Share Price Analysis
This report reflects the financial analysis of BHP Billiton Company. There are several financial tools have been used to analysis the financial performance of BHP Billiton Company such as share price analysis, ratio analysis, bottom up analysis. It is analysed that if investors wants to invest their money in particular company then they should use proper analysis methods before investing their capital. It will help them to create value on their capital.
BHP Billiton Company is mining and Petroleum Anglo-Australian Multinational Company which has been running its business on international level. The Headquarter of company is in Melbourne, Victoria, Australia
The present CEO of company is Andrew Stewart Mackenzie (BHP Billiton Company, 2015).
Owner of company
Governance structure
The governance structure of BHP Billiton Company is public listed company having its shares listed on domestic and international level (Zhu, 2014).
This ratio analysis is used to establish relation between two factors to identify the financial performance of company (BHP Billiton Company, 2015).
Calculation of ROA and ROE
|
BHP Billiton Company |
||||
|
Particulars (Amount in Million |
2014 |
2015 |
2016 |
2017 |
|
AUD$ |
AUD$ |
AUD$ |
AUD$ |
|
|
EBIT |
22,236 |
8,056 |
-7,259 |
10322 |
|
Interest |
617 |
418 |
848 |
1018 |
|
Net profit |
13,832 |
1,910 |
-6,385 |
5,890 |
|
Total Assets |
1,51,413 |
1,24,580 |
1,18,953 |
1,17,006.00 |
|
Total Liabilities |
72,270 |
59,812 |
64,662 |
59783 |
|
Shareholders’ Equity |
79,413 |
64,768 |
54,290 |
57,258.00 |
Computation of Return on assets
|
1. Rate of Return on Assets |
||||
|
2014 |
2015 |
2016 |
2017 |
|
|
A. Net income |
98 |
30 |
61 |
12 |
|
B. Total assets |
1,933 |
1,887 |
1,868 |
1,879 |
|
(A/B) |
5.07% |
2% |
3% |
1% |
Interpretation
The return on total assets of company has decreased to 5% in 2017 which is less than 4% from the return on assets of company as compared to 2014 data.
Computation of Return on equity
|
2. Rate of Return on Equity |
||||
|
2014 |
2015 |
2016 |
2017 |
|
|
A. Net income available to equity shareholders. |
13,832 |
1,910 |
-6,385 |
5,890 |
|
B. Shareholder’s Equity |
79,413 |
17,981 |
54,290 |
57,258.00 |
|
(A/B) |
17.42% |
10.62% |
-11.76% |
10.29% |
Interpretation
It is evaluated that return on equity of company has went down to 43% in 2017 which is 9% lower than the data shown four year back. It is not good indicator as company has reduced the earning of its investment since last four year (Brigham and Ehrhardt, 2013).
Computation of Debt to equity
|
3. Debt Ratio |
||||
|
2014 |
2015 |
2016 |
2017 |
|
|
A. Total Liabilities |
72,270 |
59,812 |
64,662 |
59783 |
|
B. Total assets |
1,51,413 |
1,24,580 |
1,18,953 |
1,17,006.00 |
|
(A/B) |
48% |
48% |
54% |
51% |
Interpretation
The debt equity ratio of company has gone up to 51% in 2017. However, with the decrease in the profitability, it is not good indicator. Company should have not increased its financial leverage with the decrease in its profitability.
Proving the equation
This equation is done with a view to satisfy both sides of formula.
|
Providing equation |
2014 |
2015 |
2016 |
2017 |
|
Net profit After tax/OE |
0.17418 |
0.029489872 |
-0.1176 |
0.10287 |
|
EBIT/TA*NPAT/EBIT*TA/OE |
0.17418 |
0.029489872 |
-0.1176 |
0.10287 |
(Please see the excel sheet for the proper calculation)
This equation above given is equivalent to each other’s so it is proofed.
Comparison of share price changes of BHP Billiton Company with the share price movement of all ordinary index
It is analysed that BHP Billiton Company has high ups and down in its share price. It is observed that movement of share price of BHP Billiton Company is highly dependent upon the profitability and financial leverage of company. In 2015, company had 20% increment in its share price. On the other hand, 2016 company faced lower down its share price due to sluggish market condition. (Yahoo finance, 2017). Therefore, it could be inferred that company has maintain stable market price (BHP Billiton Company, 2017).
Ratio Analysis
In 2017, Company has lower down its profitability and efficiency of the business which has reduced its share price.
1Company has less amount of return as compared to market index due to its high investment in other diversified business sector (BHP Billiton Company, 2017).
