Analyse Consolidated Income Statement and Comparison
Discuss about the Integrity Resilience Growth Annual Report.
This report will provide the analysis of the BHP financial performance considering 2017 financial year. The performance of this company is gauged in three sections. The first section includes analysing income statement, cash flow statement and balance sheet by comparing current financial year’s figures (2017) with the previous financial year (2016) and with the competitor (RIO Tinto Limited). Second section of the report includes ratio analysis technique where financial position of BHP is evaluated from Return on Assets, Inventory Turnover, Quick ratio and Price-earnings ratio by taking three financial years (2017, 2016 and 2015) to recommend to the current investor whether to continue to capitalize in BHP or not and also to the potential investor whether to spend in the company or not. Last but not the least third section of the report includes ethical standards including corporate governance statement, elaborating business operations, identification of major competitors, industry size, market value etc. explaining how management works for the best interest of the company. Further this report begins with the company overview and ends with recommendations and conclusions.
The financial figures will be pull out from the Balance sheet, income statement and the cash flow statement given in the Annual report. The financial health will be determined for the purpose of assessing whether the investor should invest or not.
BHP is an Australian based publicly listed company incorporated in 1885. The issuer code is ASX: BHP. The headquarter of the company is situated in Melbourne, Australia. From 2001, the company is functioning as a Double registered company with two parent companies named BHP Billiton limited and BHP Billiton Plc. which is commonly known as BHP. The company is engaged in the production, advertising, discovery, expansion of coper, iron ore, oil and gas, diamond, silver, lead, zinc, alumina, aluminium, coal, manganese, nickel and other range of natural assets. In financial year 2017, the company was announced as a largest independent mining and metals company based on market capitalisation. Currently company providing services in 25 nations with marketing and sales led through from United States, Houston and Singapore. Key executives of the company are: Ken MacKenzle, he is the chairman of the company and Andrew MacKenzle, he is the Chief executive officer of the company The BHP employs approximately 60,000 workforces composing 20.5 % of women while promoting variety and morals at the workplace. The main objective of the company is to offer turn-key results across the globe in order to create long-term shareholder’s value (BHP, 2018).
Analyse Cash Flow Statement
Therefore, after discussion of the company overview, BHP’s financial heath is analysed as per the three sections discussed below:
The following are the key highlights of the BHP’s profitability position:
- Considering BHP’s revenue of financial year 2017, we have observed that total turnover of the company amounted to US$ 38285 million which has increased by 23.85% from 2016 financial year. While comparing to the RIO Tinto limited, it is observed that consolidated revenue of RIO Tinto limited in 2017 was US$ 40030 million which depicts that the sales of BHP in 2017 was less in comparison to RIO Tinto limited. These figures shows that BHP’s performance is improved with itself whereas its performance is not good with RIO Tinto limited (BHP, 2017; Rio Tinto, 2017).
- Considering BHP’s finance income of financial year 2017, we have observed that total finance income of the company amounted to US$ 143 million which has increased by 4.39% from 2016 financial year. While comparing to the RIO Tinto limited, it is observed that consolidated finance income of RIO Tinto limited in 2017 was US$ 141 million which depicts that the finance income of BHP in 2017 was high in comparison to RIO Tinto limited (BHP, 2017; Rio Tinto, 2017). The below figure depicts that BHP’s finance income in 2017 was 34% which is increased by 1% from previous year as well as from RIO Tinto limited which is a positive position in a company.
- Considering BHP’s finance expenses of financial year 2017, we have observed that total finance expenses of the company amounted to US$ 1574 million which has increased by 3.57% from 2016 financial year. While comparing to the RIO Tinto limited, it is observed that consolidated finance expense of RIO Tinto limited in 2017 was US$ 848 million which depicts that the finance expense of BHP in 2017 was more by US$ 726 million in comparison to RIO Tinto limited. The total picture of finance expenses and costs represents that BHP has higher income as well as higher expenses in finance (BHP, 2017; Rio Tinto, 2017).
- Considering BHP’s net profit of financial year 2017, we have observed that total net profit of the company amounted to US$ 6222 million which has increased by 200% from 2016 financial year. While comparing to the RIO Tinto limited, it is observed that net profit of RIO Tinto limited in 2017 was US$ 8851 million which depicts that the BHP in 2017 has earned profit whereas in 2016 the company incurred loss which signifies stable position of the company in current year. While comparing to the competitor it is seen that BHP’s has earned low profits from RIO Tinto limited by US$ 2629 million (BHP, 2017; Rio Tinto, 2017).
