Financial Analysis of Rio Tinto PLC: TSR, EVA, Valuation Ratios

The assignment analyzes the Total Shareholder Return, EVA, and Valuation Ratios of Rio Tinto PLC. The analysis includes Net Asset Value, P/E, P/B, and EV/EBITDA ratios. The report offers guidelines for potential investors.

Financial Analysis-Rio Tinto PLC

Executive Summary:
The assignment contains the different methods that can be used for assessing the efficiency of
the business in generating returns on the equity invested by the share holders in a business
organization. Assessing the capacity of a business in adding value to the investment of the share
holders is an important aspect of corporate finance as such assessments help the potential
investors to choose a company that posses the possible potential of generating good return over
share holders investment, In the current assignment the methods of “Total Shareholder Return”
and EVA analysis has been used for assessing the capability of the chosen organization Rio
Tinto Plc[Anglo-Australian multinational and one of the world's largest metals and mining
corporations and listed in most of the major stock exchanges of the world including LSE, NYSE]
to add value to the investment of the share holders. The methods of Net asset valuation and the
valuation ratios are being used for assessing the valuation of the chosen organization. The
discounted cash flow method with a terminal value has been used for assessing the liqui9dy
aspect of the business. All the above analysis has been done so that a guide line can be offered to
the investors regarding their investment decisions with respect to the chosen organization.

Table of Contents
Total Shareholder Return (TSR)-(2014-2018)................................................................................4
EVA analysis-5 years......................................................................................................................6
Valuation of Companies:.................................................................................................................8
Net Asset Value, NAV................................................................................................................8
Ratio comparison P/E, P/B, EV/EBITDA...................................................................................9
Discounted free cash flow consideration along with terminal value: 5years............................13
Conclusion & Recommendation:...................................................................................................15
References......................................................................................................................................16
Appendix-1:...................................................................................................................................17
Appendix-2:...................................................................................................................................19
Appendix-3....................................................................................................................................20
Appendix-4....................................................................................................................................21

Total Shareholder Return (TSR)-(2014-2018)
The “Total shareholder return (TSR) or simply total return is being used by the companies for
measuring the performance or return generated by the stocks over time. The process of
calculating the TSR includes the appreciation in share prices and dividend payment made by the
business for the period under consideration. The method expresses the total return earned by the
share holders in an annual percentage format.
The basic assumption of this model is that the payment of dividend and purchasing of shares
causes appreciation in the share prices and which ultimately leads to the increase in shareholder’s
return (Miller et al., 2011)
Year 2014 2015 2016 2017 2018
GBP GBP GBP GBP GBP
52 weeks high (Rio
tinto, 2018) 3200 3280 3340.5 3942 4541
52 weeks low
(Riotinto, 2018) 2600 1843 1557 2882.5 3460.5
Final annual
dividend paid per
share (Rio tinto,
2018) 0.6582 0.7798 0.7421
0.1005
6 1.2943
Annual
TSR[TSR=[Share-
Price-end - Share-
Price-begin+
dividend paid per
share]/ Share-
Price-begin] 23% 78% 115% 37% 31%

Average TSR for a
5 years period 57%
23%
78%
115%
37% 31%
0%
20%
40%
60%
80%
100%
120%
140%
2014 2015 2016 2017 2018
Annual Total Shareholder Return
Annual Total
Shareholder Return
Assumptions:
Here it has been assumed that
Share price at the beginning (Share-Price-begin) = 52 weeks high price
Share price at the end (Share-Price-end) = 52 weeks low price
For the purpose of calculation share prices of the chosen business for 2014-2018 has been
used
From the above calculation it can be seen that during the past 5 years period of 2014-2018 the
business has managed to offer a growing return from 2014-2016. But from 2016 onwards a steep
decline in the total share holder’s return can be observed.

On an average during the 5 years period the shareholders of the business has earned a Total share
holder return of 57%
EVA analysis-5 years
Economic Value Added (EVA) or Economic Profit is a measure that is used for assessing the
performance of the business in delivering the value to the share holders of the company.
The measure is based on the Residual Income technique. The main idea of applying this measure
is that positive value or profitability can be generated by the business for their shareholders only
if the business is capable to generate additional wealth as the additional wealth created will be
able to generate return for the shareholders over and above the cost of the capital being
invested(Bahri et al.,2011).
EVA Analysis
Fiscal year ends
in December.
USD in millions
except per share
data. 2013-12 2014-12 2015-12 2016-12 2017-12
Net income or
NOPAT 3665 6527 -866 4617 8762
Total assets 111025 107827 91564 89263 95726
Total current
liabilities 15190 12220 10046 9362 11225
WACC 7% 7% 7% 7% 7%
capital
invested=Total
Asset-current
liabilities 95835 95607 81518 79901 84501
Finance charge
=capital
invested*WACC 6373.028 6357.866 5420.947 5313.417 5619.317
EVA[NOPAT-
finance charge]
-
2708.028 169.1345
-
6286.947 -696.417 3142.684

