Analysis Of Financial Performance Of BHP Billiton And Caltex Limited: Investment Advice

Operation and comparative advantages

There are the certain requirements which are to be followed by the management in order to report the financial statements in front of the investors and the shareholders. The analysis of the financial statements is beneficial if it is compared either in the form of year to year comparison or in the form of comparison with the other company operating in the same industry. In order to take the decision of the investment this report presents a proper analysis of the ratios of the past three years, the market performance, the price movements have been disclosed and the dividend policy have been recorded equally. The two companies that are chosen for this purpose are the BHP Billiton and the Caltex limited (Vogel, 2014).

Operation and comparative advantages 

BHP Billiton

An Australian Multinational Company named BHP Billion which is registered under Corporation Act 2001, which is called as an Anglo-Australian multinational corporation where the basic role of the company is to acquire the natural resources. The headquarters of the company is situated in Melbourne which deals in mining and in petroleum products of the company. The company was founded in the year 1885, where the BHP Billion became the largest mining company in the world on the basis of its market capitalisation. The company is listed in the Australian stock exchange, London Stock Exchange as per the name mentioned by the company such as BHP. The basic function of the company is to deal in the ore, mining, smelting and refining nickel.

The company has been involving in over 650 corporations which functions in the mining and development of natural resources of more than 100 countries in the world. Moreover, the company has a wide and different range of asserts which helps in mining and smelting of nickel. As per the financial report of the company, the company has issued dividends which are up of value of 118 US cents, where the earning per share of the company is more than 69.9 US cents. The financial position of the company also shows that the company has reduced its debts from $10.9 US billion dollars in the year 2018.

Caltex Limited

Caltex limited is one of the Australian multinational companies which is the subsidiary of the Chevron Corporation. The company came into existence in 1879 and it has served almost 180 countries. The company is engaged in the business of the transport, chemicals manufacturing and sales. The oil and the natural gas apart from the exploration and production is also included. The net income of the company is 620 billion and the revenue reported by the company is 21072.

Calculation of the performance ratios

It is a tool which is used to measure the financial position of the company. The tool analyses the financial statements of the company. Such tool helps in preparation of various ratios such as profitability ratios, liquidity ratios, gross turnover ratios etc. As per the case of Caltex Limited, it can be observed that the profitability ratios and all other financial analysis ratios are used to generate the financial analysis of the company. The following are the various types of financial ratios (Olson, 2015).

BHP Billiton

Profitability ratios

It is a type of financial ratio which is used to analyse the profitability of the company Such type of ratios is used by the financial experts, managers, and the financial analyst in order to calculate the profitability of the company.  Such method of the ratio is used in calculation of profit generation abilities of the company (Millar, Hepburn, Beddington and Allen, 2018).

Net profit margin

From the above table it can be analysed that the profitability ratios of the BHP Billiton and the Caltex Limited is recorded. The net profit margin of the BHP is 15.38% which is higher in comparison to the Caltex Limited which is 2.94% only in the year 2017. The BHP Billiton revenue decreased and along with that the cost of goods sold also decreased and in case of the Caltex Company the revenue is 17619 in the year 2016 and the cost of goods sold is 31880 which created the loss 14261. The company is not able to earn the enough revenue to set off the expenses of the year. Therefore form the above results it can be included that the client shall invest the funds in the BHP Billiton in comparison to the Caltex Limited (Lee and Eom, 2016).

Return on Assets

The return on assets of the company is basically the idea of determining the financial performance of the company in respect to the assets purchased for generating the revenue and getting the return for the efforts undertaken. The above table reflects that the return  on Equity of the BHP Billiton and the Caltex Limited are 8.84% and 13.58% respectively. Under this scenario the situation changed altogether as the return on assets is higher in terms of the ratios of the Caltex Company in comparison to the BHP Billiton. The company is utilising the assets efficiently as well as effectively. Henceforth on the basis of the return on the assets the client shall proceed for the Caltex Limited. This ultimately boosts the performance of the company (Sari, Nurlaela and Titisari, 2018).

Return on Equity

The return on equity is again the factor of measuring the financial performance as well as taking the decisions on the basis of the analysis whether to invest in the shares of the company or not. The BHP Billiton is having the return on equity at 5.14% and the Caltex Limited is having at the rate of 10.2% which is double of what the BHP Billiton is having. The return on equity is enhanced for the Caltex Limited due to increase in the number of shares and outsource of more shares. From the results thereby the Caltex Limited is a sound option to go with in case of the investment (Lee, Lee and Lee, C. F. (2009).

Capital structure (leverage) ratios

The capital structure ratios determine the capital portions and the segregated version of the capital in the form of debt and equity (Barkan, Bintliff and Whisner, 2015).

It is one of the most important tools in calculation of the financial position of the company. Such ratios are very useful in calculation of long-term solvency position of the company. A high D/E ratio results in the high risks which are faced by the company as the company is relied upon the financial borrowings from the outsiders. A low D/E ratio proves that the company is on low financial risks (Jenter and Lewellen, 2015).

