future growth of the mining companies. Also, the improved financial performances in the year 2017 as compared to previous year depicts that they are expected to provide larger returns in the future supported by the mining boom experienced by the country.

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Principles of financial management

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Executive Summary
Fundamental analysis consists of both the use of top-down and bottom-up analysis for
examining the economic and financial factors impacting the performance of an entity in the
future context. The report has carried out fundamental analysis of two ASX listed companies of
BHP Billiton and Rio Tinto operating in the same mining sector of Australia. It has been
analyzed on the basis of top-down analysis that overall macro-economic factors support the
future growth of the mining companies. Also, the improved financial performances in the year
2017 as compared to previous year depicts that they are expected to provide larger returns in the
future supported by the mining boom experienced by the country.

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Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Top-Down Analysis.........................................................................................................................4
Current Interest and Inflation Rate...............................................................................................4
Australian dollar Value................................................................................................................5
GDP Growth Rate........................................................................................................................5
Business Cycle of Economy........................................................................................................5
Impact of Economic Environment on Mining Companies..........................................................6
Bottom up Analysis.........................................................................................................................6
Ratio Analysis of Mining Companies of Australia......................................................................6
Profitability performance of BHP Billiton and Rio Tinto............................................................7
Leverage Position of Rio Tinto and BHP Billiton.......................................................................9
Market Analysis.........................................................................................................................10
Summary and Recommendations..................................................................................................11
References......................................................................................................................................12

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Introduction
The technique of fundamental analysis is largely used by the investors to gain an analysis
into the present and future performance of a business entity. The method of fundamental analysis
is used for evaluation of the performance of an entity for examining its intrinsic value through
analysis of its related economic and financial factors. This is done mainly by conducting top-
down and bottom-up analysis that helps in developing an insight into the forecasted future
performance of an entity by evaluation of the related economic and financial factors. This report
has conducted the fundamental analysis of two ASX listed companies, that are, BHP Billion and
Rio Tinto, leading mining companies within Australia. This is carried out by the use of top-down
and bottom-up analysis for identifying the macro and micro economic factors that can cause a
directional change in the value of a company.
Top-Down Analysis
The overall review of market conditions is followed by narrowing the approach to
specific entities for analyzing the impact of identified factors on their future performance. The
top-down analysis for analyzing the macro-economic condition impacting the performance of
selected companies is conducted by evaluation of the overall economic environment of Australia.
This is carried out by an evaluation of the following macro-economic factors that helps in
developing an insight into the overall economic environment of Australia as follows:
Current Interest and Inflation Rate
The central bank of Australia is emphasizing on maintaining the interest rates low within
the country and at present is low to 1.5 per cent. RBA is targeting to keep the inflation within the
range of 2 to 3 per cent in the future period of time. This is largely due to overcoming completely
the after effects of the global financial crisis on the Australian economy and to foster its
continued growth and development. This is causing a downward pressure on the interest rates to
remain low for promoting economic stability within the country. The central bank is also placing
emphasis on reducing the unemployment rate within the country which is presently recorded to
be 5.4%. The RBA is placing focus on reducing the unemployment rate to 5% for increasing the
number of people with jobs and strengthening the labor market. The interest rate is likely to

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increase in the future within the economic growths supported by mining boom and improvement
in the labor market. However, the slower rate of growth within the wages is causing uncertainty
regarding the increase in the interest rate by the RBA in the future. The wage price index within
Australia has only recorded an increase of about 2% over the past year in comparison to earlier
wage growth rate between 3.5-4 per cent. Also, though the business environment within
Australia has improved as a result of increasing capital inflows thus promoting the businesses to
take risk of investing in new assets. However, the improvement in business conditions has not
promoted the growth in spending power of consumers due to uncertainty present within the
economy. This is further causing the RBA to maintain the interest rates at a lower level within
the country (Hutchens, 2017).
Australian dollar Value
The central bank of Australia has maintained the value of Australia dollar
relatively low to about 74 US cents at present and is expected to decline in further context. The
forecast has been made by the RBA on account of the inflation forecast that is likely to remain
unchanged and thus the value of Australian dollar will continue to remain low for supporting the
economic growth. This is because the weak Australian dollar will promote the overseas
businesses to purchase the Australian products and thus will promote the exports from the
country. This in turn will support the economic growth by realizing strong revenue and reducing
the inflation level. The country at present also have experienced mining boom and thus favorable
economic environment for exports present an attractive opportunity to export the abundance of
its reserve of iron and coal to the foreign countries and thus realizing capital inflows. In addition
to this, it also promotes overseas tourists to visit Australia as the poor exchange rate will cause
them to incur less expenditure on travelling to the country. The exchange rate can be regarded as
the relative price at which value of a currency is exchanged in relation to the value of another
country’s currency. The downward trend maintained within the country of interest rate in
comparison to that of other countries such as the US is promoting the investors to sell the
Australian dollar in order to buy US dollars. This is further causing a decline in the value of
Australian dollar and its value has fallen to about 5.4% against the US dollar in the year 2018
(Rollins, 2016).

