Financial Statement Analysis Of BHP Billiton Limited And South 32 Limited

Shareholders’ Equity

For the assignment, the first company selected BHP Billiton Limited. It is a company engaged in the exploration of mineral and petroleum. The company is listed on ASX and the shares of the company are traded widely across several other international stock exchanges including London, New York and Johannesburg. The company possess a 65,000-strong workforce.

The second company shortlisted for the purpose is South 32 Limited. The company’s principle business activity is that of mining and metallurgy. Alongside the Australian stock exchange, the securities of the company are also trade in the London and Johannesburg stock exchanges. The company has workforce of over 15,000 people. The company is touted as one of the major producers of aluminium, thermal coal, nickel, manganese, zinc and cooking coal in the whole of Australia (Gullet, et al., 2018).

Shareholders’ Equity:

• Also termed as owner’s equity. It represents the contributed capital of the owners of the business. Cost of raising funds though is significantly higher when compared to debt but the upside of it is that it results in lower or no risks perception for the company when compared to debt. The equity owners of a publicly listed company are only liable to the extent of contribution. The equity owners are entitling to distribution of income by way of dividend to be paid out of net income of the current year as well as any previous accumulated reserves out of earnings(Kusolpalalert, 2018).

There are several components that are involved in the equity shareholders’ funds and they are elaborately described as under:

• Equity Share Capital: These are the funds obtained from the shareholders by issue of shares through a recognized stock exchange. The number of shares to be allotted is based on nominal value of the shares. The shares may be issued at a premium at times. During the year South 32 Limited had decided to buy back certain number of shares by passing a resolution in the board of directors and subsequently obtaining an approval from the shareholders in the annual general meeting. The buyback will reduce the number of shares outstanding but will also have a positive impact on the earnings apportioned to each share. On the contrary, BHP Billiton Limited had no changes in equity capital structure(Sikka & Willmott, 2010).
• Retained Earnings: Retained earnings is the accumulated profits the entity earns over a period resulting from activities that are operating in nature. These are the earnings that are left over after paying dividend to the equity and preference shareholders. In a year where there are no adequate profits or if there is a loss, the company can still pay dividends out of the accumulated profits subject to certain conditions stipulated in the Corporations Act. Taking cue from such provisions the company paid dividends in the 2016 despite suffering massive losses(Eisemann, et al., 2017). At the beginning of 2016, the balance in retained earnings was already standing at a negative balance which further plunged owing to the payment of dividend. However, this balance saw an upward movement in the year 2017 owing to some profits, though dividend was declared in 2017 as well (Gray, 2018). Situation was similar in case of BHP Billion which also paid dividend out of accumulated profits despite suffering losses in the year 2016 but the situation improved in 2017 and it paid dividend in that year out of profits earned for that year (Coate & Mitschow, 2017).
• Other Free Reserves: In case of South 32 Limited, this balance comprises of undistributed profits from forfeited shares, other employee awards that have either lapsed or remain unexercised. The balance also contains comprehensive income. The balance saw sharp decline in the year 2017 owing to the decline in comprehensive income(Dan, 1995). However, for South 32 Limited, there was no movement.
• Non-Controlling Interest: In simpler terms, these are the small shareholders which hold less than half of the voting power of the entity. Their share of profits is computed as a percentage of net asset position. For South Limited, the minority holding is very low at $1 million(Eisemann, et al., 2017). However, it is interesting to see a proportional increase of non-controlling interest vis a vis to that majority shareholders. This could be attributed to a sharp increase in the retained earning balance (Delone & Mclean, 2004).

However, the portion of minority interest for BHP Billiton is combatively higher when compared to South 32 Limited. There have been only minor variations in the percentage of holding. Below is the chart representing the movement.

Upon analyzing the debt and equity proportion, we can see that both the companies have made conscious efforts in lowering the debt chunk in their financing requirements. This is beneficial to the shareholders as the company would less exposed to risks arising due to defaults of interest and principal payments in the event of lower profits and liquidity crunch(Richard & Stephan, 1995).

There is a stark contrast in the Debt to equity ratio of the two companies. As can be seen from the two tables, for South 32 Limited it is drastically on the lower side when compared to BHP Billiton.

Statement of Cash Flows:

The statement of cash flows depicts the movement on the liquidity front in a company which is mandated by the Australian accounting standards as well as the Corporation Act 2001. Following are the major segments that are categorized in the cash flow statement.

1. Cash flow from Operations: This segment covers the cash flows that arise as results of the actions taken in the ordinary course of business which are revenue transactions in nature. Such transactions include collections from debtors, cash sales, operating expenses paid in cash, payment of current liabilities and payment on interest on working capital loans, etc. BHP Billiton Limited showed a constant positive cash flow all through the period under review(Abdullah & Said, 2017). This could be attributed to increase in operating revenue.  For South 32 Limited also there was positive increase from last years but the magnitude of the increase was significantly low making it lag compared to other companies (MORGAN, 1988).
2. Cash flow from Investing Activities: These activities are related to the cash flow that arise because investments made by the company either to park their idle funds or expand their operations. There are several examples of activities that fall under this category such as sale and purchase of capital assets, securities, investments in other joint ventures or subsidiaries, etc. BHP Billiton Limited sold certain Plant, property and equipment and purchased little compared to that. There has also been a rise in the expenditure incurred on exploration activities(Vieira, et al., 2017).

South 32 Limited made an investment of $12,734 million following the BHP demerger which happened in subsidiaries in the year 2015. An Overall view suggest a sharp decline in the cash flow from this segment plunging to $ 454 million in 2016 from a position of $ 15,165 million in 2015.

