Comparative Financial Analysis: BHP Billiton vs. Rio Tinto (2012-2016)

This report provides a financial analysis of BHP Billiton from 2012 to 2016, comparing its performance with Rio Tinto. The analysis focuses on key financial statements, including the balance sheet, income statement, and cash flow statement, and their implications for shareholders, lenders, and contractors. The report highlights the impact of commodity price fluctuations, particularly the decline in demand from China, on BHP Billiton's profitability, liquidity, and solvency. The analysis includes a discussion of the company's reliance on management judgment and accounting conventions, such as depreciation and impairment of assets, which are critical in the mining industry. The report utilizes ratio analysis to evaluate the company's performance and highlights the deteriorating trends in efficiency ratios compared to Rio Tinto, suggesting that Rio Tinto may be a better investment in the mining sector.

BHP Billiton is a multinational mining company based out of Australia which came into
existence in 2001 as a result of merger between Australian company BHP and Anglo Billiton
Plc. The company has global operations and focuses on mining of iron ore, potash, copper,
coal and petroleum. The financial information represented through financial statements (i.e.
balance sheet, income statement and cash flow statement) are critical to the information needs
of the various shareholders. The shareholders utilise this information to take investment
decision which is driven by extent of profit generation, strength of balance sheet and dividend
payment. The lenders take decision with regards to extending short term and long term credit
which are based on underling financial position represented from balance sheet coupled with
operational cash flows. The contractors tend to consider the revenue growth and the
underlying profits on which the future quantum of work depends. Further, short term liquidity
is considered by both contractors and employees as it impacts the ability of the company to
meet their payment obligations in a timely manner.
The most critical aspect of the income statement is essentially the revenues which clearly
highlight the commodity price trend. Also, the profits of the company are highly dependent
on the revenues as the cost structure does not undergo much change. Further, owing to the
nature of the business which involves mines and capital equipment, the plant, property and
machinery are the single most critical item of assets which tend to form investment for the
future. On the liability side, the debt trends and figures are critical considering that debt
forms a significant portion of the overall capital. Further, the tracking of debt also provides
the extent of financial leverage which becomes essential in a downtrend of commodity prices.
In relation to equity, the shares issued coupled with internal accruals are critical from the
potential future funding point of view.
Considering the nature of the business where the assets are mines and the minerals contained
in them, there is considerable use of management judgement and accounting conventions
with regards to recognition and measurement of assets. This relates to depreciation,
determination of fair value and charging impairment on asset. The ratio analysis of the
company using the financial statement from 2012 to 2016 has been carried and the same has
been compared with a peer group company i.e. Rio Tinto. Ever since the commodity prices
have started to decline on account of decreasing demand from China in 2014, the profitability
has suffered with losses in 2016. This is worrisome to investors and also contractors. With
regards to liquidity, the company has shown improvement but still these ratios are inferior
compared to Rio Tinto. This is worrisome to short term lenders and contractors. The solvency

ratios have gone down since 2014 and are inferior as compared with Rio Tinto. This is
problematic for lenders and in future the finance costs may do up. Further, the efficiency
ratios show a deteriorating trend for the period under consideration unlike Rio Tinto whose
performance is much better. Thus, it seems that Rio Tinto would serve as a better bet for an
investor who wants to take exposure in the mining sector.