Comprehensive Financial and Strategic Analysis of BHP Billiton

This report provides a comprehensive financial and strategic analysis of BHP Billiton, a leading mining company. It begins with an introduction to financial analysis and its importance, followed by a business and strategic analysis that examines macroeconomic factors, BHP's position in the mining industry, its competitors (particularly Rio Tinto), and the application of Porter's Five Forces. The report then assesses BHP's growth potential, competitive strategies, key success factors, and risk drivers, including climate change and market fluctuations. Accounting and financial analyses are conducted, including ratio analysis, common-size, and horizontal financial statements for both BHP Billiton and Rio Tinto. Finally, the report offers recommendations based on the findings, concluding with a summary of the company's financial health, strategic positioning, and future prospects.

Financial Analysis

Table of Contents
INTRODUCTION...........................................................................................................................1
1. BUSINESS AND STRATEGIC ANALYSIS.............................................................................1
Macro economic factors impaction the performance of business..........................................1
Place of Company in mining industry....................................................................................2
Competitors of BHP Billiton limited......................................................................................3
Porter five forces to analyse current profitability...................................................................4
Growth potential of an organisation.......................................................................................5
Competitive strategy, key success factors and risk drivers....................................................6
Corporate strategy used by BHP Billiton limited...................................................................7
2. ACCOUNTING ANALYSIS......................................................................................................7
3. FINANCIAL ANALYSIS...........................................................................................................8
4. PROSPECTIVE ANALYSIS....................................................................................................16
5. RECOMMENDATION.............................................................................................................17
CONCLUSION..............................................................................................................................18
REFERENCES..............................................................................................................................19
APPENDIX....................................................................................................................................21
BHP Billiton’s ratio analysis................................................................................................21
Common-size/vertical income statement: BHP Billiton......................................................22
Horizontal income statement: BHP Billiton.........................................................................22
Vertical balance sheet: BHP Billiton....................................................................................23
Horizontal Balance sheet: BHP Billiton...............................................................................24
Rio Tinto’s ratio analysis......................................................................................................26
Common size/vertical income statement: Rio Tinto............................................................27
Horizontal income statement: Rio Tinto..............................................................................27
Vertical balance sheet: Rio Tinto.........................................................................................28
Horizontal balance sheet: Rio Tinto.....................................................................................29

INTRODUCTION
Financial analysis is of great importance for the firm as it helps in making strategies
according to growth and development of business. Analysing financials of the BHP Billiton
assists the management in establishing reliability, viability, stability and profitability of business.
BHP Billiton is the second largest chain in mining industry. The report will outline the various
business strategies used by the business to analysis its strength and strategies which assist the
enterprise in dealing with fluctuations. Moreover, it will evaluate competition and corporate
strategies used by BHP to attain competitive advantage. Further, the report will outline annual
report data of BHP and its competitors which helps the company to make stability in the mining
industry.
1. BUSINESS AND STRATEGIC ANALYSIS
Macro economic factors impaction the performance of business.
In order to analyse competitive performance the company first focus on analysing in
macro economic factors with the use of PEST analysis which is as follows: Political: BHP Billiton is a leading mining organisation which is adapts changes as per
the political risk and fluctuations. Whereas there are few factors which are impacting the
growth and development of business in the industry. The major impact is caused by
changing government policies, rent agreements, terrorism, liberal leaders and many more.
For instance, the mandatory compliance of Mineral and petroleum resources development
act 2002 led to a major financial loss to firm. Economical: The fluctuation in expense, material, cost, labour can impact the growth and
development plans of enterprise. BHP Billiton is juggling to maintain stability with
changing economic factors but the loopholes in global economic factors are affecting net
turnover and demand and supply of products and services. Socio cultural: The company follows all the possible policies and procedures which can
affect the socio culture (Mauree and Geneletti 2017). Theses factors are depended on the
support provided by enterprise to neighbouring communities therefore BHP Billiton has
taken steps to maintaining appropriate working conditions, quality of life to most
neighbouring cities. For instance, currently the company is focusing on supporting its
neighbour Antofagasta.
