MBA Assignment: P/E Ratio Analysis of Mining Corporations

This assignment analyzes the Price-to-Earnings (P/E) ratios of Rio Tinto, BHP Group, and Anglo American, three multinational corporations in the mining industry, over a ten-year period from 2009 to 2018. The analysis examines the fluctuations in P/E ratios, the factors influencing them, and their implications for investment decisions. The report highlights how the P/E ratio reflects market valuation, shareholder sentiment, and company performance, considering factors like earnings per share (EPS), debt levels, and market capitalization. The findings suggest short-term investment recommendations for Rio Tinto and Anglo American, while advising against investment in BHP Group due to its unstable stock performance, based on the provided data and analysis. The assignment uses Simply Wall Street data as a reference for the analysis.

Running head: FINANCE AND FINANCIAL MANAGEMENT
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Question 2
All three companies are multinational corporations (MNCs) in the mining industry. P/E ratio
is the ratio used to estimate the current share price which is relative to the price earnings
ratio. P/E ratio is the ratio which is used by the shareholders for making the apple to apples
comparison. The formula of P/E ratio is determined below.
Market value per share / earnings share.
Three companies that have been analysed are Rio Tinto, BHP group and Anglo American
over the period of the ten years from 2009 to 2018. In case of Rio Tinto there is not much of
the fluctuation that has been observed. There are several factors which affect the P/E ratio
such as a company with high P/ E ratio usually indicates the positive future performance and
in that sense the shareholders agree to pay more and if the situation is reversed it’s a vice
versa category. From the current scenario it can be understood that in the year 2009, P/E ratio
earlier increased from 12 to 14.6 and then eventually it fell down to 6.3 times. Thereafter the
graph of the company increased from 8 to 15.8 times. This signifies that how well the

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company has improved the position due to increase in the sales and the dividend factors. As
per the drivers of the market, it can be understood that Rio Tinto will perform roughly in the
alignment with the other companies in the specific industry. Since the EPS was too strong
and the debt levels are equitable in that case EPS is quite sensitive and hence, the
performance of Rio Tinto will fall down and P/E ratio will fall down which is not acceptable.
In context with the thought process of the investors it can be stated that stock shall be bought
for the short term purposes (Simply Wall Street, Rio 2019).
One of the drawbacks of the P/E ratios is that it also takes market capitalization into
consideration. While analysing P/E ratio of BHP Billiton, it can be seen that earnings have
jumped by 34% last year. Therefore, earnings per share are down by 8.1% a year, over the
period of 7 years. P/E ratio is high and this indicates the overall performance in near future of
the company is highly potential and it will grow to an extreme level. If the P/E ratio is to be
decreased it can be done by investing the cash or funds for future growth and success. P/E
ratio increased from 17.1 times to 17.3 times and then there was a sudden fall of 10 points. In
the year 2013, the ratio was 14.3 times and this indicated that shareholders can invest in the
company for the longer duration and what happened in the year 2016 was unbelievable. The
ratio reached to 74.3 times and this created the history and since BHP Group’s debt is 7.9%
of the total market capitalization and secondly this would impact P/E ratio if it had a lot of the
cash. As per AU market the average ratio is trending at 18.2 times and the position of the
company is below the stipulated benchmark. Overall it can be said that form the point of view
of the investors the stock is unstable hence; the investment shall not be made (Simply Wall
Street, BHP 2019).
As it can be seen that higher the P/E ratio, higher will be the valuation of the company, in
case of Anglo American Business and notably increased by a whopping of 36% in the last
year. The growth of EPS over the period of 5 years has reached till 111%. As can be observed

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with the performance of Anglo Performance in terms of P/E ratio is 8.0 in the year 2012 and
it increased to 22.6 in the year 2016. The ratio also fell down to 11.2 times and this reflects
that the company is below average in comparison to the benchmark. Hence, from the overall
analysis it can be stated that if the earnings of the company are going to increase than the
current P/E may not be acceptable. From the above analysis in case of Anglo American it can
be stated that the ratio shall be bought but for the short term purposes (Simply Wall Street,
AA 2019).

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References
Simply Wall Street, AA (2019) https://simplywall.st/news/heres-what-anglo-american-plcs-
lonaal-p-e-ratio-is-telling-us/ [Accessed on 6th February 2020]
Simply Wall Street, BHP (2019) Here’s What Rio Tinto Group’s (LON: RIO) P/E Ratio Is
Telling Us [Online] Available from https://simplywall.st/news/what-does-bhp-groups-
asxbhp-p-e-ratio-tell-you/ [Accessed on 6th February 2020]
Simply Wall Street, Rio (2019) [Online] Available from
https://simplywall.st/stocks/gb/materials/lse-rio/rio-tinto-group-shares/news/heres-what-rio-
tinto-groups-lonrio-p-e-ratio-is-telling-us/ [Accessed on 6th February 2020]