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FINA600 Financial Management

ASSESSMENT 2 BRIEF

Assessment: Case Study Report

Learning Outcomes:

This assessment addresses the following subject learning outcomes:
a) Apply the key theories and principles of financial management within varying contexts.
b) Critically evaluate the role and content of each of the four main financial statements as sources of quantitative data, and their impact on business decision making.
c) Investigate and evaluate the range of issues involved in the different types of funding.  
d) Understand and evaluate budgets and their impact on long and short-term business decisions.  
e) Critically analyse financial statements using effective strategies and apply accountancy information for informed managerial decision-making.

Instructions
The basic requirement is to undertake a general financial analysis, comparing financial position and performance over the two most recent financial years, of an ASX listed company.  
The annual report for the chosen company should be available on the company website.

Note: You are to use the ‘consolidated’ data in conducting your analysis.
The analysis should consider each of the following financial ratios:  
-  profitability and market performance
-  efficiency,
-  liquidity,  
-  capital structure
Note: You are only required to look at the most recent financial report. For those ratios which involve averages, you will calculate an average for the most recent year only, the prior year ratio calculation will NOT consider average calculations.

This assignment will contain two elements:
1.  Schedule(s) of relevant ratios and other useful calculations
-  The detailed calculation of relevant ratios and other useful calculations should be included, as one appendix, prepared using Excel. An example template is provided under the assessment 2 information, FINA6017 appendix layout - Blank.xls.
-  You will be advised by your facilitator as to which ratios to calculate.
-  You are advised to show the formulae used in determining particular ratios and other figures.

2.  A written report
The written report is the main element of this assessment. A sample template is provided under the assessment 2 information, FINA6017 Assignment Suggested Layout -Blank.doc.

Answer

Executive Summary


Financial statement analysis as made in this report addresses the profitability, efficiency and the liquidity of BHP Billliton Limited. In this regard, it has been found that the company has a slow growth rate over time. The profitability of the company has been below the industry standard over the period of two years ended on 2017. Furthermore, it has also been evident that the company’s current ratio and the liquid ratio are below the industry average. Therefore, it has been recommended to concentrate on the stock management and receivable management in order to attain the industry standard in upcoming years. 

1         Introduction


1.1                  Background and Business          

BHP Billiton is a public limited company based in Australia, founded in 1885 in the mining town of Broken Hill. This company is a multinational company, which processes metals, mining and petroleum across all over the world. Headquarters of BHP Billiton is situated in Melbourne Australia and London, United Kingdom. The company mainly produces the products such as coal, petroleum, iron ore, natural gas, uranium, nickel. In the year of 2017 the total revenue of the company was around US$31.235 billion. The net income of BHP billiton was near about US$5.678 billion in 2017. It is a dual listed company including the Australian BHP Billiton Ltd and the British BHP Billiton plc,. Based on the market capitalization index of Australian stock and security exchange the BHP Billiton company was listed as the largest mining company in the world. In 2012, the revenue of the company had become three times of its revenue in 2004. In the year of 2001, BHP Billiton was merged with the Australian Broken Hill Proprietary company limited. It also merged with the Anglo-Dutch Billiton plc in the same year. The total number of employees are almost 55,000 in 2017. In the year of 2017, the company was operating an income of US$10.78 billion (BHP | A leading global resources company, 2018). 



2         Company Analysis


            2.1                  Financial statements, Current Financial performance, the economic outlook

Financial statement of BHP Billiton Ltd indicates the record of total assets, liabilities of business and equity of the shareholders of the company. In accordance with the annual report of BHP Billiton Ltd as on 30th June 2017, it can be identified the total revenue was US$38,285 million which was increased from the previous year’s revenue. In the year of 2017, the total operating profit of the company was US$11,753 million, which was also increased from the previous year. The declining trend in the operating profit was due to the increase in the total revenue of the company. The net profit of BHP Billiton was US$6,222 million in the year 2017. The increasing net profit of the company indicates the overall performance of the company. Here in this context, the net profit increased from the previous year, which reflected the good quality of performances growth of the company. The continuous progress of the revenue of the company implies the company has fulfilled to capture the market over the time period. In order to decrease the financial expenses and other expenses, the company has to make the business strategy according to its adaptability and business strength. In the year of 2017 the company made US$26.1 billion of total economic contribution through the payments of the suppliers, wages of the labours and other employe benefits. It also contributes a better economic growth through taxes, royalties and dividends. The company places one of the largest tax payer companies in Australia. The company increased the value of capital inflows in 2017 which benefited for the company’s shareholders, investors and lenders (Terms of Service Violation, 2018).