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 Technological: The growth of mining industry is completely depended on advancement
of technology therefore the enterprise is focusing on exploring and adapting changes
which can help the business in serving customer satisfaction and maintain its profitability
(Pike, Spennemann and Watson 2017). Moreover, the management of firm believes that
investment in appropriate technological resources can assist BHP Billiton in adapting
fluctuations quickly. For instance, the major technological up-gradation in mining
industry are, machinery, refiners, cranes and lorry. The advanced technology used by
BHP Billiton are Advanced shaft and tunnel boring stems, 3D laser scanning and
automated drilling.\
Industry Analysis
Place of Company in mining industry.
Market position: BHP Billiton is striving hard to maintain is leading position in the
mining industry but still it holds the second position after Rio Tinto Besides the prices of iron ore
is falling but still the company is focusing on increasing its production level to meet the demand
of the consumers. The business operations are, extracting resources, and manufacturing products.
Market Share: There are 4 competitors which are, Rio Tinto, Arconic Inc. and Vale S/A
form which BHP Billiton is competing for the high market share according to its commodities
like for copper its holds 7%, for seaborne thermal coal it holds 5% and for seaborne coking coal
it holds 19% that is highest amongst all the rivalries of mining industry (James K. and et.al.,
2014). Thus, the management is focusing on grabbing the market share for all of its metal and
materials therefore the enterprise is slowly drifting towards oligopoly like potash market. Beside,
the data represents that the mining industry is under the control of BHP. The data demonstrate
that, the maximum market share is for its iron ore production which is 29% and least is for
diamonds which is 2 percent. Despite of highest and lowest the company holds the strong control
over its base metals, energy coals and petroleum
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Source: (Alex R. 2015).
Competitors of BHP Billiton limited.
The biggest rivalry of BHP Billiton in mining industry is Rio Tinto Limited. It is the
world largest metal and material multinational organisation. Moreover, the enterprise has more
than 30 operating sites across the globe producing various types of metals and materials like,
aluminium, uranium, coal bauxite, salts, diamonds and many more. Beside, in order to maintain
the stability of growth and development the company focus on producing and delivering
environmental friendly products (Pike, Spennemann and Watson 2017).
Market position: The business holds the first position in mining industry and to
maintaining the stability and sustainability the organisation is continuously improving its
production according to market fluctuation and its stake holders(Alex R. 2015).
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Illustration 1: Market share of BHP Billiton

Market Share: The market share of Rio Tinto is divided according to its commodities in
which it represents that Sea borne cooking coal golds 6% of market, copper holds 7% and
Seaborne of thermal coal holds 2% of market share which is low according to its market position
(James K. and et.al., 2014). Moreover, from pie chart it can be evaluated that 80% of revenue of
Rio is depended upon its iron ore production which holds the market share of 43%.
Source: (Alex R. 2015).
Porter five forces to analyse current profitability.
It is the best strategy used by BHP Billiton to measure its profitability and market
competition (Hill, Jones and Schilling 2014). It provides the company access over its resource
production, strengths, goals and objectives. The porter five forces of enterprise are as follows: Bargaining power of Buyers: The bargaining power of buyers in this industry is average
and even low because the metals and materials have high demand but restricted supply
which do not provide control to buyers over bargaining. Moreover, for these types of
resources substitute products are not available therefore BHP Billiton have advantage to
maintain its profitability. Beside, the current environmental factors are stable for mining
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Illustration 2: Market Share of Rio Tinto

industry which are enabling the enterprise to have control over its position and
profitability. Bargaining power of Suppliers: The bargaining power of suppliers is very high which
results in declining control of Billiton over its profits. Suppliers have high bargaining
power in this industry because it holds control over, material, energy, labour cost,
transportation, shipping and many more. Further, in this there are many substitutes
available which enables the power to Suppliers. Threat to new entrants: BHP can focus on maximizing its profitability as the threat of
new entrant is relatively low in this industry, because of limited supply, high capital
requirement and capacity across the global market. Moreover, decline in the prices of
products, the demand will turn slow which creates a barrier of new entries. Further, BHP
is among the largest company of mining industry having advanced technology,
techniques, strategies market image and quality products therefore it will take time for
new entrants to attain that positions which again is beneficial for the stabilising
profitability (Yang, Ji and O’Leary 2017). Threat of Substitute: Due to limited capacity and demand the threat of substitute is low
for BHP because of rising cost of labour shipping, suppliers etc.
