Financial Performance Analysis of Rio Tinto Limited
Verified
Added on 2023/04/23
|12
|3123
|256
AI Summary
This report analyses the financial performance of Rio Tinto Limited and recommends whether the company is an attractive investment opportunity. The report covers areas such as maximization of stakeholders' value, stability of securities, return on investment, theoretical value of equity, dividend policy, and capital structure.
Contribute Materials
Your contribution can guide someone’s learning journey. Share your
documents today.
Table of Contents Introduction...........................................................................................................................................2 The Company....................................................................................................................................2 The Report.........................................................................................................................................2 The Analysis..........................................................................................................................................2 Maximization of Stakeholders’ Value:..........................................................................................3 Stability of securities of the company in market............................................................................5 Return on Investment:....................................................................................................................6 Theoretical Value of Equity of the company:................................................................................7 Dividend Policy:............................................................................................................................7 Capital Structure:...........................................................................................................................8 Conclusion:............................................................................................................................................9 Bibliography........................................................................................................................................10
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
Introduction The Company Rio Tinto Limited is an Anglo-Australian multi-national company which has emerged as one of the world’s largest metals and mining corporations after being operational for 146 years. Rio Tinto is a dual-listed company traded on both London Stock Exchange (LSE), where its securities are traded in FTSE 100 Index and Australian Stock Exchange (ASX), where it is listed in index of ASX200. The company has reported a revenue of $40.030 billion in 2017 while its operating income, net income, total assets and total equity in the same year stood $14.474 billion, 8.851 billion, 95.726 billion and 44.711 billion respectively. The company is also a huge employment generator having 50000 personnel on roll by 2017. The Report The report is aimed to analyse the company’s financial performance in the context of an investment decision and makes a genuine attempt to analyse and recommend as to whether the company is an attractive investment opportunity (more relevantly to an equity share holder). In order to achieve all the objectives of the report, the report relies on the inputs from following sources: Annual reports of the company; Public domains such as Yahoo Finance and Bloomberg; and Other relevant journals which can help with the direction of the report. The Analysis The following areas are analysed in order to ascertain whether or not the company is a good investment option: Value addition to the stakeholders Trend in share prices Return on Investment Theoretical Value of the equity of the company; Dividend policy of the company; and Capital structure of the company
Maximization of Stakeholders’ Value: Stakeholder of a company – Stakeholders are either individuals or groups or both that have an interest in the progression and prosperity of a company. Stakeholder of a company – Stakeholders are either individuals or groups or both that have an interest in the progression and prosperity of a company. A stakeholder may be internal or external. Internal stakeholder isone who hasinvested inthe company(say an equityshareholder)or engagedin employment by the company (say employees) while the external stakeholders include business . Maximisation of Stakeholder Value – The concept emerges from a management philosophy called ‘stakeholder approach’ that regards maximisation or furtherance of the interest of the stakeholder (either internal or external) as its most important object Metrics that measure the value of stakeholders: The following metrics are used to measure the value of stakeholders.("5 must-have metrics for value investors", n.d.) 20132014201520162017 aPrice of share68.1858.0044.7159.9075.81 bEarnings per share1.983.530.482.574.90 cTotal Assets (in millions)111025.0 0 107827.0 0 91564.0 0 89263.0 0 95726.0 0 dTotal Liabilities (in millions)57523.0053233.0047436.0 0 43533.0 0 44611.0 0 eBook Value (in millions) = c - d53502.0054594.0044128.0 0 45730.0 0 51115.0 0 fDebt (in millions)57523.0053233.0047436.0 0 43533.0 0 44611.0 0 gEquity (in millions)53502.0054594.0044128.0 0 45730.0 0 51115.0 0 hNo. of Shares O/s1861.141861.141808.191772.691763.41 iEarnings Growth78%-113%641%91% jNet Profit (in millions)1,0796499-171947768851 kP/E Ratio = a/b34.3616.4394.1323.3215.46 lBook Value per share = e/h28.7529.3324.4025.8028.99 mPEG Ratio = a/i21.0782.973.6417.01 nReturn on Assets = j/c0.97%6.03%-1.88%5.35%9.25% oReturn on Equity = j/g2.02%11.90%-3.90%10.44%17.32% pP / BV per share = a/l2.371.981.832.322.62 qDebt to Equity Ratio = f/g1.080.981.070.950.87
The inputs were obtained from Annual Reports of Rio Tinto(2017 Annual Report, 2018); (2016 Annual Report, 2017); (2015 Annual Report, 2016); (2014 Annual Report, 2015); (2013 Annual Report, 2014);("Price Earnings Ratio - Formula, Examples and Guide to P/E Ratio", n.d.)