- Considering EPS of both companies it is seen that in current year company had earned returns from per share was 110.7 cents whereas RIO Tinto limited earned returns from per share was 490.4 cents which is due to less profit earned by BHP in 2017 from RIO Tinto limited.
Operating Activities: These are those activities which affects the company’s inflows and outflows from regular business operations.
- Non-cash expenses such as depreciation as well as amortisation expenses in current year 2017 was US $ 7719 million which is lower from FY 2016 by US $ 8661 million which depicts that company has acquired less fixed assets in comparison to last year.
- In current year net finance costs was increased to US $ 1304 million as compared to last year which was US $ 1024 million this might due to increment in interest bearing liabilities.
- In 2017, inventories have increased whereas trade receivables have decreased from past year.
- Interest received to the company is more than the interest paid by the company in 2017 in comparison to 2016.
As a whole, company’s cash flows from operating activities in 2017 was US$ 16804 million which is increased by US $ 6179 million from past year which depicts that the company has sound earnings from business operations.
Investing Activities: These are those activities from which company’s cash position is affected due to long term assets and investments owned by the company.
- In 2017, the company has sold its assets for US$ 648 million while it was only US$ 107 million in 2016.
- Purchase of plant, property and equipment in 2017 was US$ 4252 million while in last year acquisition was amounted to US$ 6946 million which depicts that company has spent less by US$ 2694 million in plant, property and equipment.
- In 2017, company had made investment and funding of equity accounted investments for US$ 234 million while in last year it was – US$ 40 million.
As a whole, company’s cash flows used in investing activities in 2017 was US$ 4161 million which was decreased by US $ 3084 million from past year which depicts that the company’s cash movement in current year was better as compare to last year.
Financing Activities: These are those activities which affects the company’s cash movement due to external activities that allow to raise capital.
- BHP’s has proceeded from the interest bearing liabilities was only US$ 1577 million while last year it was US$ 7239 million whereas repayment of interest bearing liabilities was US$ 7120 million in 2017 while last year it was US$ 2788 million. Thus, net cash outflow was US$ 5543 million which has impacted highly on cash flow from financing activities.
- Current year dividend paid was US$ 2921 million while last year dividend paid was US$ 4130 million.
As a whole, company’s cash flows used in financing activities in 2017 was US$ 9133 million while it was positive in 2016 which depicts that the company’s cash movement in current year was worst as compare to last year.
Assets
- Cash and cash equivalents was US$ 14153 million in 2017 which has increased by US$ 3834 million from past year which depicts that the company has highly liquid assets which are readily convertible into known amount of cash.
- BHP’s trade and other receivables had decreased to US$ 2838 million from US$ 3155 million. The majority of overdue are less than 30 days.
- Property, plant and equipment was decreased by US$ 3478 million from last year.
- Intangible assets have also decreased by US$ 119 million.
- Inventories are raw materials, WIP and finished goods comprising of current as well as non-current total amounting to US$ 4768 million
As an overall total assets had decreased from past year by 1.64%.
- Company had interest bearing liabilities comprising current and non-current total amounted to US$ 30474 million which has tremendously decreased from 2016 financial year amounted to US$ 36421 million.
- Company’s trade and other payables had increased from the past year to US$ 154 million.
- Company’s provision amount was also increased in 2017 by 2.54% from financial year 2016.
As an overall total liabilities had decreased from past year by 7.82%.
Thus, net assets of the company have increased to US$ 62726 million whereas it was US$ 60071 million in 2016.
Following are the calculation of four financial ratios considering three financial years (2017, 2016 and 2015).
- Return on Assets:This ratio assess returns earned due to effectively utilisation of assets by the company. It is a profitability ratio where greater amount of incomes is generated through efficiently utilising assets. It is computed by dividing Net profit to total assets. Return on Assets is expressed in percentage form.
Considering BHP data for 2017, 2016 and 2015:
Evaluation: It has been observed from the above table and graph that in 2017 BHP has effectively utilised its assets which was not in case of 2016 and 2015 financial years which shows profitability position is satisfactory in 2017.