 Intensity of existing rivalry: The competition is very strong among all industry rivalries
Because the resources are limited and everyone is engaged in extracting resources and
selling services across the globe. The competition is heading tough because the
enterprises needs qualified staff, perfect strategies and transportation and the
development projects which can assist the company in maximizing profits. Therefore, to
attain the competitive advantage and to maximize profits BHP Billiton took over the
WMC resources of Australia which assisted in business in securing profits by
establishing the largest Uranium reserves.
Growth potential of an organisation
Growth potential of an organisation can be determined through two internal factors that is
Strength and Opportunities which are as follows:
Strength: The major strength of Billiton is that, it is the most famous natural resource
firm serving various types of products like, copper, silver, aluminium, Uranium and lead. The
major market share is grabbed through its iron ore production. Moreover, the company is selling
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its services in every possible international market like, south America, South Africa etc. Further,
according to its past data the entity has gained profits which assist the business in credit rating,
and raising capital in international market (Prato 2017).
Opportunities: The company have more than 25 projects which are lined up and can help
the BHP in its growth and development. Beside, the resources under projects are specified in cost
effective manner in which the firm do not need to invest much. However, the entity can also
increase its profitability by enhancing the existing products with little of innovation. Marketing
of products and services is the strategy which can be fruitful of organisation in reaching to
targeted markets and customers (Sun Gregor and Keating 2014). Thus, the BHP Billiton has also
planned a project in which the enterprise will focus on reducing the emission of green house
gases so if the project will be implemented successfully it can assist the business in attaining
advantage over profits, growth and its competitors. Moreover, merger and acquisition and
adaption of advancement in technology can help the business in increasing its operations. .
Competitive and corporate strategy
Competitive strategy, key success factors and risk drivers.
Competitive strategy: In order to maintaining the stability in growth according to
competitors the company focus on 3 major steps which are:
1. Measurement of financial risk which are related to profits and revenue with the use of
marketing techniques.
2. Implementation of excellent functional standards to strengthen the group activities of the
organisation.
3. Establishing innovation and quality of life through extraction of various resources and
development.
There are 3 steps in strategies which assist BHP Billiton in resisting into competition of mining
industry. Moreover, these factors helps the firm in maintaining short term and long term
sustainability and enhancing value for its shareholders (Pearce, Robinson and Subramanian
2017).
Success factors of BHP are as follows:
1. The individual related to firm start work with the motive to accomplishing organisational
goals.
2. The business always focuses on providing value for its all shareholders.
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3. BHP focus on maintaining sustainable development.
4. Organised and systematic business operation assists the enterprise in attaining growth and
development.
Risk drivers for BHP are described under: Climate change: This is the major risk company generally faces which can arise due to
rising sea levels, water shortages, storms, rainfall patterns and many more. Moreover, the
implementation of project which is reduction of emission of green house gases is also
creating pressure on the entity (Ketchen, Jr and Shook 2016).
 Fluctuation in macro trends: Changes in exchange rate, operating cost and product
prices impacts the business operations for long run.
Corporate strategy used by BHP Billiton limited.
The corporate strategy of company is based on handling and operating life of asset which
can be fluctuated by market and geographical changes.
 The company seek for approaches which assist the enterprise in adapting climate
changes.
 The strategy of business to innovate production and organisational operations according
to advancement of technology.
 The BHP aims at proving healthy and safe working environment to its employee which
assist the business in boosting the morale workers (Bracker 2010).
 The compliance with the corporate Governance practices and rules assist the BHP in
directing, controlling and balancing the interests of stakeholders with the company.
 Maintaining the appropriateness with the advancement and market competition company
hold the chance to grow in the industry (Hall 2012).
2. ACCOUNTING ANALYSIS
According to corporate strategy and competitor analysis, it can be determined that the
company has only 2 key success factors which are as increasing equity which denotes the
personal investment done by BHP Billiton. Moreover, the increasing current asset of firm
denotes that there are chances for the enterprise to attain competitive advantage over Rio Tinto.
Thus, the financial analysis of the BHP demonstrates that the current situation of entity is risking
its growth and stability in market according to its rivalries.
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Quality of disclosure of BHP denotes that that strategy of the company is good enough to
support the growth and development according to its market competition. Therefore, as per the
analysis of corporate strategy, it can be determined that implementing functional standards and
making regular innovation in products and manufacturing process assist the company to deliver
quality products to its buyers which implies that Billiton can enhance its success and minimize
its risk drivers by analysing its financial situation on regular basis (Zahra and Covin 2015).