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
If we plot the metrics in a graph to determine performance bench mark, we will get the following result: 12345 150.00 100.00 50.00 0.00 50.00 100.00 34.36 16.43 94.13 23.3215.46 28.7529.3324.4025.8028.99 21.07 82.97 3.6417.01 0.97%6.03%-1.88%5.35%9.25%2.02%11.90%-3.90%10.44%17.32% Bench Mark Analysis P/E Ratio = a/bBook Value per share = e/h PEG Ratio = a/iReturn on Assets = j/c Return on Equity = j/g In the above table it can be seen that the P/E Ratio has recovered from negative in 2015 to positive. The main reason for such a steep downfall in P/E ratio in 2015 is negative EPS. Further the PEG Ratio has decreased from 82.97 in 2015 to 17.06 in 2017 which is a positive sign since higher PEG Ratio would mean that the share is expensive. Further, we can also see that the BV / Share is consistent within the range of 1.8 to 2.3 and there are no wide fluctuations indicating that the share is consistently valued in the market when compared to its accounting value("Book Value per Share Definition", n.d.). Further, if we look at the Debt- Equity Ratio, we find that the ratio is in a decreasing trend from the past couple of years and it indicates that the ownership of shareholders on the overall assets is increasing. Therefore the company is doing reasonably well in maximising the value of shareholders. If we focus on value maximization for other stakeholders, let us compare the trend of Return on Assets (ROA). The return on assets after fall in 2015 has increased to 9.25%. It indicates that the company has increased its operational efficiency thereby increasing the profit generated by the assets. By increasing operational efficiency as evident in the increase in ROA, the company has maximized value to not only the shareholders but also the debt holders and the financers of the company. The ROA of the industry as a whole in Australia is 4.43% only which is less than the ROA of the Company. The ROE of the company is 17.32% against the industrial average of 6.78%. Therefore the company is performing reasonably well in maximization of value of stakeholders.
Stability of securities of the company in market Trend of Market Price of the Shares: 11 42 74 05 36 67 99 21 051 181 311 441 571 701 831 962 092 222 352 48 0 10 20 30 40 50 60 70 80 90 trend of market price of share Volume Traded 11 52 94 35 77 18 59 91 131 271 411 551 691 831 972 112 252 392 53 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 9,000,000 10,000,000 vOLUME TRADED In the above graphs we can observe that share price fluctuated between the range of 70 – 86 and we can see that the fluctuations are not wide. However we can see huge fluctuations in the traded volume of the shares in the market. By comparing the both, we can safely conclude that the shares of the company are not widely affected by the traded volume which indicates that the share prices are not extremely sensitive to the demand in the market. Note: The data for analysis was taken from Yahoo Finance("RIO ASX - Historical Data", 2019), Share prices were considered for past 12 months [i.e., 29/01/2018 to 28/01/2019]
Return on Investment: Computation of Return on Investment (short-term) 20172016201520142013 aClosing Price78.1775.2560.3944.6558.1 bOpening Price75.8560.2844.7557.568.5 cDifference = a - b2.3214.9715.64-12.85-10.40 dDividend2.901.702.272.051.78 eReturn = c + d5.2216.6717.91-10.81-8.62 fInvestment75.8560.2844.7557.5068.50 gReturn on Investment = e / f7%28%40%-19%-13% Return on Investment (long-term): Return on Investment (Long-term) aClosing Price78.17 bOpening Price68.50 cDifference = a - b9.67 dDividend10.69 eTotal Return = c + d20.36 fRate of Return = e / b30% gAnnualized Rate of Return = f/56% The Beta of Rio Tinto is 0.97(Editorial, n.d.). On the other hand the beta of BHP, its peer is 1.06. It means the company is less risky than the market portfolio. Therefore the variance in long term and short term return on investment is not attributable to economic-wide factors. They must be firm related factors.