- Inventory Turnover ratio:This ratio measures the effectiveness of a company for using the inventories in a period and how it is convertible into cash. It is computed by dividing Cost of sales to total inventories.
Considering BHP data for 2017, 2016 and 2015:
Evaluation: It has been observed from the above table and graph that in 2017 BHP has not effectively utilised its inventories which was not in case of 2016 and 2015 financial years which shows that turnover ratios is not satisfactory in 2017.
- `Quick Ratio: This ratio measures the efficiency of converting liquid assets into cash and cash equivalents in a short span of time. Only liquid assets are considered to pay off its current obligations when it becomes fall due. It excludes inventories in computation of quick assets. It is calculated by dividing quick assets to total current liabilities. Higher quick ratio is always favourable because it depicts better short-term solvency position.
Evaluation: It has been observed from the above table and graph that in 2017 BHP has Quick ratio is in decreasing trend from 2017 to 2015 which means only in 2017, quick assets are effectively converted into cash and cash equivalents. Thus represents better solvency position as compare to 2016 and 2015.
- Price-Earnings ratio: This is also termed as market prospect ratio where earnings per share of the company are compared with market value per share. It is beneficial to the investors where acquisition price of the stock is evaluated based on the recent results of the company. It is computed by dividing market value per share to earnings per share.
Analyse Balance Sheet
Evaluation: It has been observed from the above table and graph that in 2017 BHP has PE ratio is in increasing trend from 2016 to 2017 which means positive future performance of the company. Thus represents better long-term solvency position in 2017.
As discussed above, BHP is engaged in the production, advertising, discovery, expansion and exploration of copper, iron ore, oil and gas, diamond, silver, lead, zinc, alumina, aluminium, coal, manganese, nickel and other range of natural assets. In financial year 2017, the company was announced as a largest independent mining and metals company based on market capitalisation.
The group has operated as a single economic entity which is run by the management of the company. The management of the company has strategies in order to become the number one company in mining sector or industry. The strategies of BHP are to possess and run large, extended life, little cost, expandable, upstream assets differentiated by market, geography and commodity. Further the management has some low cost preferences for the growth and future value which emphasis on placement of technology, safety and productivity and the apply capital discipline for the purpose to abstract most value and returns from the assets. As the company is in the top place in the production of iron ore, metallurgical coal and copper including major interest in the oil, gas and energy coal, the management of the company will allow their multifunctional team to connect across entity to share best methods for solving problems.
In addition to above, the company is following the corporate governance for the purpose of conducting the business that value ethical standards and corporate integrity. The main competitor of the company is RIO Tinto limited. The company is also engaged in the production of energy and minerals, iron ore, copper, zinc, diamonds etc. Also after financial analysis has been complete it is recommended that the RIO Tinto’s performance is better and providing a sound returns.
Conclusion
After the above analysis, BHP is one of the finest companies of Australia The company is engaged in the production, advertising, discovery, expansion of coper, iron ore, oil and gas, diamond, silver, lead, zinc, alumina, aluminium, coal, manganese, nickel and other range of natural assets. In financial year 2017, the company was announced as a largest independent mining and metals company based on market capitalisation. RIO Tinto limited is also strong and leading company in mining sector and served its services across globe. Promote safe, moral and rewarding work place is the main goals of a company
After the summarisation both companies’ performance it is concluded that performance of BHP is sound and effective but not better than RIO Tinto limited.
Hence as an investor it should not capitalize in the BHP.
References
Rio Tinto, 2017, 2017 Annual report, viewed on 25 may 2018 from https://www.riotinto.com/documents/RT_2017_Annual_Report.pdf.
BHP, 2018, About us, viewed on 25 may 2018 from https://www.bhp.com/our-approach/our-company/about-us.
BHP, 2018, Our Approach, viewed on 25 may 2018 from https://www.bhp.com/environment/our-approach.
BHP, 2017, Annual report 2017, viewed on 25 may 2018 from https://www.bhp.com/-/media/documents/investors/annual-reports/2017/bhpannualreport2017.pdf.
BHP Billiton, 2016, Integrity Resilience Growth Annual report 2016, viewed on 25 may 2018 from https://www.bhp.com/investor-centre/-/media/bhp/documents/investors/annual-reports/2016/bhpbillitonannualreport2016_interactive.pdf.
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