Analyzing The Financial Position And Debt Equity Ratio Of BHP Billiton Limited And South 32 Limited

Owner’s Equity and Share Capital

BHP Billiton Limited, world’s largest mining company is listed under Australian stock exchange and deals in mining, metal and petroleum industry. Also listed under New York stock exchange, London stock exchange, Johannesburg stock exchange and Financial Times stock exchange 100 operates globally and employs more than 65000 people. It is the third largest revenue earning company in Australia (Alsagoff, 2010).

The other company analysed in this report is South 32 Limited which is listed under Johannesburg stock exchange and London stock exchange along with the Australian stock exchange deals in mining and metallurgy. The chief producer of zinc, nickel, aluminium, alumina, silver, thermal coal, lead, manganese and cooking coal employees more than 15000 people.

The money invested by the shareholders in the company is known as Owner’s Equity which has higher returns in comparison to debt capital and is more risky. Distributable to the shareholders this equity contains preference shares, equity shares, dividend, net profit and different types of reserves (Giacomo, et al., 2013).

Share Capital: The money invested by the owners of the company is known as share capital. These are generally traded in the market in the form of small denominations called shares. An overall decrease in the shares of South 32 Limited was seen due to the buyback of shares in 2017. The share capital of BHP Billiton Limited remained same throughout the analysed period.

Retained Earnings: The total undistributed profits of the company which can be used by the company for dividend distribution is known as retained earnings. South 32 Limited paid dividends for both 2016 and 2017 although the company faced huge losses in 2016 which depreciated the already negative balance of retained earnings but the same increased in 2017 because of the accumulated profits of $1231 Mn. BHP Billiton also paid dividend in 2016 in spite of incurrence of losses which led to an overall decrease in the balance of retained earnings. The company earned profits in 2017 and also paid dividends from the same (Durtschi, 2004).

Reserves: Consisting of forfeited employees share awards, comprehensive income of the year and employee share awards net of employee contribution and unexercised awards, reserves are the undistributed profits of the company. Due to awards and losses in comprehensive income statement, it decreased drastically in 2017 for BHP Billiton Limited but remained almost constant for the remaining period. It also remained constant for South 32 Limited throughout the analysed period (Antle & Smith, 1985).

Retained Earnings and Reserves

Treasury Shares: Mainly allotted in the form of ESOPs or dividend reinvestment plan to the employees, Treasury shares can be purchased by ESOP trusts which later on pays to the employees. Treasury shares has decreased for BHP Billiton Limited over the past 3 years due to which exercise of option by the employees is lower than purchases made by ESOP trusts (Coate & Mitschow, 2017).

Non- Controlling Interest: Shareholders having no control over the decisions of the company and owns less than 50% shares are also known as Minority interest whose share of profits is calculated on the basis of net assets position. The minority shareholder of South 32 Limited is very low at $1 Mn. whereas there is proportional increase in Non- Controlling Interest as that of controlling interest and other shareholders.

Analysis of 3 years debt equity position of the company shows that the companies have maintained a lower debt proportion to protect the interest of shareholders in the company. South 32 Limited has maintained a lower debt proportion in debt equity ratio as shown below:

To give an idea of the line items an extract of cash flow statements of both companies is provided below along with changes made in them:

Cash Flow from Operating Activities: Items that directly relates to the operations of the company such as dividend received from other companies, payment to creditors, receipts from customers, income tax paid management, interest received and paid, etc. are recorded here along with changes in current assets and liabilities of the company (Abdullah & Said, 2017). For BHP Billiton Limited the operating cash flow was positive throughout the analysed period. An increase in revenue from operation led to a net inflow from discontinued operations in 2015. A positive trend in net cash inflow from operating activities is seen for South 32 Limited but the magnitude was very less making BHP Billiton Limited the industry leaders (Mubako & O’Donnell, 2018).

Cash Flow from Financing Activities: All the finances arranged by the company to do business such as issue of share capital, payment of dividend and interest, issue of preference shares and debt, redemption of shares, etc. are recorded here. In 2017, BHP Billiton Limited repaid most of the debt and interest bearing liabilities of $ 7239 Mn. raised in 2016. Although the company had a constant inflow and outflow throughout the analysed period, a fall in the dividend payment for the company was seen for this period. South 32 Limited raised debt, paid dividend and bought back equity shares in 2017 which was missing in 2016.

Treasury Shares and Non-Controlling Interest

Cash Flow from Investing Activities: All Investing activities such as purchase sale of Investments, Property, Plant and Equipment, Investment in Joint Ventures, Entities and Subsidiaries, etc. are recorded here. For BHP Billiton Limited, inflow from sale of PPE and exploration expenditure has increased during the years with a fall in the purchases of plant and equipment and property (Mock, et al., 2018). South 32 Limited invested $12734 Mn. as a part of BHP Demerger in 2015 in subsidiaries, operations, etc. but investment in PPE has decreased. There was a huge fall in the cash outflow from Investing Activities from $15165 Mn. to $454 Mn. in 2016 when compared to 2015.