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
Theoretical Value of Equity of the company: The theoretical value of share is computed using the comparable approach to valuation of equity shares P/E Approach: As per this approach the value of equity share is computed as under(2015 Annual Report, 2016): Value of ordinary share = P/E Ratio of 2018 x Estimated Earnings per share for 2019 ParticularsResult P/E Ratio of 201834.36 Estimated Earnings per share for 2019 Current Earnings1.98 Estimated Growth0.38% Estimated Earnings per share for 20191.99 Price of the share68.44 The estimated growth rate is obtained from Yahoo Finance("RIO AX Analysis", 2019) Since the theoretical price of the share is 68.44, when compared to the actual price of 83.53 as on date, the price of the share is slightly over-valued.Since the shares are over-valued, it is being sold in market for a price which is more than its intrinsic value. So depending upon this analysis a marginal investor should not acquire this share and the existing shareholder should sell the share. Dividend Policy: The dividend policy of the company was adopted in the year 2016 in which the company decided that at the end of each financial period, the board will determine the appropriate level of dividend per share to be proposed. Therefore it is clear that the company has adopted residual pay-out policy. The board expects a total cash return to shareholders over the longer term to be in a range of 40 to 60%. The same is evident from the following table where the company maintained a dividend pay-out ratio within the range of 50-70% in order to maximize the total cash return to shareholder.The dividend pay-out ratio of another company in same industry BHP Billitonis 77.06%("BHP AUX", n.d.) (greater than pay-out of the company) which indicates that the company can adopt better pay-out ratio. 20172016201520142013 Dividend per share2.901.72.2652.0451.78 Earnings per share4.902.57-0.4753.5121.973 Dividend Pay-out Ratio59%66%NA58%90% Further the company also displayed increase in dividend per share which indicates that the company has adopted incremental growth policy of dividend. Further as per the annual report
of 2017, the company is also confident to maintain the total cash return between 40% and 60%. This clearly bears a positive sign in the minds of the shareholder and have a positive impact on the share price. Apart from distributing cash dividends, the company has also adopted buy-back of shares in 2015. The company announced a buy-back of $2.0 billion and further it has announced a buy-back of shares worth $2.5 billion during 2017. Buy-back is also viewed as favourable since it shows that the company is generating more money than it currently needs. However, pay-out of more than 50% of residual earnings to the shareholders in the form of dividend prevented the increase the total ownership of equity holders on asset, making it stable. However the company has maintained at least 50% of the ownership of total assets in the hands of shareholders of the company. Capital Structure: Cost of Capital Cost of Debt aInterest Expense897.00 bInterest Bearing Debt15,176.00 cCost of Debt6% Cost of Equity (Levered) aDividend Per Share2.90 bMarket Price per Share83.53 cCost of Equity = a/b3% dCost of Equity - Cost of Debt0.02 eDebt-Equity Ratio0.87 fTax Rate0.31 gCost of Equity = (c ) + [(d)x(e )x (1 - f)]4% EquityDebtTotal Cost of Capital aRequired Rate of Return = a x b4.05%5.91% bComponent of Capital51,115.001517666,291.00 cWeight of Component0.770.23 dWeights x Required Rate of Return3.12%1.35%4.47% The weighted average cost of capital is 4.47%(Ward, 1999). On the other hand, the WACC of BHP is 5.21%("BHP AUX", n.d.). This indicates that the company has better borrowing power than its peer BHP since the company ended up borrowing capital at lesser cost than its peer. This is because the company is largely dependent upon the share capital of the company which has relatively lesser required rate of return than the debt of the company.