3         Ratio Analysis


            3.1                  Profitability and Market ratios


(see appendix   for calculations)20162017Industry average
Return   on assets5.26%5.32%10%
Return   on equity2.53%9.92%15%
Net   profit margin20%16%16%
Gross profit margin(15%)28%30%
Net Interest Income
%%
Expense ratio/Cost to Income ratio4%4%2%
Cash   return on sales34%44%40%
Earnings   per share$ 120 per share$ 110.7 per share$ 125
Price   earnings ratio0.21 times0.25 times0.30 times
Earnings   yield4.70%4%5%
Dividends   per share$78$54$80



The various aspects of profitability ratios that are determined in this scenario express the potential of the company to generate a greater level of earnings in respect to its expenses that are associated with the operations of the businesses. 

The different calculation of ratios is mainly undertaken, which would provide various level of effective evaluation with the context of shareholders and operating management. With respect to  the operating management for the company, the various aspects of net profit margin, operating profit margin, return on assets and the return on equity along with the other market ratios such as earnings per share, price earning share, dividends per share and earnings yield  are discussed in this particular study for the purpose of evaluating the profitability of the firm. As far as the investors’ perspective is concerned, the various financial ratios such as earnings per share (EPS) ratio, return on assets  (ROA) and the return on equity (ROE) is used (BHP Billiton Ltd - AnnualReports.com. 2018)

The return on assets of the company that is chosen in this scenario has been 5.26% and 5.32% for the financial year of 2016 and 2017.  Moreover, the different implications of the financial ratio concerning Return on Assets mainly measure the degree of efficiency by which the company can successfully manage its assets in order to generate an optimum level of revenue during that period. The industry average has been considered to be 10% in case of return on assets. Though the figures that are computed in the case of return of assets seems to be much below par than that of the industry averages, but they have been experiencing an increasing trend from 2016 to 2017. It is a common fact that the companies that are found to be capital intensive in nature mainly maintain lower percentages for the return on assets. In contradiction to that, the companies that engage in providing high quality services maintains substantial percentages of return on assets. Thus, in this particular prospect, the return on assets that is evaluated for the company did not present a sound figure that is alarming for the company BHP Billiton. As BHP Billiton is a mining company it mainly requires a significant amount of capital expenditures for the initial setup of the different operations of mining and exploration. 

The profitability metric of return on equity mainly reveals the various aspect of probability earned by a particular company with comparison to the amount of capital that is invested by the shareholder of the business concern.  

 The figure that is computed for the financial year of 2017 seems to be much greater than that of the year of 2016. With comparison to the industry standard that is determined to be 15%, the figures for Return on shareholders equity of the chosen company has been mainly on the lower side. With the point of view of the Investors, they may not be encouraged to invest in the shares of BHP Billiton as the management of the company cannot utilise effectively and efficiently the capital derived from the shareholders that is needed for the purpose of expansion of the company. 

 The profitability ratio of net profit margin of the company  determines the potential of the company when it comes to indicate how much profit the a company in general can generate with respect to its total sales. The net profit margin of the company was found to be higher in 2016 as compared to that of 2017. As a matter of concern, the figures of net profit margin has been experiencing a declining trend. Moreover, in comparison to the industry average, the figures that are determined for the net profit of the company are very much instrumental in case of exercising a greater cost control and correct pricing system of the products. 

