Fundamental Analysis of BHP Billiton and Rio Tinto

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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