In accordance to above analysis it can be determined, that according to RIO Tinto, BHP
Billiton is facing major risk due to 3 major factors which as follows:
Revenue and profit: as per the analysis it has been evaluated that from past 3 years that
is from 2014 the revenues of the company are continuously decreasing which clearly
representing the declining situation which can turn risky for maintaining stability of firm
whereas in comparison to Rio Tinto the revenue of Rio has increased since 3 years which
determines the red flag for BHP.
Expense: In accordance to the evaluation it has been determined that expense of BHP
Billiton are continuously increasing and till 2016, which is not good factor for the companies'
growth and development. In comparison to Rio Tinto the revenue of company are increasing
vary fast rate.
Total current liability: The continuous increase in current liability of BHP Billiton can
be very risky for its sustainability and growth because according to its competitor, the entity is
going down continuously from past few years.
Hence, the company also makes use of Red flag which helps it in determining the
situation which are reason of potential problems for decreasing revenue and profits. In
accordance to analysis it has been demonstrated that there are three major 3 flags of the BHP
Billiton are decreasing revenue and profits and increasing expenses.
3. FINANCIAL ANALYSIS
Financial analysis of the company is the key element of the appropriate investment
advice. Ratio analysis is a quantitative expression of company’s results in annual report that
provides a quick indication to analyze financial strengthens of an enterprise. BHP Billton’s
performance for a period of 4 years and its comparison with the competitor, Rio Tinto has been
performed here as under:
Calculations attached in Appendix
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Investment management
It provides the financial methodology to evaluate return on equity comprising three
elements that are net profit ratio, assets turnover ratio and equity multiplier.
Figure 1 Return on equity of BHP Billiton and Rio Tinto
Finding the results, it is presented that BHP Billiton’s ROE was 17.03% in 2013 shows a
good return for the investors, however, over the period, in 2016, it shows negative results which
is a clear indication that investors had suffered financial loss instead of any return. In contrast,
competitor, Rio Tinto improved ROE from 2.02% to 10.44% shows remarkable performance.
Failure of Samarco’s Fundao dam on 5th November leads to a significant realse of mine tailling
comprising water and mud mining waste. It was a non-operated joint venture of BHP billiton
which carries on iron ore mining, processing & concentration. It led to cause extensive
environmntal damage and affected agriculture, vegetation and other activities. In response, BHP
had provided immediate extensive support and assistance to the affected community and
workforce (BHP Billiton’s annual report, 2016). Its underlying profit that are avilable for the
owners decreased to US$1.2 bn due to high decrease in the commodity prices. Heavy business
loss and decrease in assets are the two responsible reasons behind decline in ROE. In 2016, Total
Shareholder Return was -36.8% because of decrease in share price and less payment of dividend.
BHP’s EPS worth -120 cents indicate loss situation whilst Rio Tinto’s provided positive return to
256.9 cents on each share. Due to negative return, BHP’s return on capital is computed to -
5.85%, however, Rio Tinto’s ROCE show attractive return of 8.5%.
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Due to detrioriation in pricing and high market volatility, Rio Tinto changed its
progressive dividend policy in 2016 by adopting a flexible approach comprising three factors,
maintaining strong financial position, reinvestment and rewarding to the shareholders (Abor and
Bokpin, 2010).
Figure 2 Rio Tinto's cash management policy
(Source: Rio Tinto’s annual report, 2016)
Following company’s financial planning to resilient against the macroeconomic
conditions and challengin external environment, firm has maintained impressive results and
deliverd favorble return o the shareholders. Investment in Pilbara infrastructure and its
Aluminium group, Copper & diamond and iron ore operations achieved solid results. High net
profit availability made it possible for the firm to deliver good return. High growth projects i.e.
Oyu Tolgoi underground, Amrun and Silvergrass maintained sound control over CAPEX to US
$3 bn (Rio Tinto’s annual report, 2016). Following portfolio strategy, firm disposed off
Lochaber UK by $1.3 bn. World-class assets, robust and strong balance sheet, talented personnel
base and performance drivers. Besides this, volatility in the oil, gas and other mineral prices with
the change in global economic and political factors, supply and demand forces, natural tariffs
resulted decline in the sales revenue. Rio Tinto’s TSR % highly influenced from the weakened
commodity prices, in 2016, its TSR is 41.3% that depicts outerperformance over peers TSR who
reported 17% return over 4 years.
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