Financial Analysis and Investment Recommendation: BHP Billiton Report

This report provides a comprehensive financial analysis of BHP Billiton, an ASX-listed company, for prospective investors. It examines the company's core business, geographic locations, and financial performance based on the 2018 and 2017 annual reports. The analysis includes profitability ratios (net profit margin, return on equity), liquidity ratios (current ratio, quick ratio), market ratios (price to earnings ratio), and cash management metrics. The report highlights improvements in liquidity and market position, along with a discussion of market potential, business strategies, remuneration trends, and management strength. The conclusion recommends BHP Billiton as a strong investment, emphasizing its low debt, dividend offerings, and improved financial metrics. The report also references key financial management and accounting sources to support its findings.

Executive summary
Potential as well as existing investors of any entity is mainly concerned regarding the
ability of the entity to continue its business, paying dividends, earning fair return and provide the
capital growth. The report will therefore, analyse the ASX listed company, BHP Billiton in
context of its financial performance based on which it can be concluded whether the entity is
good one for investment or not. BHP Billiton is 1 of the biggest resource and mining companies
that conducts its business in more than 25 nations.
Entity’s core business and its geographic location
It falls under the largest producers of manganese, aluminium, nickel, uranium, iron ore,
titanium minerals and silver. Further the entity deals with coal assets as well as petroleum. Min
business of the entity are scattered over different locations including Singapore, Malaysia, Chile,
Canada, UK, US. The company is located in London, England and main office of the entity is
located in Australia (BHP 2019).
Financial result
Ratio Analysis of BHP Billiton
2018 2017
Net Profit Margin 17.75% 18.52%
Return on equity 12.76% 10.67%
Current Ratio 2.51 1.85
Quick Ratio 2.25 1.52
Price to Earnings Ratio 46.62 24.18
Cash flow margin 0.40 0.44
Short-term debt coverage 1.26 1.40
From the above, the financial performances of the entity can be interpreted as follows –
 Profitability ratio – it determines the company’s ability to earn profit from its revenues.
Net profit ratio that determines the percentage of profit generated from the revenue
earned by it is signifying that the same is dropped from 18.52% to 17.75% during the
period from 2017 to 2018. Considering the return on equity that is the return provided by
the entity on shareholder’s investment went up from 10.67% to 12.76% over the period
from 2017 to 2018. Hence, the entity is able to generate sufficient profit from its revenues
(Robinson et al. 2015).
 Liquidity ratio – liquidity ratios measure the entity’s short term assets against its short
term liabilities. Current ratio that measures the entity’s sufficiency of current assets to
make payment for short term obligation for the entity went up from 1.85 to 2.51 (Dokas,
Giokas and Tsamis 2014). On the other hand, the quick ratio that does not consider the
short term assets those are time taking in terms of converting into cash against the short
term obligations went up from 1.52 to 2.25. Hence, the liquidity position of the entity
over the years from 2017 to 2018 has been enhanced (Seay 2014).
 Market ratio – though the EPS of the entity is reduced from $ 1.1 to $ 0.69, owing to
increase in the stock price the PE ratio of the entity went up from 24.18 to 46.62. It

signifies that the investors expect more return from the investments (Grimm and
Blazovich 2016).
 Cash management – it helps the entity in determining the cash amount available with it as
compared to the requirement. It measure the money earned from the operation for each
dollar of sales made by t for the entity is dropped to 0.40 in 2017 from 0.44 in 2018. On
the other hand, the short-term debt coverage that signifies the entity’s ability to meet its
short term debt obligation along with the interest from the available cash from operation
for the entity has been dropped to 1.26 in 2017 from 1.40 in 2018 (Nobes 2014).
Hence, considering the overall financial performance of the entity it can be stated that the
company has strong financial background and moreover, over the years from 2017 to 2018 it has
improved its liquidity position and market position (Cao, Chychyla and Stewart 2015).
Market potential and business strategies
Since the beginning of commodities crash resulted from dropping of oil pricing the entity
had incredibly tough times. However, it managed to increase the cash flow rapidly and planned
for going forward. Further it improved its position through payment of debt aggressively (Pandey
2015). BHP Billiton aspire to become achieve capabilities to become the leader in industry that is
applicable to the portfolio of the world class assets in the commodities those are most attractive.
This includes the capabilities and culture that will enable to execute the business strategies and
commodities those are highly attractive with high potential of economic rent that can be matched
with its capabilities (BHP 2019).
Remuneration trend and management strength
Remuneration provided by the entity to the higher income groups are in the upward trend
and in addition to the wages the entity also provide the travelling allowances to its employees as
the non-wage benefit. However, the competitor’s wage structures are different from BHP
Billiton. CEO of the entity, Ken MacKenzie is the head of the entity’s management team (BHP
2019). CEO has extensive knowledge and experience regarding global business. Other directors
who form the management team are Malcolm Broomhead, Andrew Macenzie, Lindsay Maxsted,
Anita Frew, Terry Bowen, Carolyn Hewson, John Mogford and Shriti Vadera. Each of the board
members has required knowledge and experience required for their posts. Further, while the new
employees are engaged they are selected on the basis of their knowledge in the mining industry
and based on their experience in respective fields (BHP 2019).
Conclusion and recommendation
From the above, it can be concluded that BHP Billiton can be considered as a strong
investment at present scenario. It has low debt as well as offers the investors with incredible
dividend that is making it a strong investment for the investors. Further, over the years from
2017 to 2018 it has improved its liquidity position and market position. Apart from that, the
profitability position as well as cash flow management ratios is signifying that the entity is able
to manage its obligation with the available cash and generating earning from the investment
made by the shareholders. Therefore, it is recommended that the BHP Billiton shall be
considered as a good investment.

Reference
BHP. (2019). BHP | A leading global resources company. [online] Available at:
https://www.bhp.com/ [Accessed 11 Jun. 2019].
Cao, M., Chychyla, R. and Stewart, T., 2015. Big Data analytics in financial statement
audits. Accounting Horizons, 29(2), pp.423-429.
Dokas, I., Giokas, D. and Tsamis, A., 2014. Liquidity efficiency in the Greek listed firms: a
financial ratio based on data envelopment analysis. International Journal of Corporate Finance
and Accounting (IJCFA), 1(1), pp.40-59.
Grimm, S.D. and Blazovich, J.L., 2016. Developing student competencies: An integrated
approach to a financial statement analysis project. Journal of Accounting Education, 35, pp.69-
101.
Nobes, C., 2014. International classification of financial reporting. Routledge.
Pandey, I.M., 2015. Essentials of Financial Management, 4th Edtion. Vikas publishing house.
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial
statement analysis. John Wiley & Sons.
Seay, S.S., 2014. The economic impact of IFRS-a financial analysis perspective. Academy of
Accounting and Financial Studies Journal, 18(2), p.119.