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

This report presents a comparative financial analysis of BHP Billiton and Rio Tinto, two major players in the mining industry, using financial data from 2012 to 2016. The analysis focuses on key financial ratios including profitability, liquidity, solvency, and efficiency. The report examines the impact of commodity price fluctuations, particularly the decline in Chinese demand, on BHP's financial performance, which led to a decline in profits and dividends. While BHP demonstrated improved liquidity ratios, they still lagged behind Rio Tinto. Solvency ratios also deteriorated for BHP, reflecting the sensitivity to commodity prices, whereas Rio Tinto showed healthier solvency ratios. Efficiency ratios revealed a concerning trend for BHP, with Rio Tinto outperforming. The analysis concludes that, based on the data and the scope of the analysis, Rio Tinto emerges as the stronger financial performer. The report underscores the importance of financial statement analysis in assessing the performance of companies in the mining sector and the impact of external factors like commodity prices on their financial health.

A global mining company, BHP Billiton was formed through the existence of BHP (Australia
based) and Anglo Dutch Billiton Plc (UK based). The company is one of the largest in the
business as reflect from the market capitalisation ($ 111 billion) and annual revenues ($ 31
billion). Further, the company has interests in mining or various metallic and non-metallic
minerals with a wide geographical spread of mines spanning various continents. The
shareholders use the information available in financial statements to evaluate the prospects of
future capital appreciation and expected dividend payments. The lenders use the same to
compute the credit risk while the government uses the same to test compliance with
applicable regulations. For the contractor, financial statements indicate the expected future
projects coupled with potential to default on the existing outstanding payments.
In relation to the income statement, the most pivotal aspect remains revenues which
essentially play a vital role in determining profits. This is due to the nature of the mining
business where revenue receipts are heavily influenced by prevailing commodity prices and
hence revenue fluctuations are common. Usually the expenses do not have much of an
influence unless there is a write-off. Besides, considering the capex requirement, fixed assets
are substantial and PP&E account for almost 75% of the total assets held by the company. In
relation to the liability, long gestation period of capital intensive projects imply that long term
borrowing contribute significantly to the total liabilities. A small portion is also contributed
by short term debt. Further, internal accruals for the company are significant and can provide
support for future projects.
The business type where the ores are inside the mine, considerable management judgement
coupled with accounting conventions are required to report the information in the form of

financial statements. This relates to asset recognition, measurement (fair value, depreciation,
impairment) coupled with reporting. However, the management judgement is driven form the
technical reports coupled with industry trends and their respective experience. The last five
year (i.e. FY2012 –FY2016) financial statements have been used to carry out ratio analysis
and the chosen competitor is Rio Tinto which has presence in a number of minerals and
global presence. The profitability of BHP has shown a declining trend in 2014-2016 as the
Chinese demand has plummeted leading to crash in prices of various base metals. This
transforms into lower prices, lower dividends for investors while less work for contractors.
Liquidity ratios have seen improvement on a y-o-y basis but continue to be lesser than
corresponding ratios for Rio Tinto. The solvency ratios are driven by commodity prices for
BHP and thus in 2014-2016, these ratios have worsened. However, the corresponding
solvency ratios for Rio are much healthy which allows more scope for debt financing going
ahead when commodity prices improve. However, lenders might demand higher interest rates
from BHP. The deteriorating efficiency ratios present a matter of concern as the competitor
performance is superior and also the declining trend was observed during 2012-2014 also.
This analysis clearly reflects Rio emerging as a more sound company as compared to BHP on
the basis of the limited analysis undertaken.