Profitability Ratio
The mining industry is one of the most crucial industries in the world which tends to provide necessary raw materials for the functioning of the different industry. Both the companies operate in the mining industry and aim to find profitable natural resources for mining. They tend to provide mining tools and heavy machinery to operate in the industry and provide the necessary excavation expertise to mine the minerals and metals. The companies tend to operate in the mining industry however the materials which is mined by both the companies is different. BHP Billiton was founded in the year 1885 and the headquarters of the company is in Melbourne. BHP Billiton mines iron ore, aluminium, uranium and some other metals which are crucial to other industries for operations (BHP 2022). Rio Tinto the competitor of BHP was founded in the year 1864 and has two headquarters around the globe. The company is listed in two stock exchange one being in London and the other in Melbourne Australia. Rio Tinto on the other hand focuses to mine precious metals and products apart from some industry intensive metals (Rio Tinto 2022). The operating memorandum for both the companies is the same, but the material which is mined by both the company is different. The operating activities of the company is mining and excavation of metals from the earth.
Ratio analysis is performed for analysing the financial performance of the company. Ratio analysis is used by external analysts for ascertaining various aspects of the company like liquidity, profitability, solvency, Efficiency And Performance Ratio.
Profitability ratio are the financial ratios which are used for ascertaining financial performance of the company at the end of accounting period. Profitability ratios helps in determining how efficiently company is making profit from its operations. Under profitability ratio operating profit and net profit margin has been ascertained.
Operating profit margin is a type of profitability ratio which helps in ascertaining operating profit and revenues that has been generated from its operations. It is generally shown as a percentage (Langemeier and Yeager 2018).
Net profit margin is a type of profitability ratio which shows relation of net profit and net sales. It is also expressed as percentage. This ratio is calculated for helping investors in determining whether management of company will be able to earn profit from sales and it also helps in determining how efficiently operating cost are being managed (Nariswari and Nugraha 2020).
Based on calculation it has been seen that operating profit margin of BHP in 2020 was 33.59% and in 2021 it increased to 42.60% whereas operating profit margin of Rio Tinto in 2020 was 37.72% and in 2021 it increased to 46.96% which means that both the companies are managed efficiently and there is less risk involved in the company (Operating Profit 2022). Based on net profit margin it has been seen that NP of BHP in 2020 was 20.35% and in 2021 it increased to 22.12% whereas NP of Rio Tinto in 2020 was 23.31% and in 2021 it increased to 35.55% which means that both the companies are converting its sales into actual profit efficiently (Yasa and Wirawati 2020).
Operating Profit Margin
Therefore, as the operating profit and net profit ratio of Rio Tinto is higher in comparison with BHP so it can be said that financial health and performance of Rio is better.
Efficiency ratio is calculated for analysing how efficiently company is employing its resources for producing income. For measuring current and short-term performance of company efficiency ratios are used by analysts. Under efficiency ratio non-current assets turnover and return on capital employed has been ascertained.
Non-current assets turnover ratio is a type of efficiency ratio which is used for measuring annual revenue earned per unit of non-current assets. In other word, this ratio is used for determining how efficiently business is using non-current assets for generating revenue (Lubyanaya et al. 2016).
Return on capital employed is a type of ratio which shows how efficiently company is generating profit from its capital. It is an important ratio for investors as they use it while screening for companies to invest (Shrotriya 2019).
Based on calculation it has been seen that non-current asset turnover of BHP in 2020 was 0.51 and in 2021 it increased to 0.74 whereas non-current assets turnover of Rio Tinto in 2020 was 0.58 and in 2021 it increased to 0.81 which means that both the companies are utilising its non-current assets efficiently and there is less risk involved in the company. Based on return on capital employed it has been seen that ROCE of BHP in 2020 was 1.07 and in 2021 it increased to 1.39 whereas ROCE of Rio Tinto in 2020 was 0.93 and in 2021 it increased to 1.30 which means that both the companies have large amount of profit that can be reinvested in the business for providing benefit to the shareholders (Lisek, Luty and Zio?o 2020).
Therefore, as the non-current assets turnover and ROCE of Rio Tinto is higher in comparison with BHP so it can be said that financial health and performance of Rio is better.
Performance ratio is calculated for ascertaining how efficiently and effectively company is using its resources for generating revenue. This ratio also helps in determining growth of investment of investors. Under performance ratio earnings per share and price earnings ratio has been ascertained.
Earnings per share is a type of ratio which is used for measuring how effectively company is earning profit that is it shows how much money company is making for each share (Jasman and Kasran 2017). It is widely used for ascertaining corporate value.
