BHP, Rio Tinto And Glencore: Financial Performance Analysis

Overview of BHP Group Ltd, Rio Tinto Company, and Glencore

BHP

BHP Group Ltd is a Worldwide Mining And Resources corporation. The Broken Hill Proprietary Company Limited was founded in 1885. The company produces copper and uranium, as well as a copper smelter, a copper refinery, and precious metals such as gold and silver. The company’s production activities, which are predominantly in Australia and the Americas, collect and refine minerals, gas, and oil (reuters.com, 2021). 

Rio Tinto

The Rio Tinto Company, headquartered in London, United Kingdom, was founded in 1873 by investors to mine old copper workings at Rio Tinto nearby Huelva in southern Spain.” Rio Tinto Plc is a mineral resource discovery, mining, and processing company.   Aluminum, Iron Ore, Copper and Diamonds, Minerals, Energy, Other Operations are the company’s business segments (Institute of Developing Economies, 2021).

Glencore

 The Glencore was formed in 1974 by commodity merchants Marc Rich and Pincus Green as Marc Rich & Co. AG. It is responsible for the manufacturing and sale of a variety of mineral products. Metals and energy, minerals, and agricultural goods are among the company’s operations, which include refining, handling, preservation, as well as distribution.  copper, zinc, lead, nickel, aluminium, oil products, iron ore, coal, and cobalt are all produced and traded by Glencore. Glencore has coal mines in Colombia, Australia, and South Africa that it owns and controls.  Chad, Cameroon, and Equatorial Guinea are among the countries where the corporation has oil and gas producing assets. The automobile, power generating, steel, oil, and processing sectors are the industries it mostly services. 

All information is obtained from the financial statements of BHP, Rio Tinto, and Glencore from 2016 to 2020 for the computation of ratios, including the income statement, statement of financial position, statement of cash flow, and statement of equity.

Return on Capital Employed (ROCE)

ROCE stands for Return on Capital Employed, and it is a form of financial measure that is used to determine a firm’s profitability and capital productivity.  When evaluating a firm for investment, financial managers, shareholders, and private investors may utilize the ROCE ratio as one of the numerous profitability ratios (StockEdge, 2018).

 BHP’s return on capital employed ratio is 2020 is 16%, which is lower than the return in 2019. In 2020 the operating profit is dropped to $14421 million. Due to the significant operational costs spent by the firm in 2016, the company had a negative return in 2016 which is -7%. However, beginning in 2017, the firm began to achieve a positive return on capital employed. Rio Tinto’s ROCE was 11 % in 2016, and it is climbed to 20 % in 2020. Rio Tinto earn huge profits in 2020 and it increased as compared to 2019. In comparison to the previous year 2019, ROCE has grown in 2020. It happened because, with the exception of 2019, the company’s earnings before interest and taxes have been steadily increasing. Glencore’s Return on ROCE reached 9% in 2017 but has since been steadily declining due to lower EBIT. In 2020 ROCE is fall to negative (-7%). There is a huge fall in operating profit in 2020 as compared to 2019.

Ratio Analysis: ROCE

Rio Tinto’s ROCE is better than BHP’s and Glencore’s, according to the overall analysis. Rio Tinto appears to be performing better in terms of profitability and capital efficiency. 

 

Figure 1. Return on capital employed.

Gross profit is one of the most crucial indicators of a company’s profitability and financial performance.

Except in 2016, BHP maintains a gross profit ratio of greater than 50% every year since 2017. BHP successfully utilizes its labor, raw materials, and other sources to achieve high gross profit, according to financial records. In 2020, the gross profit of BGP Group dropped. Rio Tinto’s return on gross profit ratio was 21 % in 2016, and it is currently 41 % in 2020. It occurred as a result of a rise in income and a drop or even a balance in the costs of goods sold. Glencore’s revenue will be lower in 2020 as compared to 2019, affecting the return on gross profit ratio. The gross profit margins in 2018, 2019, and 2020 are 4%, 2%, and 3%, respectively.