Assumption:
The current period WACC (Appendix-4 ) is assumed to be fixed for all the periods under
consideration
2013 2014 2015 2016 2017
-8000
-6000
-4000
-2000
0
2000
4000
-2708.0275
169.1344999999
99
-6286.947
-696.4165
3142.6835
EVA
EVA
The EVA analysis reveals that expect 2014 & 2017 the business has failed to add any positive
value to the shareholders investment. But a trend of recovery can be observed from 2015
onwards with respect to creation value to the investment of share holders.
Thus the average EVA of the business for the 5 years period of 2013-2017 is (-1276) USD
million and which indicates that negative economic value has been added or say the value of
invested capital of the shareholders’ is being destroyed.
Thus EVA analysis depicts a very grim picture with respect to the ability of the business with
respect to creation of value to the capital invested by the shareholders.

Valuation of Companies:
Net Asset Value, NAV
The net asset value of a business is the asset net of liabilities divided by the number of
outstanding shares of the business for the period under consideration. In other words nav
presents the market value of equity per share holder. Thus a higher nav value always reflect that
the shares of the company are worth of investing as by selling the shares the owner can earn
substantial amount profit from the appreciation of share prices. Moreover if a business’s NAV
registers a continuous growing trend then indicates that the business is efficient enough for
generating good return over the share holder’s equity (Khan et al.,2011).
Fiscal year ends in December.
USD in millions except per share
data. 2013 2014 2015 2016 2017
Total assets 111025 107827 91564 89263 95726
Total liabilities 65139 61542 54215 49973 51015
Market Cap USD Mil 79718 65136 39709 52879 91824
Average share price, GBP 3147 2976 2615 2317 3412
Average share price, USD 4138 3912 3438 3046 4485
approximate number of shares per
year, million 19 17 12 17 20
NAV[=( Asset-liabilities
)/Number of shares],USD 2382 2780 3233 2263 2184

2013 2014 2015 2016 2017
0
500
1000
1500
2000
2500
3000
3500
2382 2780
3233
2263 2184
NAV
NAV
From the above discussion it can be seen that the chosen organization has registered a smooth
growth with respect to the net asset value of the shares of the company where the from 2013-
2015, but from 2016 onwards the business has registered a declining trend in terms of NAV
Ratio comparison P/E, P/B, EV/EBITDA
The P/E ratio is the ratio of market price per share in relation to the earnings per share and is
used for valuation of shares of a company by comparing with that of the other companies or
industry benchmark. Generally the P/E ratio reflects that how much the investors are ready to
pay for one unit earnings with respect to that share. So higher will be the ratio then grater will be
the market prospect or market demand of the shares of that company because the market
investors are ready to pay a higher amount for that share for 1 unit earnings of that share
compared to the other hares in the market and industry bench mark(Williams and Neumann,
2011).

The price-to-book ratio, or P/B ratio or price-to –book value ratio is a financial ratio that is
used to compare a company's current market price to its book value where the book value is the
value of asset of the company as per balance sheet less of intangible assets and liabilities. The
ratio is often identified as the Market-to-Book ratio and the ratio indicates that how much price
the investors are ready to pay for the book value assigned to each share. A higher ratio is always
preferred as it indicates the greater market prospect of the shares of that company (Hilliard and
Zhang, 2015).
Industry
Average
2013 2014 2015 2016 2017 2018 2018
P/E (Morningstar,
2018) RIO 13.5 18.5 1000 15.4 8.9
S&P 500 18.6 18.6 19 20.3 22.9 20.7 18.7
P/B (Morningstar,
2018) RIO 1.8 1.3 0.9 1.4 1.7 2.1 1.9
S&P 500 2.6 2.7 2.7 2.8 3.2 3.3
2014 2015 2016 2017 2018
0
20
40
60
80
100
120
13.5
18.5
100
15.4 8.9
18.6 19 20.3 22.9 20.7
P/E-RIo
P/E-S&P500
From the above graphical depiction it can be seen that the between the period of 2015-2017 the
P/E ratio of the business where much stronger than the benchmark ratio of S&P500.But from

