Financial Performance Analysis of BHP Billiton: 2016-2018 Report

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Company Performance Analysis
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Contents
Abstract............................................................................................................................................3
I. Introduction..................................................................................................................................3
II. Financial Analysis of selected company.....................................................................................4
2.1. Description of BHP Billiton limited.....................................................................................4
2.2. Calculation and analysis of selected performance ratios......................................................4
2.3. Cash management analysis...................................................................................................9
2.4. Perform a sensitivity analysis with data provided..............................................................10
2.5. Identify and discuss the systemic risks and un-systemic risks that may affect the
performance of the selected company........................................................................................15
2.6. Identify the dividend payout ratio and dividend policy......................................................16
III. Recommendation Letter...........................................................................................................17
IV. Conclusion...............................................................................................................................17
References......................................................................................................................................18
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Abstract
Financial analysis is the complete assessment of the financial components of a company and
relates them to the external factors affecting the operations of the company. The company under
consideration is the BHP Billiton Limited which is an Australian MNC working in mining,
petroleum, and metals sector. The company underwent a financial crisis owing to a dam failure
in 2015, but stabilized the situation by the next year through quick formulation and
implementation of the management policies for the same. A complete analysis of 3 years has
been carried out to ascertain its viability as an investment option and it has shown positive results
throughout the process. Company has shown strong stability and profitability capabilities as a
conclusion of the analysis.
I. Introduction
Financial analysis is an important part of an investor to analyze the financial performance of any
company. In this study, the financial performance of BHP Billiton limited will be discussed with
trend analysis and financial ratios analysis. Ratios are an important part of financial analysis
because ratios give a quick indication of the financial performance of any company. Trend
analysis is useful for investors to predict the future value of stock prices of a company, in trend
analysis a company compares the past financial performance of the company to get an insight
about future stock prices of the company. Marketable securities of BHP Billiton limited will be
discussed briefly in this study. Marketable securities have quick liquidity, these securities an
investor can easily buy or sell and marketable securities are considered good for business due to
high liquidity. Sensitivity analysis is useful to know about the efficiency of a project or business,
it predicts uncertainty of business through various tools of sensitivity analysis. The sensitive
analysis will be briefly discussed in this study with the past three year data. In this study, BHP
Billiton limited selected as a company to analyze financial performance. BHP Billiton limited
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company selected in this case study because of availability of data, it's easy to find data of BHP
Billiton limited because BHP Billiton limited provide proper financial data to investors so that
investor use this data and invest in the company. The main purpose of this study to analyze the
financial performance of BHP Billiton limited so that overseas investors take an insight about the
financial performance of the company and in near future, they supposed to invest in the
company. The practical part of this study will clearly show in excel sheet with proper formulas
and calculation after that there will be a brief analysis of the position of the company.
II. Financial Analysis of the selected company
2.1. Description of BHP Billiton Limited
BHP Billiton limited is an Anglo-Australian multinational company which works in mining,
metals and petroleum sector. The headquarter of BHP Billiton limited company is located in
Melbourne (Australia). BHP Billiton limited company is a subsidiary company of BHP group
plc. And provide their services across the world. BHP company was founded in 1885 in a broken
hill of new south Wales that is a mining isolated place far from the city after that they wide their
business. When anglo- dutchBilliton company merge with BHP in 2001 than they formed a
combined entity BHP Billiton limited and after that in 2017 BHP Billiton limited company was
ranked as world’s largest mining company in market capitalization and BCH Billiton company is
known as third highest revenue earning company in Melbourne (Wasiuzzaman, 2014). In the
year 2015, BCH Billiton limited company was facing the worst environment disaster crisis in
2015 that is considered as the worst crisis in the history of mining which was happened in Brazil.
The citizens of Brazil filed a lawsuit against BCH Billiton company because if deadly dam
collapse at mining site which was killed 17 peoples and left around more than 700 peoples
homeless, that was a really big disaster in mining history. The main comparative advantage of
BCH Billiton limited is diversity in thoughts which give them a comparative advantage over
others. According to a study by McKinsey, organizations which are kept diverse executive team,
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they earn a higher profit than the rest of companies. Diverse thoughts in a team always provide a
comparative advantage over others because a team can think from many perspectives if they
have diversity in thoughts. The BCH Billiton limited have a diverse workforce which provides
higher creativity in their work which is ultimately benefit the entire company (Wang, 2015).
