Financial Analysis of BHP Billiton: Stakeholder Impact and Performance

This presentation provides a financial analysis of BHP Billiton, one of the world's largest mining companies. It examines the company's key stakeholders, including shareholders, lenders, contractors, and employees, and how they are impacted by its financial performance. The analysis covers key financial statements like the income statement, balance sheet, and cash flow statement, highlighting critical aspects such as revenue, expenses, assets, liabilities, and equity. It also explores the impact of accounting conventions and management judgments on asset measurement and impairment. Furthermore, the presentation delves into ratio analysis, comparing BHP Billiton's profitability, liquidity, solvency, and efficiency ratios with those of its competitor, Rio Tinto, over a five-year period. The analysis reveals trends in commodity prices and their impact on the company's financial performance, emphasizing the implications for various stakeholders, including investors, lenders, contractors, and employees. The presentation concludes by discussing the challenges faced by BHP Billiton, particularly in light of declining commodity prices, and their impact on stakeholders.

Slide 1– BHP Billiton is one of the largest mining companies in the world which is
headquartered in Victoria. Australia. The company is listed on the ASX and has a current
market capitalisation of about $ 111 billion making it the fourth largest company in
Australia. The company came into existence in 2001 through the merger of the Australian
company (BHP) and UK based Billiton Plc. BHP has five major business verticals namely iron
ore, coal, copper, potash and petroleum. Also, the mines have a wide geographical coverage
including Australia, North America and South America as highlighted.
Slide 2- Two key stakeholders which depend of financial statements are shareholders and
lenders. The shareholders tend to focus on EPS which in turn is driven by profit margins. This
is essential in determination of share price. The going concern assumption needs to be
validated through the liquidity while the credit risk is represented by capital structure. The
dividends are captured in cash flows which act as a pivotal income source. For the lenders,
liquidity and solvency ratios are critical which are determined from the balance sheet as
they indicate the creditworthiness. Also, operating profit and cash flow from operations
indicates the ability to meet the interest obligations.
Slide 3- Two other stakeholders of importance are contractors and employees. In the mining
business, role of contractors is pivotal. Contractors tend to analyse the income statement to
capture the likely growth of business along with profitability which in turn determine their
future business. Further, the balance sheet and cash flow through liquidity position
indicates the ability of the firm to clear their outstanding payments in a timely manner.
Employees analyse income statement to determine their present and future bonuses which
is driven from company’s profits. Further, the ability to meet employee expenses is reflected
from short term liquidity measures.
Slide 4 – One of the key parameters of the income statement is the revenue as it drives the
profitability of the business. This in turn reflects the trend in commodity pricing which owing
to cyclical trends is pivotal. With regards to expenses, the largest expense is cost of revenue
which essentially indicates the efficiency but is less vital than the income. Considering the
capital intensive nature of mining business, majority of the assets are in the form of fixed
assets i.e. PP&A. An increase in this aspect auger well for the future. Further, from short
term liquidity perspective, cash is imperative.

Slide 5- The capital intensive nature of the business implies that a large component of
funding is secured through long term debt besides short term debt for working capital
requirements. Hence, a trend analysis of both long term and short term debt becomes
pivotal as increased financial leverage may increase business risk and consequently cost of
debt. Only in the recent years i.e. 2014 onwards have there been accounts payables which
coincide with the plummeting commodity prices. In relation to equity, common stock
outstanding coupled with retained earnings or internal accruals are pivotal to determine
financing of capital projects.
Slide 6 – The asset measurement is highly influenced by presence of accounting convention
and judgement of management considering the nature of business. With regards to
exploration costs, the management determines based on its sound judgement where future
benefits are expected to result or not which in turns decides the representation of these
costs. In this regard, the management would take judgement about the recoverable ores,
the percentage of mineral present, expected future prices coupled with stripping cost.
Ofcourse all these are guided by technical reports from professionals which help the
management to make estimates. Besides, the presence of inventory coupled with valuation
also involves role of convention and management judgement.
Slide 7- Also, since the company has acquired various intangible assets, thus in order to test
for impairment especially when there is a drop in commodity prices, the fair value needs to
be determined which would be driven by the likely quality and quantity of ore to be
recovered coupled with the estimated costs which is essentially driven by management
judgement. Also, depreciation of the asset requires prudent use of accounting convention
and management judgement regarding useful life and the method of depreciation to be
deployed.
Slide 8 – The ratio analysis of BHP Billiton based on the last 5 years financial statement is
shown. The values in bracket indicate the corresponding values for the competitor Rio Tinto
for the corresponding period. The profitability ratios typically tend to represent the profit
margins of the business. The liquidity ratios represent the short term liquidity of the
business which becomes critical for BHP considering the plummeting commodity prices
since 2014 due to slowing demand for China. The long term liquidity is highlighted by the

solvency ratios which represent the financial leverage as well. The efficiency of the business
operations becomes critical especially when commodity prices are low so that margins can
be maintained.
Slide 9 – The profitability ratios of the company are mirroring the trends in commodity
prices which peaked out in 2013 and have been declining from 2014 onwards thus adversely
impacting profitability of operations. However, the more worrisome aspect is that the major
competitor has generated profits in 2016 compared to losses for BHP Billiton. With regards
to liquidity, it is positive for BHP Billiton that there is an improvement in these ratios
ensuring greater comfort to short term lenders, contractors and employees. However, for
the period the ratios are better for Rio Tinto which is negative for BHP Billiton.
Slide 10 – The deterioration in solvency ratios from 2014 to 2016 may be attributed to the
declining profitability of the firm as a result of which the company had to secure
incremental debt to fulfil ongoing obligations. Further, due to lower equity prices from 2014
onwards, raising incremental equity was not a prudent option. However, Rio Tinto has
performed significantly better in this regards indicating lesser financial leverage. The
downward trend in efficiency for BHP Billiton during the period is worrisome particularly
considering that these values have seen improvement for Rio Tinto that too at a time when
the industry conditions are unfavourable.
Slide 11- The low profitability translates into lower EPS and declining share price along with
lower dividend payout, hence adversely impacting the interest of the investors. For long
term lenders, the increasing financial leverage especially in the recent years is a matter of
concern coupled with lower operating profit leading to higher risks and lower comfort. The
lower commodity prices imply lesser work for the contractors in the near future while
liquidity constraints may cause some delay in repayment of dues. On account of falling
profits, the employees bonuses would be adversely impacted and also salary hikes and
introduction of hikes may be deferred to future when commodity prices improve.