Caltex Limited

The debt to Equity ratio of the company is 0.50 in the year 2015 and in case of the Caltex Limited the company posed a debt to equity ratio in the year 0.14. The debt to equity ratio of the companies is low but in case of the BHP Billiton the company still has an edge over the Caltex. The debt component shall be increased to get the benefit of the tax (Krantz and Johnson, 2014).

Interest Coverage Ratio

It is a type of the ratio which shows the interest paying capabilities of the company. Such ratios are very useful in calculation of interest paying capability of the company. A high interest coverage ratio is useful for the company where such ratio is useful to take various financial decisions of the company whether the company is capable enough to pay the interest rates of the loan which is applied by the company (Vogel, 2014). 

Interest coverage ratio of the Caltex Company is better as it determines how well the company is able to pay the interest expense on its outstanding debt. The Caltex company reported the interest coverage ratio at 12.33 for the financial year 2017 and it has increased form 10.96 in the previous year and 9.02 in the year 2015, whereas the BHP showed a negative ratio in the year 2016 at -8.56 and it increased to 10.14 in the year 2017.

Liquidity ratios

It is a type of ratio which is used in calculating the liquidity of the company. Under this type of ratio analysis, the current asserts of the company are compared with the current liabilities of the company. Such type of ratio analysis helps in finding out the liquidity position which is availed by the company which can be used for the payment of creditors of the company (Jenter and Lewellen, 2015).

The current ratio of the company us 1.84 in the year 2017 and has increased from 1.34 in the year 2016. In case of the Caltex Limited the current ratio is 1.16 which is lower than the current ratio of the BHP Billiton and henceforth, the client shall definitely go for the BHP Billiton option as it would convert the assets into liquid form more easily.

Quick ratio

Under this type of ratio, a quick analysis of the company can be done whether the current liabilities of the company can be paid through the quick funds of the company. Quick funds are the funds which could compensate the payment of current liabilities. Such payment of quick liabilities could be done through a quick payment of cash to the creditors of the company (Jenter and Lewellen, 2015).

The Quick ratio of the company is 1.49 in case of the BHP Billiton and the 0.33 in case of the Caltex. The liquidity position of the CALTEX is low and therefore the company needs to improve the ratio. The assets are not utilised properly and ratio is low. Therefore it can be interpreted from the results that it is better to invest in the BHP Billiton rather than Caltex Limited (Gitman,  Juchau and Flanagan, 2015)

Calculation of the performance ratios

Share prices movements

The graph of the BHP Billiton and mirrors the cost moving approach as opposed to the normal returns of the S&P 200 All Ords Index. The pattern lines set on the graph obviously features that the normal return of the BHP Billiton Company never crossed the normal return of the S&P 200. At first the organization was performing superior in comparison to the normal returns of the S&P, nonetheless, in the long stretch of May 2016 the organization saw a positive record in contrast to the average return on the S&P 200. The organization needs to focus on the average return of the S&P 200 and based on it shall work to bring the price in the range. Subsequently on the inspirational viewpoint it very well may be presumed that the organization needs to take a shot at the value developments and the costs are specifically relative for this situation (Newman., 2016).

Caltex limited

In the chart the S&P 200 is overlapping the price movements of the Caltex Company. The company is having a direct relationship between the S&P 200 and the Caltex average return. Only in the January 2015, the company’s returns went above the S&P 200. Rest apart the company is below the S&P return only. Further the company showcases the direct relationship because the average return of the Caltex as it is totally dependent on the market performance and hence it is totally opposite of what the BHP Billiton Company does. Further in case of the above two scenarios the price movement is still and static until the fluctuations seen in the BHP Billiton company. Therefore the client should select the Caltex Limited for the investment purpose as there is an assurance of the returns (Acapm, 2018).

Factors affecting the share price BHP Billiton

The stock seems to be fairly valued at the moment of the recording of the stock through the valuation model. The trading is around 3.09% below the intrinsic value and therefore the current market trends suggest that if the investor or the client wants to purchase the BHP Billiton shares this is the right time. Further there are certain factors which influence the price of the shares which are outlined below (Newman., 2016).

Resilient commodity prices: The share price of the BHP Billiton affects by the fact that there is a core dominance of the commodity prices. It continues to strengthen the market share of the company and hence it has a greater impact on the prices (Newman., 2016).

Dividends : If the elevated prices of the commodity grows and at the same time BHP Billiton continues to reduce the costs across its business, BHP could remain in the better place and such move is likely beneficial and accepted by the investors and the shareholders.

Caltex Limited

Again the price fluctuation reason in case of the Caltex Limited is the removal of the Chevron from the share register typically increases the Caltex’s shares and arguably opens it up for the purpose of the merger and acquisition activity (Llewellyn, 2016).

Profitability ratios

The drop in the share price has regularly led to the Caltex stock take a curve towards the attractive pricing strategy. The dividend yield posts the theories of the Chevron and its exit has been amazing. This happened because the investors are set to gain an advantage from the release of franking credits, the major cause of building up due to Chevron (Acapm, 2018).

Beta values

The beta values of the BHP Billiton and the Caltex is 1.20 and the 0.43 respectively and the expected return of the company is 6.20% and 5.43%.