2017 onwards the valuation of the business in terms of the ratio has declined compared to the
S&P500 benchmarked index. Finally the P/E of 2018 is 8.9 which is much lower than the
industry average of 18.7.Thus the business has registered a declining performance with respect to
return on share holders equity from 2017 onwards in comparison to the industry standard with
respect to the P/E ratio.
2013 2014 2015 2016 2017 2018
0
0.5
1
1.5
2
2.5
3
3.5
1.8
1.3
0.9
1.4
1.7
2.1
2.6 2.7 2.7 2.8
3.2 3.3
P/B,RIO
P/B.S&P500
The P/B ratio demonstrates that the market prospect of the shares of the chosen company is at
much lower level compared to the industry benchmark as indicated by S&P500 index. However
the noticeable factor is that (as indicated by the ratio) that the gap between the markets returns
over stock between the industry standard and that of business is reducing from 2015 onwards.
One noticeable factor is that as per the P/E ratio the return or earnings on equity of the business
was better or close to the industry standard .But as per P/B ratio the market worth of the shares of
the organization is far below the industry standard.
The underlying reason is that the company is efficiently generating retained earnings which is
giving a strong earning per share but the business is inefficient to convert the earnings in to asset

and the return on asset of the company is not fairly attractive and the investors are not ready to
pay high price for 1 unit increase in the value of the asset.
The EV/EVITDA is popular a metric that is being used as a valuation tool to compare the value
of a company including the amount of debt to the company’s cash earnings net of noncash
expenses.
EV(Enterprise
value)
[Appendix-2] 83,958
109,05
3
EBITDA 17783 19228
EV/EBITDA 4.72 5.67
Generally, if the EV/EBITDA ratio value of business if lies below 10 then it is assumed to be
healthy ratio for the investors. For the S&P 500 the EV/EBITDA has typically averaged in-
between 11 to 14 over the last few years covering almost all the industries. From 2017 onwards
the average EV/EBITDA for the S&P was being reported as 12.75
Here the identified EV/EVITDA ratio for the business for the years 2017, 2018 are staying at
much lower level than the industry standard and therefore it can be suggested that the debt
obligation of the business is quite low compared to the industry standard.
Year 2014 2015 2016 2017 2018
GBP GBP GBP GBP GBP
Final annual
dividend paid per
share 0.6582 0.7798 0.7421
0.1005
6 1.2943
18% -5% -86% 1187%

Generally the investor’s prefer to invest in a company that is having strong p/E ratio with low
EV/EVITDA ratio along with a solid growth of dividend.
But looking at the above scenario it can be seen that the chosen organization has registered a
declining P/E ratio, erratic growth of dividend over years along with a low EV/EVITDA ratio
(compared to the industry standard) and therefore can be suggested that the current performance
of the business is not projecting it as an attractive destination of investment for the investors
(Achleitner et al.,2010)
Discounted free cash flow consideration along with terminal value: 5years
Discounted cash flow method
RIO
Fiscal year ends
in December.
USD in millions
except per share
data. 2013 2014 2015 2016 2017 2018
Free cash flow
(Morningstar,
2018) 2077 6124 4698 5453 9402 7719
Average free
cash per period 5912
Growth Rate 195% -23% 16% 72% -18%
Average growth
rate 48%
WACC
(Finance.yahoo.c
om, 2018) 6.65%
perpetual growth
rate=g 5.00%

forecasting
Period 1 2 3 4 5
Terminal
value=[Final
Projected Free
Cash
Flow*(1+g)/(W
ACC-g)]
Projected free
cash flows, USD
in millions 5912.2 8775 13025 19334 28697 1826179
Cost of equity-
7.4%
(Finance.yahoo.c
om, 2018) 7.40%
discounted
present value
5504.8
11
7607.8
33
10514.
28
14531.
09
20082.
45 1277974
Cumulated
present value of
cash flow, USD
in million
13362
14
Assumptions:
For the purpose of projection of cash flow to be generated by the business for the next 5 years
the cash flow statement of the business for the last 5 years period of 2013-2017 has been
considered. In other words the free cash flow generated by the business for the period of 2013-
2017 has been considered for estimating the growth rate (48%) of the free cash generated by the
business(Steiger, 2010.).
Then the average of the free cash flows generated by the business for the 5 years period is being
taken as the starting free cash flow for the projection period-1
Afterwards the cash flows of the next 4 projection periods are being estimated on the basis of the
assumption that the business will generate free cash flow with a 48% growth