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GDP Growth Rate
The Gross Domestic Product (GDP) refers to the market value of overall goods and
services that are produced over a year that is an important indicator of the economic strength of a
country. The statistics have revealed an increasing growth rate in the real GDP of Australia from
the year 2012 to 2018 with forecasted projections of increase in its value till the year 2022. It is
estimated that GDP in Australia is growing up at the rate of 2.27 per cent on an annual basis. The
increasing exports, business investment and government spending is driving the growth of GDP
within the country (Australia posts strongest economic growth in two years, 2018). The net
disposable income has depicted a growth of about 2.5 per cent over the year that has caused
increasing speeding on household such as transport, heath care and insurance products within the
country. There is relatively decline in the saving ratio and this depicts that consumers are
spending more in comparison to the previous year’s results. However, the slower growth of
wages still in Australia is a major point of concern that can cause a negative impact on GDP
growth and thus causing RBA to maintain the interest rates at low level (Australia Real GDP
Growth, 2018).
Business Cycle of Economy
Australian economy at present can be regarded to have a positive state of growth and as
such can be categorized as a developing economy. The economy is still in a growing phase with
increase in the GDP value and the mining boom experienced within the country. The low level of
inflation and open trade policies further presents a favorable economic environment for the
growth and development of the business entities within the country (Rollins, 2016).
Impact of Economic Environment on Mining Companies
The mining boom experienced within the country presents an attractive opportunity of
growth and development for the mining sector companies. The open trade and investment
policies of Australia supported by the falling value of Australian dollar promote the export of
mining products to the foreign countries. The lower exchange rate is causing an increase in eth
demand of mining products from foreign countries. Thus, the present economic environment of
Australia can be stated to largely support the growth of Australian mining companies (Hutchens,
2018).

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Bottom up Analysis
Fundamental analysis requires measuring the financial performance of individual stocks
in the selected industry. It can be performed through applying the bottom up approach of
fundamental analysis. Top down analysis has provided the information of market condition, GDP
growth, interest rate and other important macro criteria that govern the performance of particular
industry in same market. In order to perform the bottom up analysis it has been decided to apply
ratio analysis method.
Ratio Analysis of Mining Companies of Australia
In order to perform the bottom up analysis, ratio analysis of BHP Billiton and Rio Tinto
has been carried out for year 2016 and 2017. Ratio analysis will evaluate profitability, leverage
position and market growth of both the selected companies.
Financial data used to calculate all the ratios have been provided in below table
Financial data BHP Billiton Rio Tinto
2017 2016 2017 2016
Amount in $ million
Net Profit
$
6,222.00
$
(6,207.00)
$
8,851.00
$
4,776.00
Sales
$
38,285.00
$
30,912.00
$
40,030.00
$
33,781.00
Owner's Equity
$
62,726.00
$
60,071.00
$
51,115.00
$
45,730.00
Earnings before interest and
tax
$
11,753.00
$
(6,235.00)
$
14,474.00
$
7,116.00
Expenses paid for interest
$
1,574.00
$
1,161.00
$
848.00
$
1,111.00
Total Liabilities
$
54,280.00
$
58,882.00
$
44,611.00
$
43,533.00
Total Assets
$
117,006.00
$
118,953.00
$
95,726.00
$
89,263.00
(Annual Report: BHP Billiton, 2017 and Annual Report: Rio Tinto, 2017)