According to the gross profit ratio, BHP generates a high gross profit return because of its efficiency in utilizing labor, raw materials, and other suppliers. Rio Tinto also performed better in terms of gross profit ratio. 

Figure 2. Gross profit ratio

The net profit margin is a percentage that compares a company’s earnings to its total revenue. It assesses a company’s operational efficiency (CARLSON, 2020).

Revenues are expected to decline in 2020 as a result of excessive infrastructure investment, low mineral output due to labor shortages, and the potential of covid 19 epidemics over the planet. BHP’s net profit ratio will fall to 20% in 2020 as a result of this. Rio Tinto’s net profit return in 2018 was the highest in the past five years, from 2016 to 2020. Because of the impact of Covid 19, returns in 2019 fell to 16 % from 34 % in 2018. Glencore’s net profit ratio is underperforming due to a drop in sales and a rise in operating costs. In addition, the firm is dealing with a drop in coal demand in the market, covid 19 directives from the local government, low cobalt prices, as well as the expiration of licenses in its Chad oil activities (cnbc.com, 2020).

According to the ratio analysis, Rio Tinto outperforms the competition. It shows that Rio Tinto transforms its sales into profit more efficiently than its competitors.

Figure 3. Net profit ratio.

Current Ratio

The current ratio is a well-known liquidity indicator. The current ratio indicates how much “cover” the company has for each and every £1 due to it (Riley, 2022).

BHP’s current ratio is 2020 is 1.45, implying that current assets are worth 1.45 times current liabilities. However, the ratio is 2019 is greater than 1.45, i.e., 1.89 times, implying that the present ratio will decline in 2020. In 2018, the current ratio was 2.51, which was higher than it had been in the previous five years. Rio Tinto’s current ratio for 2020 is 1.80, which is greater than the current ratio for 2019, but lower than the current ratio for 2018. Glencore’s current ratio is 1.10 times in 2020, slightly higher than 1.07 times in 2019. It indicates that the present ratio has improved slightly.

Ratio Analysis: Gross Profit Ratio

When comparing the total performance of BHP, Rio Tinto, and Glencore, we discovered that BHP outperformed the others. It indicates that BHP has sufficient funds to fulfill its bills. Rio Tinto’s current ratio is doing better than BHP and Glencore in the year 2020.

Figure 4. Current ratio

Acid Test Ratio

All other assets, such as inventories, are excluded from the acid test ratio, which only indicates assets that may be turned into cash throughout one quarter. The acid-test ratio is used to determine a company’s capacity to pay existing creditors without obtaining new capital (Indeed Career Guide, 2021).

The acid test ratio of BHP was 2.16 times in 2018, but dropped to 1.52 times and 1.09 times in 2019 and 2020, respectively. It demonstrates that the company’s liquidity is dropping while its obligation is expanding. Rio Tinto’s acid test ratio is 2020 is 1.44, which is higher than in 2019. It shows that the company’s ability to pay current creditors has improved. The acid test ratio in 2018 was 1.57 times. Glencore’s acid test ratio has been steady over the previous five years as a result of its large inventory stock.

We noticed that Rio Tinto’s acid test ratio in 2020 is stronger than the others after evaluating all three firms. Rio Tinto’s financial health is good, according to this indicator. However, BHP’s total performance is significantly superior to those of its competitors.

Figure 5. Acid test ratio

Cash Ratio

The cash ratio is used to evaluate how much cash is available to meet the borrower’s interest expenses, and it also represents the cash available to the amount of interest to be paid as a ratio. If the ratio is greater than one, the firm has sufficient financial resources (Bragg, 2021).

The ratio is 1.27 times in 2019, but it falls to 0.91 times in 2020, which is not a positive indication for BHP. Total cash was $13426 million in 2020 which was $15613 million in 2019. Rio Tinto’s cash ratio has been over one for the past five years, except for 2016. Rio Tinto’s cash ratio is improved in 2020 compared to the previous year due to an increase in total cash. Glencore’s cash ratio has been below one since 2016, indicating that they do not have enough cash to meet their borrower interest obligations. In 2020, the total cash of Glencore has decreased.