1. Cash flow from Financing Activities: The cash flows that arise as result of transactions that are capital in nature are covered under this segment. Some examples of transactions that occur in this category are issue of shares or debentures, repayment of long term debt, redemption of debentures, etc. While analyzing BHP Billiton, we see that there has been a significant movement in this category for the year 2017 as the company has repaid a major chunk of the loan that it raised in the fiscal of 2016(Yadao, 2018). We also see that the company has lesser dividend in 2017. In case of South 32 Limited we observed that a lot of activities such as raising additional debt funds, buy back of equity and payment of dividend unlike 2016 when there wasn’t much of a movement (Yadao, 2018).

The table presented below is a comparative analysis for a period of 3 years for both the companies:

A look of the cash flow statement of BHP Billiton shows a sharp decline of in the cash flow from investing activities of around $ 3000 approximate compared to the 2016 figures. Also, there is a $6,000 million rise from operating activities (Boghossian, 2017). The company as it seems was key to reduce its debt burden and hence a significant chunk of the debts were paid off in 2017 that resulted in massive cash outflow. 2015 was also the only year in the last three years that had a net negative overall cashflow.  BHP Billiton has a lead over South 32 in terms of net cash flow but it also to be noted that unlike BHP Billiton, South 32 did have a net negative cash flow in any of the three years under review. The reason for a significant negative figure in cash flow from investing activities of South 32 is the demerger that happened with BHP in 2015.

Statement of Other Comprehensive Income:

• Following the Australian accounting standards this statement reports the following items:

1. In case of South 32 Limited: Certain items such as gain on actuarial valuation, tax incidence (Both gains and losses) on comprehensive income cannot be included in consolidated income statement and hence included here(Antle & Smith, 1985).
2. In case of BHP Billiton Limited: Items such as gain or loss on revaluation of medical schemes and pension plans which are not part of income statement are included here. However, there are certain items that remain in other comprehensive income for a limited period and depending on the circumstance of nature of the transaction in general may be moved to income statement. These include exchange rate movements on foreign operations, income or loss from hedging contracts, etc.

• The income and expenses which do not pertain to the normal operations of the business are covered under Other Comprehensive income. Some of these items can be reclassified into the income statement later upon fulfillment of certain conditions prescribed under the prevailing accounting standards.
• Below is a comparative analysis performed on the income statement:

Any gains that are unrealized that might have been a part of the items disclosed above are not recorded in the income statement but in the statement of comprehensive income. This would have the impact of lowering the profit that would have been available for distribution to the equity shareholders (Alsagoff, 2010).

• Among the items included in the above statement are actuarial losses and gains, income arising on hedging contracts, fair value fluctuations in the carrying amount of assets and liabilities. Since these items are not of operational nature, it does not warrant the attention of the managers for evaluations carried out by them and hence not considered to be part of income statement.

Treatment related to Corporate Tax:

1. The below table highlights the metrics of the three years for the two companies under consideration:

From the above we can see that the tax expense of BHP Billiton Limited is more than ten times that of South 32 Limited.

1. A brief look at those figures would reflect the fact that South 32 Limited has comparatively a lower effective tax rate on its income as compared to BHP Billiton Limited. In 2015 for Billiton the rate was 45.5 % whereas for South 32 it was 32 %. For 2017 BHP was under a tax rate of 39.7 % whereas for South 32 it was 30.7 %. However, in 2016, the tax rate for South 32 was higher by a slight margin of under 1 %.
2. The temporary differences that arise due to difference in regulations between accounting and taxable income are accounted for as Deferred tax assets or liabilities. The deferred tax assets are used in setting off future taxes payable in case the company is earning adequate profits. The deferred tax assets and liabilities can set off among themselves. In the balance sheet they are classified under Current assets or liabilities respectively.
3. Many such instances of differences were observed for the two entities. For South 32 there has been a decline in deferred tax assets because paying lower taxes. In BHP, it was observed that the deferred tax liabilities declined which was a result of reversal to deferred tax assets for a period of 3 years.
4. There was a steady decline in the cash tax paid by BHP since 2015. The situation was reverse in case of South 32 where it went from a refund of $ 1 million USD in 2015 to a liability of $ 127 million(Abdullah & Said, 2017)
5. There has been a wide gap in the cash tax rate between the two entities. The cause of this could be attributed to the presence of enormous of accumulated losses over 2015 and 2016 which resulted in significant deferred tax asset. This benefit was utilized by them to lower their cash tax rate.

References

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Alsagoff, N., 2010. Microsoft Excel as a tool for digital forensic accounting.

Antle, R. & Smith, A., 1985. Measuring Executive Compensation: Methods and an Application. Journal of Accounting Research , 23(1), pp. 296-325.

Boghossian, P., 2017. The Socratic method, defeasibility, and doxastic responsibility. Educational Philosophy and Theory, 50(3), pp. 244-253.

Coate, C. & Mitschow, M., 2017. Luca Pacioli and the Role of Accounting and Business: Early Lessons in Social Responsibility. s.l.:s.n.

Dan, S., 1995. The benefits of activity-based cost management to the manufacturing industry. Journal of Management Accounting Research, Volume 7, p. 167.

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Eisemann, T., Parker, G. & Alstyne, M., 2017. STRATEGIES FOR TWO SIDED MARKETS. [Online].

Gray, D., 2018. ‘Extraordinary turnaround’: Big miners pushing ASX towards 10-year high. The Sydney Morning Herald.

Gullet, N., Kilgore, R. & Geddie, M., 2018. USE OF FINANCIAL RATIOS TO MEASURE THE QUALITY OF EARNINGS. Academy of Accounting and Financial Studies Journal, 22(2).

Kusolpalalert, A., 2018. The relationships of financial assets in financial markets during recovery period and financial crisis. AU Journal of Management, 11(1).

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Yadao, J., 2018. Forensic accountants and big data.

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