The computation of the beta has been computed as below.
|
SUMMARY OUTPUT |
|
|
Regression Statistics |
|
|
Multiple R |
0.144108826 |
|
R Square |
0.020767354 |
|
Adjusted R Square |
-0.025862772 |
|
Standard Error |
0.086274529 |
|
Observations |
23 |
|
ANOVA |
|||||
|
df |
SS |
MS |
F |
Significance F |
|
|
Regression |
1 |
0.003314971 |
0.003315 |
0.445363 |
0.511812502 |
|
Residual |
21 |
0.156309183 |
0.007443 |
||
|
Total |
22 |
0.159624154 |
|
Coefficients |
Standard Error |
t Stat |
P-value |
Lower 95% |
Upper 95% |
Lower 95.0% |
Upper 95.0% |
|
|
Intercept |
0.022678913 |
0.019440188 |
1.166599 |
0.25645 |
-0.017749171 |
0.063106998 |
-0.017749171 |
0.063106998 |
|
X Variable 1 |
0.510451257 |
0.764886492 |
0.667356 |
0.511813 |
-1.080217282 |
2.101119796 |
-1.080217282 |
2.101119796 |
The beta of the company is .51.
E(R) =
E(R) = Expected rate of return
= Risk free rate of return
β = Beta
= Market Risk Premium (BHP Billiton Company, 2014).
|
Calculation of Required rate of return |
|
|
Risk free rate (A) |
4% |
|
Beta (B) |
0.510451257 |
|
Market Risk premium (C) |
6% |
|
Required rate of return [A+(B*C)] |
7.06% |
(Please see the excel)
The required rate of return of company is too higher i.e. 7.06% (BHP Billiton Company, 2017).
After analysing the annual report and web information, it could be determined that BHP Billiton Company has been following conservative investment methods in its business. The petroleum and mining industry both have been showing sluggish market condition. Therefore, company has invested low amount of capital in its business. Company has followed conservative investment program which is not good indicators for the organization.
Cost of equity (calculated through CAPM) = 7%
Cost of Debt = 0%
WACC = Cost of debt (interest rate after tax) + cost of equity
|
WACC |
Capital Amount |
Cost of capital |
% of portion |
WACC |
|
Equity |
57,258 |
7.06% |
0.4892132 |
3% |
|
Debt |
59783 |
1.19% |
0.5107868 |
1% |
|
Total capital |
117041 |
WACC |
4% |
The weighted average cost of capital of company is 4% (BHP Billiton Company, 2016).
The weighted average cost of capital is the average cost of capital which has to pay to deploy the funds in business. The implication of higher WACC on investment decision would be negative as company will have to bear high cost to accept the particular investment plan. On the other hand, lower cost of capital might allow company to accept each and every project to increase its return on capital employed (Yahoo finance, 2018).
It is evaluated that return on equity of company has went down to 43% in 2017 which is 9% lower than the data shown four year back. It is not good indicator as company has reduced the earning of its investment since last four year (Brigham and Ehrhardt, 2013).
Computation of Debt to equity
|
3. Debt Ratio |
||||
|
2014 |
2015 |
2016 |
2017 |
|
|
A. Total Liabilities |
72,270 |
59,812 |
64,662 |
59783 |
|
B. Total assets |
1,51,413 |
1,24,580 |
1,18,953 |
1,17,006.00 |
|
(A/B) |
48% |
48% |
54% |
51% |
BHP Billiton Company has not increased its debt to equity ratio. It has increased its debt to equity ratio to 51% in 2017 which reflects higher financial leverage (Laudon, and Traver, 2013).
The gearing ratio of company has increased to 10% in 2017 which is 7% higher as compared to last four year data. It is required to increase the profitability of company with the increase in its fixed interest expenses.
|
Gearing ratio |
||||
|
Gearing Ratio |
3% |
5% |
-12% |
10% |
The dividend policy of the company is determined on the basis of profit earned by company. The dividend policy is profit based.
|
Gearing Ratio |
||||
|
2014 |
2015 |
2016 |
2017 |
This profit based dividend policy is determined to offer dividend to shareholders. It is analysed that company has increased the dividend amount with the increase in the profit and Vice-Versa. The dividend policy is set of rules and regulations which is determined to implement standards process system to distribute the dividend to shareholders.
After evaluating the details of this BHP Billiton Company, it is evaluated that investors should not invest their capital for short term. This company is good for the long term investment plan. BHP Billiton Company has shown decreased in its profitability. Nonetheless, for the short term investment, this company is not vulnerable. It could be advised to investors that if they have no other company in the market which could give them the better results as compared to BHP Billiton Company then they could opt this company in their portfolio (Zhu, J., 2014).
References
BHP Billiton Company, 2014, annual report, Retrieved on 19th February, 2018 from https://www.bhp.com/investor-centre/annual-reporting-2017
BHP Billiton Company, 2015, annual report, Retrieved on 19th February, 2018 from https://www.bhp.com/investor-centre/annual-reporting-2017
BHP Billiton Company, 2017, annual report, Retrieved on 19th February, 2018 from https://www.bhp.com/investor-centre/annual-reporting-2017
BHP Billiton Company, 2016, annual report, Retrieved on 19th February, 2018 from https://www.bhp.com/investor-centre/annual-reporting-2017
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.
Laudon, K.C. and Traver, C.G., 2013. E-commerce. Pearson
Yahoo finance, 2018, BHP Billiton Company, retrieved on 19h January from https://in.finance.yahoo.com/
Zhu, J., 2014. Quantitative models for performance evaluation and benchmarking: data envelopment analysis with spreadsheets (Vol. 213). Springer
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