For the purpose of discounting the projected cash flow the cost of equity of 7.40% has been
used where cost of equity has been calculated by using the CAPM model (Appendix-3)
For the purpose of calculation of the terminal value the WACC of the business has been
calculated as 6.65% and it has been assumed that the terminal cash flow of the business will
grow at a rate of 5% up to perpetuity
Thus the cumulated present value of the future projected cash flows for a period of 5 years
amounts to 1336214.394 USD million which is much higher than the cumulative cash flow of the
business for the period 2013-2018.
This indicates that there is a good expectation regarding the future cash generation ability of the
business.
Conclusion & Recommendation:
Thus as a whole it can be seen that the TSR and EVA are suggesting that the efficiency of the
business to generate return on share holders’ equity is low to moderate. The P/E ratio that has
been used for the valuation of the company demonstrates that the investors are ready to pay
lesser amount compared to the industry standard for buying an unit of share of the chosen
organization for unit potential prospective earnings for each stock of the company.
Generally the investor’s prefer to invest in a company that is having strong p/E ratio with low
EV/EVITDA ratio along with a solid growth of dividend.
But looking at the above scenario it can be seen that the chosen organization has registered a
declining P/E ratio, erratic growth of dividend over years along with a low EV/EVITDA ratio
(compared to the industry standard) and therefore can be suggested that the current performance
of the business is not projecting it as an attractive destination of investment for the investors

References
Achleitner, A.K., Braun, R., Engel, N., Figge, C. and Tappeiner, F., 2010. Value creation drivers
in private equity buyouts: Empirical evidence from Europe. The Journal of Private Equity,
pp.17-27.
Bahri, M., St-Pierre, J. and Sakka, O., 2011. Economic value added: a useful tool for SME
performance management. International Journal of Productivity and Performance Management,
60(6), pp.603-621.
Finance.yahoo.com. (2018). Yahoo is now part of Oath. [online] Available at:
https://finance.yahoo.com/quote/RIO/key-statistics?p=RIO [Accessed 26 Sep. 2018].
Hilliard, J. and Zhang, H., 2015. Size and price-to-book effects: Evidence from the Chinese stock
markets. Pacific-Basin Finance Journal, 32, pp.40-55.
Khan, Z.H., Alin, T.S. and Hussain, M.A., 2011. Price prediction of share market using artificial
neural network (ANN). International Journal of Computer Applications, 22(2), pp.42-47.
Miller, D., Le Breton‐Miller, I. and Lester, R.H., 2011. Family and lone founder ownership and
strategic behaviour: Social context, identity, and institutional logics. Journal of management
studies, 48(1), pp.1-25.
Morningstar (2018). Cash Flow for Rio Tinto PLC ADR (RIO) from Morningstar.com. [online]
Financials.morningstar.com. Available at: http://financials.morningstar.com/cash-flow/cf.html?
t=RIO&region=usa&culture=en-US&ownerCountry=USA [Accessed 26 Sep. 2018].
Riotinto (2018). Share price & tools. [online] Riotinto.com. Available at:
http://www.riotinto.com/investors/share-price-and-tools-90.aspx [Accessed 26 Sep. 2018].
Steiger, F., 2010. The validity of company valuation using Discounted Cash Flow methods.
arXiv preprint arXiv:1003.4881.
Williams, P. and Naumann, E., 2011. Customer satisfaction and business performance: a firm-
level analysis. Journal of services marketing, 25(1), pp.20-32.

Appendix-1:
RIO TINTO PLC ADR -INCOME STATEMENT
Fiscal year ends in December. USD in millions
except per share data.
2013-
12
2014-
12
2015-
12
2016-
12
2017-
12 2018
Revenue 51171 47664 34829 33781 40030
4062
5
Cost of revenue 11883 34657 27919 21865 22910
Gross profit 39288 13007 6910 11916 17120
4062
5
Costs and expenses
Research and development 231 60 58
Interest expense 507 649 750 787 592 329
Other operating expenses 35045 2806 6886 4726 3654
2570
4
Total costs and expenses 35783 3455 7636 5573 4304
2603
3
Income before income taxes 3505 9552 -726 6343 12816
1459
2
Provision for income taxes 2426 3053 993 1567 3965 4529
Net income from continuing operations 1079 6499 -1719 4776 8851
1006
3
Other 2586 28 853 -159 -89 -226
Net income 3665 6527 -866 4617 8762 9837
Net income available to common
shareholders 3665 6527 -866 4617 8762 9837
Earnings per share
Basic 1.98 3.53 -0.47 2.56 4.9 5.82
Diluted 1.97 3.51 -0.47 2.55 4.86 5.78
Weighted average shares outstanding
Basic 1847 1848 1825 1797 1787 1315
Diluted 1858 1859 1825 1809 1800 1315
EBITDA 8803 15061 4669 11924 17783
1922
8