Now coming to the interpretation of the gross profit margin of the company, the gross profit margin of the company that is computed for 2016 is negative which proves the fact that the company cannot make a significant profit on the sales and it also fails to control its overhead costs. Moreover, the gross profit margin of the company for 2017 has improved to a greater extent. The gross profit margin that is found to be higher in case of 2017, proves the fact that BHP Billiton can undergo a significant profit on the sales and at the same time the overhead costs are found to be quite controlled. The investors can invest to a greater extent for the company which is having a significant gross profit margin.

The various implication of an expense ratio has been useful in measuring the amount of fund’s assets that are used for operating and administrative expenses. It mainly shows the costs of the company in relation to its different level of income.         

The lower the expense ratio, the better is it for the future prospect of the company. Moreover, the cost to expense ratio for the company has been similar for the both the financial years of the company 2016 and 2017. The figure computed for cost to expense ratio has been less, which shows the fact that the company is achieving a significant level of betterment. 

The cash return on sales that is determined mainly evaluates the fact how effectively and efficiently a particular company a company can manage its costs/expenses of the company.  

The figure for cash return on sales in the year 2017 has been much greater in comparison to 2016. this signifies that BHP Billiton has been efficient in generating a significant amount of profit from the revenue earned by the company. In the year of 2017, the company can alter their total costs of operations along with that of the different levels of production. 

The market ratio of earning per share mainly estimates the various amount of net income that is earned over the particular period of time. It mainly shows how profitable a company will be on the basis of the shareholders. 


            3.2                  Efficiency ratios


(see   appendix for calculations)20162017Industry average
Asset   turnover0.066 times0.33 times1.2 times
Cash   return on assets0.022 times0.144 times1.45 times
Fixed   Asset turnover0.31 times0.39 times2 times


Efficiency ratio indicates the company's efficiency regarding managing their assets and liabilities respectively. This ration also reflects that how a company generates their assets to increase the revenue of the company. Here in the year of 2016 and 2017, the table indicates the assets turnover ratio of BHP Billiton Ltd was 0.066 times and 0.33 times respectively. It means each dollar of company’s assets generated 0.066 and 0.33 times of its revenue in 2016 and 2017 respectively. It reflects that the company could not efficient to generate the sales using its assets in proper way. The industry average of the asset turnover ratio was 1.2 times that means utilisation of assets to generate the revenue is low.

Cash return on assets  is used to compare the business performances in order to other members of the industry. It is a efficiency ratio which reflects the total cash flow of a company without being affected by during the income measurement of the company. The BHP Billiton Ltd generated cash return on assets 0.022 times in 2016 and 0.144 times in 2017. It shows that in order to increase the assets, the company utilized its assets to generate the return on cash, that was increased from 2016 to 2017 slightly. The industry average of cash return on assets was 1.45 times. It illustrates to make a growth in the mining  industry BHP Billiton should increase the sales to generate a maximum cash return through using company’s assets properly.

Fixed turnover ratio reflects how a company utilise its fixed assets to maximize the sales of the business. The declination of the ratio mentions the company’s over investment on their business equipments or other expenses. The fixed asset turnover ratio of the company was 0.31 times and 0.39 times in 2016 and 2017 respectively. The industry average was 2 times during the year. It indicates that for running a efficient workflow in the market, BHP Billiton Ltd could not utilize its fixed assets much effectively for maximize the sale of the business.








            3.3                  Liquidity ratios


(see appendix   for calculations)20162017Industry average
Current   ratio1.44:11.85:12:1
Quick   ratio1.16:1

1.76:1
1:1
Receivables turnover2.57 Days2.57 Days 5 Days
Average collection period141 Days27 Days75 Days


Liquidity ratio is used to evaluate a company's working capital strength. Thus, it is also known as Working Capital Ratio. Current ratio indicates the ability of a company to pay off it all short-term debt obligations (Papanastasopoulos, 2018). In the year 2016, the company had a current ratio of 1.44:1 and in the year 2017 the current ratio was 1.85:1. The change of the current ratio from 2016 to 2017 indicates that the company has a good financial health. However, the industry average  current ratio is 2:1 which means that the company was not able to pay against the current liabilities in accordance to the market standard. Thus it is noted that to increase the liquidity or working capital in the industry the company has to generate the operating cycle  efficiently and able to turn its product into cash effectively.