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Profitability performance of BHP Billiton and Rio Tinto
Profitability analysis means evaluating the performance of company to earn the revenue
through proper allocation of resources in the profitable business. Some of major profitability
ratios are return on equity, return on assets and net profit ratio.
Profitability Ratios BHP Billiton Rio Tinto
2017 2016 2017 2016
Net Profit Ratio 16.25% -20.08% 22.11% 14.14%
Return on Equity 9.92% -10.33% 17.32% 10.44%
Return on Assets 5.32% -5.22% 9.25% 5.35%
(Deegan, 2013)
Return on Equity: It is most important financial ratio among all the ratios as it measures the
profitability metrics of the company. The purpose of calculating this ratio is to measure how
much a company is profitable for the shareholders (Owners of the company) for their total
investment. It tells the value of net income gained by the company as the percentage of
shareholder equity.
Formula: Net profit /Shareholder’s Equity (Deegan, 2013)
2017 2016
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
Return on Equity
Percentage

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The above chart reflects the comparison of BHP Billiton and Rio Tinto on the percentage
of net income earned on the shareholder’s equity. It was seen that BHP has suffered a loss in
year 2016 while 9.92% return on equity was earned in year 2017. It means economic position of
mining industry has improved a lot that has helped BHP to increase their net profit. On the other
hand, Rio Tinto has positive return on equity in both the years. So it can be interpreted that Rio
Tinto has better return on equity ratio as compared to BHP Billiton.
Return on asset: This ratio is vital from the management point of view as this ratio shows the
percentage of profit earned on the total resources used by the entity. In other words this ratio
measures amount of profit earned on per dollar of assets.
Formula: Net income after tax/Total Assets (Deegan, 2013)
2017 2016
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
Return on Assets
Percentage
It has seen from the above chart that Rio Tinto was successful in utilizing the resources
(total assets) in optimum manner while BHP Billiton fails to do. The return on assets of BHP
Billiton was negative in year 2016 that reflects poor utilization of assets or loss occurred due to
non repetitive items but BHP Billiton has booked a return on assets of 5.32% in year2017.
The overall profitability performance of mining industry was weak in year 2016 due to decrease
in value Australian dollar and less demand in international market. However in year 2017, there

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was boom in the industry that helps both BHP and Rio Tinto to earn the maximum profits and it
can be noticed through the sharp increase in both return on equity and return on assets ratios
(Deegan, 2013).
Leverage Position of Rio Tinto and BHP Billiton
Leverage position means debt capital owned by the company in relation to shareholder’s
equity capital. The leverage analysis is also known as solvency analysis. It measures the
company ability pay the long term debt liabilities as and when they get due.
Leverage ratios
BHP Billiton Rio Tinto
2017 2016 2017 2016
Debt to Equity ratio 86.54% 98.02% 87.28% 95.20%
Interest Coverage ratio 7.47 -5.37 17.07 6.41
(Brigham and Houston, 2012)
Debt to Equity Ratio: This ratio is core leverage ratio as it measures the portion of debt and
equity capital that has been used to finance the assets of the company. The lower debt to equity is
better for companies as it implies that major of assets has been financed through the equity rather
than the debt capital.
Formula: Total Liabilities/Shareholder’s Equity (Brigham and Houston, 2012)

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2017 2016
80.00%
82.00%
84.00%
86.00%
88.00%
90.00%
92.00%
94.00%
96.00%
98.00%
100.00%
86.54%
98.02%
87.28%
95.20%
Debt to Equity Ratio
Percentage
The above chart provides that almost 50% of assets of both companies have been
financed through the use of leverage capital i.e. debt capital. There was major decrease in debt to
equity ratio of both the companies in year 2017 which is a good sign of improvement in financial
leverage position of the company.
Interest coverage ratio: It is another most important leverage ratio that measures the ability of
company to bear interest expenses that arises on debt capital every year. Higher interest coverage
ratio means excellent leverage position of the company.
Formula: EBIT / Interest Expenses (Brigham and Houston, 2012)