Price earnings ratio is a type of ratio used for measuring the current share price of company in relation to earnings per share. It is considered as most important metric for valuing stocks. This ratio shows whether stock at its current price is cheaper or its expensive (Houmes and Chira 2015).
Based on calculation it has been seen that earning per share of BHP in 2020 was 1.57 and in 2021 it increased to 2.24 whereas EPS of Rio Tinto in 2020 was 6.04 and in 2021 it increased to 13.03 which means that both the companies are earning huge profit for distributing it to shareholders and profitability of company is better (Arsal 2021). Based on price earnings ratio it has been seen that PE ratio of BHP in 2020 was 32.85 and in 2021 it decreased to 23.12 whereas PE ratio of Rio Tinto in 2020 was 19.45 and in 2021 it decreased to 9.01 which means that in both the companies the investors are paying less per dollar of overall earnings of company. Hence, lower PE ratio is better for the company as well as for investors (Baird, Dodd and Middleton 2020).
Net Profit Margin
Therefore, as the EPS of Rio Tinto is more and PE ratio of Rio is less in comparison with BHP so it can be said that financial health and performance of Rio is better.
Liquidity ratio is calculated for ascertaining the ability of company in repaying its debt obligations when they become due. This ratio shows how efficiently company is converting its current assets into cash so that it can meet its liabilities. Liquidity ratio plays an important role in company’s financial stability and credit ratings. Under liquidity ratio current ratio and quick ratio has been ascertained.
Current ratio is used for measuring financial strength of the company. This ratio measures how efficiently company is maximising liquidity of current assets for settling debt and payables (Nuryani and Sunarsi 2020). In other words, this ratio measures the ability of company in meeting its debt obligations that are due in a year.
Quick ratio is considered as the best ratio for measuring liquidity of company as this ratio is more conservative in comparison to current ratio. This ratio measures the capability of the company in paying its short-term liabilities by having assets that are convertible into cash (Anggraeni 2015).
Based on calculation it has been seen that current ratio of BHP in 2020 was 1.45 and in 2021 it increased to 1.63 whereas CR of Rio Tinto in 2020 was 1.46 and in 2021 it increased to 1.50 which means that both the companies have the capability of paying its debt obligations as they have large proportion of short-term assets. Based on quick ratio it has been seen that QR of BHP in 2020 was 1.17 and in 2021 it increased to 1.36 whereas QR of Rio Tinto in 2020 was 1.46 and in 2021 it increased to 1.50 which means that in both the companies have more quick assets than current liabilities and both the companies are converting its assets into cash quickly.
Therefore, as the current ratio and quick ratio of Rio is high in comparison with BHP so it can be said that financial health and performance of Rio is better.
Solvency ratio are calculated for measuring how efficiently cash flows of company are covering its debt. In other words, this ratio helps in assessing the ability of the company for meeting long-term financial obligations. Under solvency ratio gearing ratio and debt ratio has been ascertained.
Gearing ratio is a type of financial ratio which is used for comparing form of owner’s equity or funds borrowed by company. This ratio is used by investors for measuring financial leverage of the company (Jufrizen et al. 2019).
Debt ratio is a type of ratio used for measuring the extent of leverage of the company. This ratio measures the ability of the entity to pay for that debt. It is a leverage ratio which shows the percentage of assets financed with debt. This ratio is used by creditors for determining the amount of debt in the company (Dwipayana and Suaryana 2016).
Efficiency Ratio
Based on calculation it has been seen that gearing ratio of BHP in 2020 was 0.74 and in 2021 it decreased to 0.66 whereas GR of Rio Tinto in 2020 was 0.65 and in 2021 it decreased to 0.60 which means that both the companies rely on equity for financing and risk is also low in the company. Both companies have low amount of debt to service. Based on debt ratio it has been seen that DR of BHP in 2020 was 0.51 and in 2021 it decreased to 0.49 whereas DR of Rio Tinto in 2020 was 0.47 and in 2021 it decreased to 0.45 which means that in both the companies are less leveraged and risk is also low in both the companies. It also means that both the companies have stable business and they have the potential of longevity.
Therefore, as the gearing ratio and debt ratio of Rio is lower in comparison with BHP so it can be said that financial health and performance of Rio is better.
Conclusion
Based on the above analysis it can be concluded that ratio analysis is an important tool for measuring financial health and performance of company. Based on analysis it can be said that profitability, efficiency, performance, liquidity and solvency of Rio Tinto is better in comparison to BHP. Hence, BHP needs to focus on improving financial performance so that it can achieve growth and success and it can be profitable in future.
Reference
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