The quick ratio indicates the company's ability that how a company can meet its short-term liabilities. It is more diligent way to evaluate the ability of a company to pay its current liabilities. Here in this context, BHP Billiton generated quick ratio 1.16:1 and 1.76:1 in the year of 2016 and 2017 respectively. The industry average of quick ratio was 1:1. It is quite similar to the current ratio.

The receivable turnover ratio indicates the ability of a company to collect its dues from the debtors. The industry average collection period is 75 days. The increase in time of average collection period indicates low capability to collect the debts from the debtors and the decrease in time of average collection period indicates the higher ability to collect the debts from the debtors. In this above study, the table shows the company’s receivable turnover ratio which was 2.57 times in both the years. However, the average collection period were 141 days and 27 days in the year 2016 and 2017 respectively. Since the time of the average collection period of 2016 was higher than 2017 hence it illustrates that in the year 2017 the company was able to collect their debts much faster than the previous year.






            3.4                  Gearing ratios


(see   appendix for calculations)20162017Industry average
Debt to   equity ratio98.02%86.54%50%
Debt   ratio50 %46 %50 %
Equity   ratio50 %54 % 50 %
Cash debt coverage5 %15 %50 %
Interest   cover ratio4.6 times6.55 times10 Times


According to Fazzini (2018), the gearing ratio defines the proportion of debt capital in the capital structure of a company. In this regard, it is to be mentioned that BHP Billiton had a debt equity ratio of 98.02% in 2016, which has declined to 86.54% in 2017. this denotes that the debt capital of the company has decreased over the stated two years. In this context, it is to be stated that the industry average debt equity ratio is 50%, which implies that the company is having an excessive debt pressure in the present context. However, the debt ratio of the company for 2016 and 2017 were 50% and 46% respectively which were at par to the industry average of 50% and therefore, it can be stated that the company maintains an optimum debt in the capital structure. Similarly, the equity ratios of the company for both the years were similar to the industry average. The cash debt coverage ratio of the company was 5% in 2016, which was increased significantly in 2017 to 15%. However, the company was unable to attain the industry average of 50% cash debt ratio. In this regard, it can be stated that the cash generating ability of the company by its operations is found as low as compared to the other industry players. In the above table, the analysis of interest coverage ratio has also been made and it has been found that the ability of the company to pay interest to its lenders out of operating profit has increased to 6.55 times in 2017 from 4.6 times in 2016. However, it has also been witnessed that the industry average interest coverage ratio is 10 times and therefore, it can be stated that the performance of the company to pay interest is significantly low as compared to the industry average figure. This could be considered as the result of low operating profit of the company over 2016 and 2017.     



4         Recommendations and overall assessment

Financial statement of BHP Billiton Ltd. for comparative analysis of two accounting years 2016 and 2017 shows the financial structure and its growth of the business over the period of time. In order to make the analysis faster the income statement, cash flow statement, the balance sheet of the company is used in the study. Ratio analysis illustrates the efficiency, profitability and the ability to cope up with company’s debts.

From the above comparative ratio analysis statement profitability and market ratio, efficiency ratio, liquidity ratio and gearing ratio of accounting years 2016 and 2017 are evaluated to collect the information about the financial structure of the business. Efficiency ratio is used to evaluate the company’s ability to generate the total revenue by using the current assets of the company. According to the above table, it is stated that the company made a slight progress in year 2017 to generate the total sales of the company by using the current assets. In 2017, the company was able to maximize the current assets from as compared to the liabilities to pay off all the short-term obligations.  The average collection period of debts of the company also reflects that in 2017 the company was efficiently collected their short term and long-term debts from its debtors. In the year of 2017, the proportion of the equity of the company was increased from 2016. It indicates that the company's financial risk was decreased from 2016 to 2017, which improves the business capability and helps to increase the number of shareholders of the company.

Although the speed of growth of the company is low in terms of profitability, efficiency, liquidity and debt equity  of the business, however, it is stated that the company can succeed in the future by generating the working capital and increase the total revenue of the business. Therefore, it can be stated that the investors can invest in this company. 