According to an overall examination of all financial statements over the previous five years, we observed that only BHP has maintained a cash cover ratio of more than 1.5, indicating that BHP’s performance in terms of paying their creditors is excellent. As a result, investors could choose BHP.

Figure 6. Cash cover ratio

Assets Turnover Ratio

BHP’s asset turnover ratio has been below one since 2016, indicating that it is inefficiently utilizing its assets to generate revenues. Rio Tinto’s asset turnover ratio has been below one for the past five years. The ratio is 2020 and 2019 is 0.48. It’s because the company’s assets are growing faster than its sales, which might be a warning sign. Due to high income and low assets, Glencore’s asset turnover ratio has remained over one. In comparison to 2019, the asset turnover ratio is 2020 is lower.

Ratio Analysis: Net Profit Ratio

Only Glencore’s asset turnover ratio has been above one in the previous five years when compared to the other two corporations. This suggests that Glencore’s income is increasing as a result of its asset utilization.

Figure 7 Assets turnover ratio

Inventory Turnover

In comparison to the previous year, the inventory turnover ratio of the BHP group has dropped from 4.05 to 3.87. Because the cost of items sold in the current year has reduced, the ratio has decreased. Rio Tinto’s assets turnover ratio has also decreased to 6.73 in 2020 from 7.58 in 2019. This is due to a decrease in the cost of goods sold and an increase in inventories. If inventory management is competent, this is a negative indicator. Glencore’s inventory turnover ratio will drop by a large margin in 2020 due to a significant drop in the cost of goods sold. The inventory turnover ratio was 10.16 in 2019, whereas it was 6.30 in 2020.

According to financial statement research, Glencore has a higher inventory turnover ratio, indicating that it has stronger inventory management capabilities. Since inventories seem to be the most liquid kind of asset, a higher inventory turnover is generally desirable.

Figure 8. Inventory turnover ratio

Fixed Asset Turnover Ratio

BHP’s fixed asset turnover ratio is 0.53 in 2020, which appears to be relatively low for a mining company. Because of the fall in revenue, the fixed asset turnover ratio is low. Rio Tinto’s fixed asset turnover ratio would same somewhat in 2020 due to higher growth in total fixed assets compared to revenue. Glencore’s annual report shows that both income and total fixed assets have decreased in 2020 compared to 2019. Glencore’s fixed asset turnover ratio has also fallen to 1.81 as a result of this.

The fixed asset turnover ratio is used to calculate a company’s operating profit. Glencore has a better and greater return than the others in this scenario. However, due to the high cost of goods sold, operational costs, and other expenses, the firm did not produce as much profit as others.

Figure 9. Fixed asset turnover ratio

Only the International Financial Reporting Standards (IFRS) 16 Lease will establish the right accounting outcome (bhp.com, 2022).

Non-financial characteristics of a company, including its environmental awareness and how well it connects only with the local community, are still not covered in the accounting transactions. A financially successful corporation might be a catastrophe in other ways. Throughout a mine’s existence, all three companies, BHP Group, Rio Tinto, and Glencore, painstakingly monitor the mine’s impact on the environment and neighboring inhabitants.

Mineral reserves and resources seem to be considered the most valuable asset for mining companies. These are indeed a mining company’s most valuable economic asset. Mineral deposits are excluded from the purview of IAS 16 “Property, Machinery and Equipment” and IAS 38 intangible assets.

Intangible assets are often not included in everything as property. Instead, the costs chosen to create an intangible asset are immediately assigned to spend. Intangible assets appear on the balance sheets of all three firms.

Whenever a hedging mechanism applies for accounting treatment under IAS 39 “Financial Instruments,” the expense of hedging capital projects could always be recognized as a component of the asset cost.

After analyzing all of BHP’s, Rio Tinto’s, and Glencore’s financial statements over the previous five years, we discovered that both BHP and Rio Tinto fared better in terms of profitability and efficiency. Glencore continues to do well in terms of liquidity ratio.