The below table shows the 3 years comparative analysis of both the companies:

The comparative analysis of cash flow statement of BHP Billiton Limited shows a fall in the cash outflow from investing activities to $4161 Mn. in 2017 whereas an increase of $6000 Mn. was seen in cash inflow from operating activities. The company paid off most of its debts in 2017 resulting in a massive increase in cash outflow from financing activities. The net cash flow of the company was positive in 2016 and 2017 in comparison to a negative inflow in 2015. The company has a higher cash inflow and outflow in comparison to South 32 Limited, although the later do not have any negative cash flow during the analysed period. South 32 Limited invested a huge amount in entities and subsidiaries because of BHP Demerger and raised a large amount of equity shares in 2015 which resulted in a negative cash inflow in Investing and Financing activities with operating activities contributing majorly to cash inflows (Lessambo, 2018).

The other comprehensive income statement of both the companies reports the following items:

BHP Billiton Limited: Remeasurement of gains and losses in medical and pension schemes cannot form part of income statement whereas items such as income from investments, cash flow hedges, exchange fluctuations because of translation of foreign operations, etc. may be reclassified to the income statement.  

South 32 Limited: Income from sale of investments can be included in consolidated income statement if it can be taken to equity with expenses and tax benefit on the same. But items such as actuarial gains, equity accounted investments and tax benefit and losses on other comprehensive income cannot be included in consolidated income statement (Kangarluie & Aalizadeh, 2017).

The other comprehensive income statement does not pertain to the normal operating business of the company due to which it is not reported in the profit and loss account or the income statement of the firm. This includes those items which can be reclassified during the year and is reported separately as per the standards mentioned in IFRS.

Debt Equity Ratio

Comparative analysis of comprehensive income statement of both the companies is shown below:

The unrealised profits hidden in these items would have been recorded and distributed amongst the shareholders if these items would have been included in the normal income statement of the companies, thus resulting in lower profit distribution to the shareholders.

The above items includes changes in the fair value of assets and liabilities, revaluation of assets, actuarial gains and losses, retirement benefits, hedging gains and losses which does not relates to the normal business operations of the entity and are not being directly managed and monitored by the Managers. So, these items should not be taken into consideration for evaluation of managers (Garon, 2018).

The tax expenses of both the companies as per the latest financial statement is as follows:

South 32 Limited had a tax expense of $ 393 Mn. in 2017 compared to $ 4100 Mn. for BHP Billiton Limited.

BHP Billiton Limited has a higher effective tax rate in comparison to South 32 Limited for the entire period. The effective tax rate for BHP Billiton Limited was 45.5% in 2015, 35.8% in 2016 and 39.7% in 2017, whereas the same for South 32 Limited has been 32%, 36.6% and 30.7% respectively (Charles H, et al., 2015).

The deferred tax Assets and Liabilities are the permanent and temporary differences between taxes calculated as per tax base and as per accounting base. These are reported in the financial statements of the company and can be used in the future years. The deferred tax assets and liabilities, shown under current assets and current liabilities respectively can be set off against each other. Reasons for formation of deferred tax assets and liabilities are as follows:

Incomes and losses which are disallowed under income tax rules but are recorded in the accounting income statement.

Revenues recognised in one period are different for accounting and tax purposes.

Different tax base of assets for taxation and accounting purposes (Bumgarner & Vasarhelyi, 2018).

Recorded in the balance sheet as per the reporting requirements of IFRS and GAAP.

Many permanent and temporary differences were found due to changes in tax bases which led to several changes in deferred tax assets and liabilities of both the companies. The deferred tax assets of South 32 Limited decreased because of lower tax paid in the last 2 years with deferred tax liabilities remaining almost constant for the entire period. For BHP Billiton Limited, there was a fall in the deferred tax liabilities of the company for the last 3 years and it is reverse for the deferred tax assets during the same period.

Cash Flow Statements

The cash tax paid by BHP Billiton Limited was $ 4373 Mn. in 2015 which decreased to $ 2286 Mn. and $ 2585 Mn. in 2016 and 2017 respectively. Whereas cash tax paid by South 32 Limited was $ 127 Mn. in 2017 which was much higher than $ 52 Mn. paid in 2016 and a refund of $ 1 Mn. in 2015.

The cash tax rate of South 32 Limited has been 0.3% in 2015 which increased to 3.4% in 2016 and further to 7.8% in 2017. Whereas for BHP Billiton Limited it decreased constantly from 54.3% in 2015 to 31.5% in 2016 and 25% in 2017.

The reason behind the huge difference in the cash tax rate for both the companies is availability of benefit of deferred tax assets to South 32 Limited because of accumulated losses from 2015 and 2016 and the difference in size of operation of both the companies. Cash tax rate is the tax computed after adjustments of deferred tax assets and liabilities and other tax adjustments whereas as per income tax laws the book tax rate of 30% which is same for all the companies for all the years is levied straightaway (Andiola, et al., 2018).

References

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