Since the profitability of the company was very low hence it is noted that any merger or acquisition cannot be applled in terms of business growth.

The company is required to generate more profit, utilize the current assets to generate the total revenue and also turn the products into cash to increase the flow of liquidity of capital in the business. 

Appendices – attached Excel Spreadsheet       

Profitability and Market Ratios - 2016-2017







20162017Average for Industry





Return on Assets(Profit / Average total assets)6207/(118,953+117,006)/26222/117,006


0.05260.0532


5.26%5.32%10%










Return on Equity(Profit / Average equity)6207/(60071+ 62726)/26222 /62,726


0.0252734190.099193317


2.53%9.92%10%










Net Profit MarginNet profit / Sales or revenue6207/ 309126222/38,285 


0.2007958070.162517957


20%16%16%










Gross Profit MarginGross profit / Sales or revenue(30912-35487)/ 30912(38285-27540)/38,285


-0.1480007760.280658221


-15%28%30%






















  










Expense ratioExpenses (excluding tax) / Net sales1161/30912 1574/38285

(using operating expenses/operating income)




4%4%10%










Cash return on salesNet cash flow from operating activity / Sales or   Revenue$10625  /30912   $16,804/38,285 


0.343717650.438918637


34%44%40%










Earnings per shareProfit for shareholders / Number of ordinary shares$120 $110.7$125 

EPS   taken from annual report












Price earnings ratioCurrent market price / Earnings per share$25.60 / 120$27.89 / 110.7

share price taken from annual report0.21330.2519


0.21 times0.25 times0.30 times










Earnings yieldEPS / Share price120 / $25.60110.7/$27.89 

share price taken from annual report4.68753.969164575


4.70%4.00%5%










Dividends per shareDividends - Special dividends/ No of shares$78 $54 $80 
(determined)DPS   taken from annual report





Efficiency Ratios - 2016-2017







20162017Average for Industry





Asset turnoverSales / Average total assets30,912/(118,953+117,006)/2 38,285/ 117,006


0.0655029050.327205442


0.066 times0.33 times1.2 times










Cashflow return on assetsNet cash from op activities / Average total assets$10,625/(118953+117006)/2 $16804/117006 


0.0225145050.143616567


0.022 times0.144 times1.45 times










Fixed-Asset Turnover RatioSales / Total non current assets30912 /101,239 38285 / 95,950


0.3053368760.399009901


0.31 times0.39 times2 times




Liquidity Ratios - 2016,2017







20162017Average for Industry





Current RatioTotal current assets / Total current liabilities17714/1234021,056/11,366


1.441.85


1.44:11.85:1 2:1










Quick Ratio(Total current assets - Inventory) / Total current   liabilities(17714 -3411)/12340 (21056 - 1095)/11366 


1.161.76


1.16:11.76:1 1:1










Receiveables turnoverCredit sales rev / Avg receivables30912/(3155+2,836)/2*365 2,836/38,285*365


2.5798698050.270377432


2.572.575










Average collection periodAverage receiveables x 365 / Net credit sales rev(3155*365)/ (Acc rec *365) / Rev


141.480007827.03774324


141 days27 days75 days




Gearing Ratios - 2016,2017







20162017Average for Industry





Debt to EquityTotal debt/Total equity or Total liabilities/Total   equity 58882/60,071 54280/62726 

(use debt figures only) - DEBT or BORROWINGS0.9802067550.865350891


98.02 86.54 50%










Debt ratioTotal debt / Total assetsDebt / Total AssetsDebt / Total Assets


58882/11895354280/117,006


50%46%50%










Equity RatioTotal equity / Total assets60071/11895362726/117006


0.5049977720.536092166


50%54%50%










Cash debt coverage$$ from op activities / Avg total liabilities$10625/(58882+ 54280)/2)$16804/(54,280)/2


0.0469459710.154789978


5%15%50%










Interest coverage ratioEBIT / Interest expenseEBIT / Interest ExpEBIT / Interest Exp


7259/157410322/1574


4.6 times6.55 times 10 times


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