Financial Analysis Report: Analyzing BHP Billiton's Performance

This financial analysis report examines the performance of BHP Billiton, an ASX-listed company, based on its 2018 annual report. The report assesses key financial indicators, including profitability ratios like net profit margin and return on equity, liquidity ratios such as current and quick ratios, and market performance metrics like EPS and PE ratio. It highlights the company's strong financial background, improved liquidity, and market position, while also acknowledging challenges from commodity price drops. The analysis concludes that BHP Billiton presents an attractive investment opportunity due to its strong financial standing, lower debt, dividend payouts, and positive market indicators. The report also reviews the company's management structure, business strategies, and remuneration trends to provide a holistic assessment for potential investors.

Running head: FINANCIAL AND ECONOMIC INTERPRETATION AND
COMMUNICATION
Financial and economic interpretation and communication
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1FINANCIAL AND ECONOMIC INTERPRETATION AND COMMUNICATION
Executive summary
Inventors of any organisation including both the potential as well as existing
shareholders are anxious to know the regularity in dividend payment, its liquidity, solvency
as well as profitability position. Hence the report intends to analyse the performance of BHP
Billiton that is listed under ASX. It is considered as the largest producer for aluminium,
nickel, manganese, uranium, titanium minerals, iron ore and silver. Apart from that the entity
is also engaged in dealing petroleum. Majorly the entity’s business is spread out over
Malaysia, Singapore, Canada, Chile, UK and US.
Interpretation
Analysing the financial performance of the entity based on its most recent annual
report that is for the period ended 30th June 2018 it is established that the net profit margin
that is used for evaluating profit earning ability from the sales revenue reduced to 17.75% in
2018 as against 18.52% for the previous year (Seay 2014). If the other profitability ratios like
return on equity that measures return provided to the shareholders, it is recognised that the
same went up to 12.76% in 2018 as against 10.67% for the previous year (BHP 2019).
Considering the liquidity ratio that is utilised to measures the capability of the entity
to meet its short term obligations upon becoming due, it is determined that the capability of
the entity to meet its short term dues has been improved in 2018 as against previous year
(Robinson et al. 2015). This can be established though the quantitative data that represents
that the current ratio that measures the current assets against its current liabilities has been
enhanced and reached to 2.51 in 2018 as against 1.85 for previous year (Dokas Giokas and
Tsamis 2014). Further, the quick ratio that only considers the assets those are readily
convertible to cash has been enhanced and reached to 2.25 in 2018 as against 1.52 for
previous year.

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Going forward to the market performance it is noticed that BHP Billiton’s EPS
dropped to $0.69 from $ 1.1. However, the PE ratio reached to 46.62 in 2018 against 24.18
for 2017. Hence, it indicates that the investors are ready to pay higher price for the entity’s
stock (Cao, Chychyla and Stewart 2015). If the cash management position is analysed, it is
recognized that cash flow margin that measures the cash generated from operation against
sales made consisting each dollar has been dropped to 0.40 in 2018 against 0.44 in previous
year. Further the debt coverage ratio for short term period that measures the ability of the
firm to pay off the debt those are payable in short term period along with the interest with the
available cash that is generated from operation are dropped to 1.26 in 2018 against 1.40 in
previous year (Pandey 2015)
Hence, taken into account the overall financial performance of BHP Billiton for the
year 2018 as against previous year it can be determined that the financial background of the
firm is strong enough to maintain its long term sustainability. Further, during the time gap of
2017 to 2019 it enhanced its market position as well as liquidity position (Nobes 2014).
If the company’s market potential and its business strategies are evaluated it is found
that owing to drop in the oil prices the entity faced commodity crash that lead it to run
through the incredible hard times. However, the entity rapidly managed to enhance the cash
flow and made plan for going forward. In addition, the entity enhanced its position my
making the payment of its outstanding debts in aggressive manner (BHP 2019). The entity
aspires in becoming the leader in mining industry and to achieve the same it started preparing
its portfolio consisting of world class assets under commodities those are considered to be
most attractive. These include both culture as well as capabilities that will allow it executing
its business strategies. It will further enable to invest in commodities those are considered to
highly attractive and have high level of potential for earning economic rent that can be in line
with the capabilities (Grimm and Blazovich 2016).

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If the company’s remuneration trend for higher level income groups is analysed it can
be identified that the trend of remuneration are in upward movements and apart from that as a
non-wage benefit it offers travelling allowances to employees. However comparing the wage
structure of its competitors it is found that they have different wage structure. Business head
for the entity’s management team is its CEO Ken Mackenzie who has widespread experience
and knowledge concerning the global business (BHP 2019). Some of the other directors
included in the management team are Shriti Vadera, Malcolm Broomhead, Lindsay Maxsted,
Andrew Macenzie, Terry Bowen, Anita Frew, Carolyn Hewson and John Mogford. Each of
them has extensive experience and knowledge as required to serve their post. In addition, if
the entity considers for engaging any new employee, they got selected based on their
experience in required field and knowledge for mining industry (BHP 2019).
Conclusion
Based on the above study is can be concluded that BHP Billiton has strong financial
background and hence, will be considered as an attractive investment for the investors.
Another strong point for considering it as an investment option is that the debt portion under
its capital structure is lower as compared to equity and provides incredible dividends that
makes it attractive for the investors who expects regular return from their investments.
Moreover, it enhanced its market as well as liquidity position as compared to previous year.
PE ratio is also signifying that the investors are willing to pay higher prices for its stock. The
cash management as well as profitability position is denoting that BHP Billiton is capable of
generating earning for its shareholders and managing its liabilities with operational cash. All
these facts lead to the conclusion that BHP Billiton is considerable as an investment prospect
and the investors can invest into it.

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Reference
BHP., 2019. BHP | A leading global resources company. [online] Available at:
https://www.bhp.com/ [Accessed 31 Aug. 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.

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