Dividend plays an important role in the compounding of the returns in the long term and also forms the sizeable part of the investment returns. When analysing the past records the BHP Billiton is giving the returns to its shareholders with a yield of 2.9%. Also the current trailing pay-out to fall ratio is 71.4% of the earnings, which records a dividend of 4.8%. The board implemented the Dividend Reinvestment Plan for implementation for the final dividend in the year 2018 (Summers, 2018).

The dividend policy of the BHP Billiton continues to raise its dividend through the even the yield of the dividend is very high. The miner’s shares are currently trading on 10% fully franked dividend yield, or 14.3%. This escalated upside when grossed up for the franking credits. Also in the shares have been marked up by 6% or 48.1 per share to 746.9 per share following the numerous numbers (Dividens.com, 2018). The group in July sold its US onshore oil and shale gas business to energy giant the BP and the merit energy for the amount of the 10 million. In total the group paid the dividend of the $6.3 billion which is also inclusive of the $1.8billion above the minimum pay out policy (Dividens.com, 2018).

On 28^th August 2018 the Caltex Limited announced the financial results for the six months ending 30^th June 2018. The interim dividend paid by the company is 57 cents per share which is fully franked and can be cashed as required. The company also represents the pay-out ratio of 50.3%. The board reviews the policy and the Caltex Limited intends to pay the total dividends for each section and the record payment dates are 11^th September and 5^th October 2018 (Acapm, 2018).

Recommendation letter

Dear Client,

This is to inform you that as per the comparative analysis undertaken of both the firm such as the BHP Billiton and the Caltex Limited it can be inferred from the figures that the profitability position of the Caltex Limited is much better than the BHP. The leverage ratios of the BHP company is low in terms of the ICR, however the Debt to Equity ratio is sound in case of the BHP so there is a mixed result (Jenter and Lewellen, 2015). Lastly looking at the liquidity position of the company the BHP is sound. Moreover in terms of the price movements the BHP is the sound partner and according to the CAPM model the beta value of the BHP is high and so are the returns at 6.20% in comparison to the 0.43 beta value of the Caltex and the expected return being the 5.43% which is lower than the BHP. Hence in overall scenario the BHP is performing better and the company can expect the good returns if the investment is made.

Conclusion

From the above analysis it can be deduced that the crucial ideas and the monetary investigation of the organization is equally necessary to get a comprehension of how the organization is performing from each edge and accordingly the examination of the ratios and price movements have been taken to shape a hold. This won’t just help the financial specialists and the investors in settling on the choice whether to contribute hold or sell the shares however they will likewise know about any dynamic advances or changes that are to be taken by the organization which will assist them with having the future and the long term benefits.

References

Acapm, (2018) 3 reasons now could be the time to buy Caltex Australia Limited 

Barkan, S.M., Bintliff, B. and Whisner, M., (2015) Fundamentals of legal research. United States: John and Wiley sons.

Dividens.com, (2018) BHP Billiton: Dividend Policy in Focus

Gitman, L.J., Juchau, R. and Flanagan, J. (2015) Principles of managerial finance. Australia: Pearson Higher Education AU.

Jenter, D. and Lewellen, K. (2015).CEO preferences and acquisitions.The Journal of Finance, 70(6), 2813-2852.

Kimmel, P. D., Weygandt, J. J., and Kieso, D. E. (2010) Financial accounting: tools for business decision making. New Jersey: John Wiley and Sons.

Krantz, M., and Johnson, R. R. (2014) Investment Banking for Dummies. New Jersy: John Wiley and Sons.

Lee, A. C., Lee, J. C., and Lee, C. F. (2009) Financial analysis, planning and forecasting: Theory and application. Singapore: World Scientific Publishing Co Inc. California: Routledge.

Lee, J.Y. and Eom, J.G., (2016) Analysis of Corporate Recruitment through ser-M Model: Case Study of GS Caltex.  16(3), pp.181-194.

Llewellyn, K.N., (2016) The common law tradition: Deciding appeals United States of America: Quid Pro Books.

Millar, R.J., Hepburn, C., Beddington, J. and Allen, M.R., (2018) Principles to guide investment towards a stable climate. Nature Climate Change, 8(1), p.2.

Newman., R. (2016) 3 ways the BHP Billiton Limited share price could go higher in 2017

Nikolai, L. A., Bazley, J. D., and Jones, J. P. (2009) Intermediate Accounting. USA: Cengage Learning.

Olson, D.M., (2015) Democratic Legislative Institutions: A Comparative View: A Comparative View. California: Routledge.

Sari, R.K., Nurlaela, S. and Titisari, K.H., (2018) The Effect of Liquidity Ratio, Profitability Ratio, Company Size, and Leverage on Bond Rating in Construction and Real Estate Company. In PROCEEDING ICTESS (Internasional Conference on Technology, Education and Social Sciences).

Summers., L. (2018) What Does BHP Billiton Limited’s (ASX:BHP) Share Price Indicate

Vogel, H.L. (2014). Entertainment industry economics: A guide for financial analysis. New York: Cambridge University Press.

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