According to the overall research, both BHP and Rio Tinto are recommended for investment based on profitability and efficiency. BHP and Rio Tinto both generated more revenue and profit. However, Glencore outperforms the liquidity ratio, but we do not suggest it based on total performance.

Recontamination to boost performance:

• Modular systems technologies for a diverse range of mining, such as drive and control technologies, may help you improve productivity and effectiveness. Connectivity with the most up-to-date technology can aid productivity. Significant technical advancements, such as robotics, digitalization, and digitalization, are creating a serious influence on the mining industry. Autonomous cars, computerized drilling, underground boring equipment, drones, plus sensor technologies are just a handful of the innovations transforming the industry.
• Statistical evidence and comprehensive analytic technologies enable better management and operational decisions that improve machine utilization and productivity.
• Creating proper venues will encourage responsibility and showcase managerial growth prospects. Make a plan that will aid mining companies in tackling a long-standing problem: creating efficient management.

 Conclusion

According to an analysis of BHP’s, Rio Tinto’s, and Glencore’s financial ratios and financial statements, both BHP and Rio Tinto have an excellent return on capital employed, gross profit ratio, and net profit ratio. BHP and Rio Tinto deliver a superior return based on current ratio, acid-test ratio, and cash cover ratios. Glencore has a superior inventory management system in place. 

Reference

reuters.com. (2021). BHP Group Ltd (ADR)BHP. https://www.reuters.com/. Retrieved 4 November 2021, from https://www.reuters.com/companies/BHP.

Institute of Developing Economies. (2021). Rio Tinto – AGE (African Growing Enterprises) File – Institute of Developing Economies. Institute of Developing Economies. Retrieved 5 December 2021, from https://www.ide.go.jp/English/Data/Africa_file/Company/guinea01.html#anchor1.

StockEdge. (2018). Return on Capital Employed (ROCE). StockEdge Blog. Retrieved 26 October 2018, from https://blog.stockedge.com/impact-of-return-on-capital-employed/.

CARLSON, R. (2020). What Is Net Profit Margin?. The Balance Small Business. Retrieved 23 July 2020, from https://www.thebalancesmb.com/what-is-the-net-profit-margin-ratio-393204.

cnbc.com. (2020). Glencore posts the first annual loss in four years as impairments bite. https://www.cnbc.com/. Retrieved 18 February 2020, from https://www.cnbc.com/2020/02/18/reuters-america-update-2-glencore-posts-first-annual-loss-in-four-years-as-impairments-bite.html.

Riley, J. (2022). Q&A – How is the current ratio calculated and interpreted? | tutor2u. tutor2u. Retrieved 6 January 2022, from https://www.tutor2u.net/business/blog/qa-how-is-the-current-ratio-calculated-and-interpreted.

Indeed Career Guide. (2021). What Is the Acid-Test Ratio and How Is It Calculated? | Indeed.com. Indeed Career Guide. Retrieved 10 September 2021, from https://www.indeed.com/career-advice/career-development/acid-test-ratio.

Bragg, S. (2021). Cash coverage ratio — AccountingTools. AccountingTools. Retrieved 11 July 2021, from https://www.accountingtools.com/articles/2017/5/5/cash-coverage-ratio.

glencore.com. (2021). Annual Report 2020 [Ebook]. Retrieved 6 April 2021, from https://www.glencore.com/dam/jcr:e03a8caf-f2aa-46ad-81c5-821719caf5bf/Glencore_AR20_Interactive.pdf.

Riotinto.com. (2022). Annual Report 2020. Riotinto.com. Retrieved 6 May 2021, from https://www.riotinto.com/-/media/Content/Documents/Invest/Reports/Annual-reports/RT-Annual-report-2020.pdf?rev=6df52113b92840648d05a4ac9e4cc1d8.

bhp.com. (2022). Annual Report 2020 [Ebook]. Retrieved 6 January 2022, from https://www.bhp.com/-/media/documents/investors/annual-reports/2020/200915_bhpannualreport2020.pdf.