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
Analysis of existing capital Structure: 20132014201520162017 Capital Structure Owner's equity53,502.0054,594.0044,128.0045,730.0051,115.00 Interest bearing debt18,055.0012,495.0013,783.009,587.0015,176.00 Total Capital Structure71,557.0067,089.0057,911.0055,317.0069,170.00 Debt Ratio Total liabilities57,523.0053,233.0047,436.0043,533.0044,611.00 Total Assets1,11,025.001,07,827.0091,564.0089,263.0095,726.00 Debt Ratio0.520.490.520.490.47 Debt-Equity ratio1.080.981.070.950.87 The above capital analysis gives us an insight on capital structure of the company. As we can look at the capital structure, the company is substantially dependent on the share capital for financing its assets rather than the debt funds. The Shareholders of the company are going to have maximum share of the assets as the debt ratio is following a declining trend. The prospects of the share capital of the company is showing positive sign since the company is providing a ROE of 17.32% and a dividend pay-out of more than 50%. Conclusion: The company overall scores better as far as shareholders are concerned and hence the company’s share capital turns out to be an attractive investment. However the company is dependent more upon the share capital than debt as evident in the debt-equity ratio and hence the shareholders are extremely susceptible to the factors like negative returns, decline in market value of assets, etc. While the report made a genuine attempt in finding out the attractiveness of the investment in the company, the report may have been more effective if the theoretical price of share is computed using the DDM approach. But owing to lack of information on the growth prospects of the dividend and the lack of trend in growth of dividend, the same cannot be made. However the analysis of theoretical price of the shares was concluded using P/E approach since the data regarding earnings growth was readily available in the public domain. Further, the report didn’t focus on the latest projects on which the company has invested and the effectiveness and profitability of the same since the company did not have such standalone projects with readily available data regarding the cash flows. However, after thorough analysis of aforementioned criteria, the investment in the company seems attractive.
Bibliography RIO AX Analysis. (2019). Retrieved fromhttps://in.finance.yahoo.com/quote/RIO.AX/analysis?p=RIO.AX Rio Tinto. (2018).2017 Annual Report. Melbourne. Rio Tinto. (2017).2016 Annual Report. Melbourne. Rio Tinto. (2016).2015 Annual Report. Melbourne. Rio Tinto. (2015).2014 Annual Report. Melbourne. Rio Tinto. (2014).2013 Annual Report. Melbourne. Book Value per Share Definition. Retrieved fromhttps://ycharts.com/glossary/terms/book_value_per_share RIO ASX - Historical Data. (2019). Retrieved fromhttps://in.finance.yahoo.com/quote/RIO.AX/history? p=RIO.AX Price Earnings Ratio - Formula, Examples and Guide to P/E Ratio. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/valuation/price-earnings-ratio/ 5 must-have metrics for value investors. Retrieved fromhttps://www.investopedia.com/articles/fundamental- analysis/09/five-must-have-metrics-value-investors.asp Using the P/E Ratio to Value a Stock. Retrieved fromhttps://www.thebalance.com/using-price-to-earnings- 356427 Ward, C. (1999). Estimating the cost of capital.Journal Of Corporate Real Estate,1(3), 287-293. doi: 10.1108/14630019910811088 Editorial, R. ${Instrument_CompanyName} ${Instrument_Ric} Quote| Reuters.com. Retrieved from https://www.reuters.com/finance/stocks/overview/RIO.AX BHP AUX. Retrieved fromhttps://in.finance.yahoo.com/quote/BHP.AX/key-statistics?p=BHP.AX BHP AUX. Retrieved fromhttps://in.finance.yahoo.com/quote/BHP.AX/financials?p=BHP.AX