RIO TINTO PLC ADR----BALANCE SHEET
Fiscal year ends in December. USD in
millions except per share data.
2013-
12
2014-
12
2015-
12
2016-
12
2017-
12
Assets
Current assets
Cash
Cash and cash equivalents 10216 12423 9366 5774 8310
Short-term investments 710 157 104 335 1055
Total cash 10926 12580 9470 6109 9365
Inventories 5737 4350 3168 2937 3472
Prepaid expenses 332 220 242 266 279
Other current assets 5287 3975 2674 5743 5562
Total current assets 22282 21125 15554 15055 18678
Non-current assets
Property, plant and equipment
Gross property, plant and equipment 115765 115269 106569 107837 115889
Accumulated Depreciation -44938 -46576 -45512 -48982 -53796

Net property, plant and equipment 70827 68693 61057 58855 62093
Goodwill 1349 1228 892 951 1037
Intangible assets 5421 5880 3336 3279 3119
Deferred income taxes 3555 3540 3309 3728 3395
Prepaid pension costs 290 625 871
Other long-term assets 7301 7361 7416 6770 6533
Total non-current assets 88743 86702 76010 74208 77048
Total assets 111025 107827 91564 89263 95726
Liabilities and stockholders' equity
Liabilities
Current liabilities
Accounts payable 3095 2592 2567 2787 3255
Short-term debt 3909 2684 2436 696 548
Capital leases 7 7 21 4
Other current liabilities 8179 6944 5036 5858 7418
Total current liabilities 15190 12220 10046 9362 11225
Non-current liabilities
Long-term debt 24505 22535 20812 16889 14575
Capital leases 39 45 24 49
Deferred taxes liabilities 4140 3574 3286 3121 3628
Accrued liabilities 146 248 179 1 13
Deferred revenues 127 234 246
Pensions and other postretirement
benefits 12479 13367
Minority interest 7616 8309 6779 6440 6404
Other long-term liabilities 13376 14656 13068 1423 1508
Total non-current liabilities 49949 49322 44169 40611 39790
Total liabilities 65139 61542 54215 49973 51015
Stockholders' equity
Common stock 5141 4765 4174 4139 4360
Additional paid-in capital 4269 4288 4300 4304 4306
Retained earnings 23605 26110 19736 21631 23761
Accumulated other comprehensive
income 12871 11122 9139 9216 12284
Total Stockholders' equity 45886 46285 37349 39290 44711
Total liabilities and stockholders' equity 111025 107827 91564 89263 95726
RIO TINTO PLC ADR -INCOME STATEMENT
Fiscal year ends in December. USD in millions
except per share data.
2013-
12
2014-
12
2015-
12
2016-
12
2017-
12 2018
Revenue 51171 47664 34829 33781 40030 4062

5
Cost of revenue 11883 34657 27919 21865 22910
Gross profit 39288 13007 6910 11916 17120
4062
5
Costs and expenses
Research and development 231 60 58
Interest expense 507 649 750 787 592 329
Other operating expenses 35045 2806 6886 4726 3654
2570
4
Total costs and expenses 35783 3455 7636 5573 4304
2603
3
Income before income taxes 3505 9552 -726 6343 12816
1459
2
Provision for income taxes 2426 3053 993 1567 3965 4529
Net income from continuing operations 1079 6499 -1719 4776 8851
1006
3
Other 2586 28 853 -159 -89 -226
Net income 3665 6527 -866 4617 8762 9837
Net income available to common
shareholders 3665 6527 -866 4617 8762 9837
Earnings per share
Basic 1.98 3.53 -0.47 2.56 4.9 5.82
Diluted 1.97 3.51 -0.47 2.55 4.86 5.78
Weighted average shares outstanding
Basic 1847 1848 1825 1797 1787 1315
Diluted 1858 1859 1825 1809 1800 1315
EBITDA 8803 15061 4669 11924 17783
1922
8
Appendix-2:

Appendix-3
Cost of Equity:

Appendix-4
Cost of Equity:

Cost of Debt:
Tax rate calculation:
WACC :