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Mining Company in Australia- BHP Billiton

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Added on  2020-02-24

Mining Company in Australia- BHP Billiton

   Added on 2020-02-24

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BHP Billiton is a multinational mining company based out of Australia which came intoexistence in 2001 as a result of merger between Australian company BHP and Anglo BillitonPlc. The company has global operations and focuses on mining of iron ore, potash, copper,coal and petroleum. The financial information represented through financial statements (i.e.balance sheet, income statement and cash flow statement) are critical to the information needsof the various shareholders. The shareholders utilise this information to take investmentdecision which is driven by extent of profit generation, strength of balance sheet and dividendpayment. The lenders take decision with regards to extending short term and long term creditwhich are based on underling financial position represented from balance sheet coupled withoperational cash flows. The contractors tend to consider the revenue growth and theunderlying profits on which the future quantum of work depends. Further, short term liquidityis considered by both contractors and employees as it impacts the ability of the company tomeet their payment obligations in a timely manner.The most critical aspect of the income statement is essentially the revenues which clearlyhighlight the commodity price trend. Also, the profits of the company are highly dependenton the revenues as the cost structure does not undergo much change. Further, owing to thenature of the business which involves mines and capital equipment, the plant, property andmachinery are the single most critical item of assets which tend to form investment for thefuture. On the liability side, the debt trends and figures are critical considering that debtforms a significant portion of the overall capital. Further, the tracking of debt also providesthe extent of financial leverage which becomes essential in a downtrend of commodity prices.In relation to equity, the shares issued coupled with internal accruals are critical from thepotential future funding point of view.Considering the nature of the business where the assets are mines and the minerals containedin them, there is considerable use of management judgement and accounting conventionswith regards to recognition and measurement of assets. This relates to depreciation,determination of fair value and charging impairment on asset. The ratio analysis of thecompany using the financial statement from 2012 to 2016 has been carried and the same hasbeen compared with a peer group company i.e. Rio Tinto. Ever since the commodity priceshave started to decline on account of decreasing demand from China in 2014, the profitabilityhas suffered with losses in 2016. This is worrisome to investors and also contractors. Withregards to liquidity, the company has shown improvement but still these ratios are inferiorcompared to Rio Tinto. This is worrisome to short term lenders and contractors. The solvency
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