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2017 2016
-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
BHP Billiton
Rio Tinto
7.47
-5.37
17.07
6.41
Interest Coverage Ratio
Times
It is good to say that in year 2017, the leverage position of both the company is
satisfactory but in year 2016 BHP even not capable to bear interest expenses on time.
The leverage position of both the companies have been improved in year 2017 as compared to
year 2016 it is because there was sharp decline in debt capital owned by the company and there
was improvement in financial profitability to bear the interest expenses. Overall it can be said
that mining sector of Australia had started picking up from year 2017 and it will grow to year
ahead to support of Australian Government and favorable conditions in future years (Brigham
and Houston, 2012).
Market Analysis
Market performance can be measured through use of market performance ratios such as
EPS and P/E ratios etc. In this segment market performance of current year (2018) will be
evaluated through use of market ratios.
Market Performance
Companies EPS P/E Ratio
BHP Billiton 1.80 14.70
Rio Tinto 1.86 12.00
Mining Industry 1.26 13.30
(Investsmart: Rio Tinto, 2018 and Investsmart: BHP Billiton, 2018)

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EPS: Earnings per share shows the income earned on per share held by the equity shareholders.
EPS of Rio Tinto was better than the BHP and when compared to industry average both
companies provide above average EPS to their shareholders.
P/E Ratio: This ratio measures market price per share in relation to earnings per share. BHP
Billiton has better PE Ratio as compared to Rio Tinto ((Brigham and Houston, 2012).
Summary and Recommendations
It can be stated from the carrying out fundamental analysis of the selected mining
companies that economic and financial factors presents a favorable environment of growth and
development for them in the future context. The lower exchange rate and reduced rate of
unemployment presents an attractive opportunity for these companies to grow and prosper. It is
recommended to the investor on the basis of top-down and bottom-up analysis that both the
company’s financial performance have improved in the year 2017 as compared to that of 2016.
This is largely supported by the mining boom that has caused an increasing mend of mining
products from overseas. The mining boom with a forecast of declining value of Australian dollar
further supports their growth and development in the future. As such, investors are suggested to
invest in the company for realizing higher returns in the future.

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References
Annual Report: BHP Billiton. 2017. [Online]. Available at:
https://www.bhp.com/-/media/documents/investors/annual-reports/2017/
bhpannualreport2017.pdf [Accessed on: 27 September, 2018].
Annual Report: Rio Tinto. 2017. [Online]. Available at:
https://www.riotinto.com/documents/RT_2017_Annual_Report.pdf [Accessed on: 27
September, 2018].
Australia posts strongest economic growth in two years. 2018. [Online]. Available at:
https://www.rte.ie/news/business/2018/0606/968506-australia-gdp-figures/ [Accessed on: 27
September 2018].
Australia Real GDP Growth. 2018. [Online]. Available at:
https://www.ceicdata.com/en/indicator/australia/real-gdp-growth [Accessed on: 27 September
2018].
Brigham, F., and Houston.J. 2012. Fundamentals of financial management. Cengage Learning.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Hutchens, G. 2017. Australia's interest rate will stay low for years – Reserve Bank governor.
[Online]. Available at: https://www.theguardian.com/australia-news/2017/nov/22/australias-
interest-rate-will-stay-low-for-years-reserve-bank-governor [Accessed on: 27 September 2018].
Hutchens, G. 2018. Australia's GDP growth jumps to 3.1% on back of mining exports. [Online].
Available at: https://www.theguardian.com/business/2018/jun/06/australias-gdp-growth-jumps-
to-31-on-back-of-mining-exports [Accessed on: 27 September 2018].
Investsmart: BHP Billiton. 2018. [Online]. Available at:
https://www.investsmart.com.au/shares/asx-bhp/bhp-billiton-limited [Accessed on: 27
September, 2018].

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Investsmart: Rio Tinto. 2018. [Online]. Available at:
https://www.investsmart.com.au/shares/asx-rio/rio-tinto-limited [Accessed on: 27 September,
2018].
Rollins, A. 2016. 6 factors that drive the Australian dollar. [Online]. Available at:
https://www.intheblack.com/articles/2016/07/14/6-factors-that-drive-the-australian-dollar
[Accessed on: 27 September 2018].