2.2. Calculation and analysis of selected performance ratios
Efficiency Ratios
Particulars 2016 2017 2018
Asset Turnover Ratio 0.26 0.31 0.39
Inventory Turnover Ratio 1.22 1.64 2.12
Receivables Turnover Ratio 9.80 12.74 14.10
Average Collection Period 37.25 28.65 25.90
Asset Turnover ratio is the ratio between the total assets of the company and the revenue earned
by the company for the period. It helps us to identify well the revenue is earned using the assets
of the company and if the assets are efficiently utilized. The company shows an increasing trend
(0.26 to 0.39) and hence suggests that the company has been getting efficient over the years and
generating more revenue (Iskandar-Datta and Jia, 2012).
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2016 2017 2018
-
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
Asset Turnover Ratio
Inventory Turnover Ratio is the ratio between the inventory and the revenue suggests that stocks
are efficiently utilized in the generation of income. Company is showing an increasing trend
(1.22 to 2.12) suggesting that inventory is selling quickly and there is efficient management of
the stock (Lee and Fargher, 2013).
2016 2017 2018
-
0.50
1.00
1.50
2.00
2.50
Chart Title
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Receivables Turnover Ratio is the ratio between the receivables and the turnover suggesting the
company is efficient in debt collection and incurs less bad debts. The company again shows an
increasing trend signifying the company's high efficiency to collect timely debts reducing
blockage of funds (Velasquez and Hester, 2013).
2016 2017 2018
-
5.00
10.00
15.00
20.00
25.00
Chart Title
Average Collection Period is the period in which the company collects its debts. It is calculated
using the turnover and receivables of the company. Company has shown an upward trend i.e.
collection days have decreased indicating the company has been collecting debts more often
(Spitz, et. al., 2012).
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2016 2017 2018
-
10.00
20.00
30.00
40.00
Chart Title
Profitability Ratios
Particulars 2016 2017 2018
Gross Margin 100 % 83.33 % 81.68%
Operating Margin (20.17) % 35.28 % 37.42 %
Return on Assets (5.22) % 5.72 % 6.91%
Return on Equity (10.33)% 10.67 % 12.76 %
Gross Margin is the margin earned by the company from the sale of goods over the cost of goods
sold and direct expenses incurred during the manufacturing process. Company has shown
decreasing trend in the gross margin from 100% to 81.68% signifying that company’s direct
revenue has decreased over the years and direct expenses have increased (Shamsabadi, et. al.,
2016).
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2016 2017 2018
-
20.00
40.00
60.00
80.00
100.00
Gross Margin
Operating Margin is the margin of the company over the operating expenses of the company. It
suggests how efficiently the company carries out its operations and how much company earns
from it before considering finance cost (Simshauser and Catt, 2012). The company faced a dam
failure on 5th November 2015 leading to a series of unexpected expenses causing the company to
incur a loss of 20.17%. Next year onwards company has started recovering losses making a
profit of 37.42% in 2018.
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2016
2017
2018
(40.00) (20.00) - 20.00 40.00 60.00
Chart Title
Return on Assets explains the earning made by the company on the assets employed by it. As the
company has faced a disaster in 2015-16, it has returned a loss of 5.2%. Afterward, the company
has provided a return of 6.91% in 2017-2018.
2016 2017 2018
(6.00)
(4.00)
(2.00)
-
2.00
4.00
6.00
8.00
Chart Title
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Return on Equity is the return earned by the company over its equity over a period of time. This
ratio is most significant to the current and potential investors and helps them to ascertain their
income or make a decision whether to invest or not (Ranti, 2013).
2016 2017 2018
(15.00)
(10.00)
(5.00)
-
5.00
10.00
15.00
Return on Equity
2.3. Cash management analysis
Company has an overall $1,199 million invested in ‘Other Financial Assets' out of which $200
million relates to ‘Other Current Financial Assets', diversified in different areas and sectors.
Funds have been hedged through interest rate swaps and derivative instruments. Not only they
help in the hedging purposes, but also increase the liquidity of the company and provide
immediate funds as and when required (Soosay, et. al., 2012). Hedging ensures that funds are
secured and protected against market uncertain market conditions and changes. No specific
information has been provided for the individual marketable securities available with the
company but a general idea has been drawn out from the general information available in the
notes to accounts.
2.4. Perform a sensitivity analysis with data provided
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Price of the product = $20
Units to be sold = 300,000 units
Time period = 4 years
Equipment Cost = $2,000,000
Residual Value = $200,000
Working Capital Requirement = $600,000
Other Information-
Depreciation method = Straight Line Method
Variable cost per unit = $12
Cash fixed costs per year = $300 000
Discount rate = 10%
Tax Rate = 30%
The formula for NPV =PV of Net Inflow – PV of Net Outflow
PV of Net Inflow =Total of PV of [(Sales p.u. – Variable cost p.u.) x Units) – Fixed Cost]
PV of Net Outflow = Initial Investment – PV of Salvage Value + Working Capital – PV of
Working Capital
Net Inflow = [(20-12) x 300,000 – 300,000]
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