Using Financial Statements To Compute Ratios-Myassignmenthelp.com

Question: Discuss About The Using Financial Statements To Compute Ratios? Answer: Introduction BHP is a pioneer in the resource industry and has its presence in the global arena. It is one of the biggest producers of commodities that have iron ore, copper, coal, etc. Further, it has enhanced its activities to conventional and unconventional oil, coal and gas. It is regarded as the biggest producer of commodities such as iron ore, silver, nickel, etc. The main aim of the company is to own, as well as have an operation on the low-cost assets that are divided by geographical constraint and market. It strives to cater to the need of the customers through its resources and growth. The main aim is to extract oil, gas and other minerals from various locations of Australia (BHP Billiton, 2016). The products of BHP can be traced all around the globe and the major sales can be tracked in Singapore, as well as Houston. The workforce consists of 1, 23,850 employees with other contractors that have its reach to more than 130 destinations (BHP Billiton, 2016). The long-term view of the comp any helps the company to cement a strong position in the market. The operations and movement of the company is a proper indicator of the power and fundamentals of the company and has provided a strong support towards economic growth. BHP Billiton is dual listed and has its headquarters in Australia. The primary or the main listing is on the Australian Stock Exchange. Framework The corporate planning of BHP Billiton is strong enabling the company to meet the challenges that pertain to the external environment and enables to increase the total return. The phase that is starting provides the development of the central case that enables bottom up assessment (BHP Billiton, 2016). The planning process is structured in a manner that enables to elbow many uncertainties that exist globally. Moreover, the framework helps in the structuring of the external factors that contains political, technical and governance. Further, the presence of governance and the compliance process makes it sure that the internal control is assessed and the practices do not suffer (Brealey et. al, 2011). Thereby, the framework is structured in a manner that eliminates the situations that are adverse in nature. Sources of Financing The net debt of BHP Billiton consists of liabilities that bear interest and the in tune to this, the group issued Global bonds that sum to US$ 5 billion and consisted of Senior floating rate notes of value US$500. Further, the group consisted no commercial papers that are supported by credit facilities. In the year 2015, the net financing cash flow enhanced to US$284 that increased sharply from US$8.3 million. The company used a hybrid of multi currency and the lower dividend was paid as per the new structured policies. The main aim of the group is to own, as well operate assets that have large life, low cost, and the new policy that contains diversified by market and geography. The monitoring of the group is due with the aid of gearing ratio, the ratio that can be termed as net debt to net debt in addition to assets. The exposure of the group is present to the interest rate risk on the borrowings that is outstanding and other investments (BHP Billiton, 2016). The management of the i nterest rate risk is done through the strategy of portfolio risk management. The group contains debt that is issued at rates that are fixed in nature. Further, the exposure of the group is even present to the interest rate swaps. The activities of finance comprise of receipts from liabilities that have an interest bearing and other earnings from the debt related tools, liabilities repayment that has an interest bearing tag, the revenue from the ordinary shares, buy back, dividend payment, etc. These are the cash flow from financing activities. Further, the component of equity consists of share capital, reserves, treasury shares and retained earnings. Moreover, the share capital that is issue consisted of shares that were supported by public, preferences and the treasury shares (BHP Billiton, 2016). Capital Structure and Financial ratio The capital structure of any company is denoted through the debt equity ratio, debt ratio, and the equity ratio. In the case of BHP Billiton, it is noted that the proportion of debt is higher in all the five years and has crossed 1 meaning the stress of the debt is high. Further, it indicates that the capital of the company is more concentrated on debt. Hence, a huge outflow of the funds will happen by way of interest. The equity ratio of the company stands below 0.50 which means the company has standard equity balance. Higher the equity ratio the best will be the situation (Davies Crawford, 2012). Overall the capital structure means that more reliance is in debt. Financial ratio As per the computation, it can be commented that the liquidity of the company is strong and hence, BHP Billiton can meet the obligations. The current assets are sufficient to match the current liabilities. Further, both current and quick ratio has increased over the span of five meaning stressing on the strong liquidity position of the company. On the other hand, the gross profit of the company is formidable that indicates the strong control over the cost of sales. However, the net profit margin declined in the current year that is a big alert and negative sign on the part of the management (Horngren, 2013). Rio Tinto Rio Tinto, listed on the ASX is a leading company in the mining field and is completely based on the processing of minerals. It has its presence worldwide and a mining group and mainly emphasizes on mining, as well as processing of mineral resources of the Earth. The goal of the company is to generate high returns that are sustainable in the eyes of the shareholders and hence, establish a portfolio that is efficient in nature. Rio has its presence in more than 35 countries and has a workforce of more than 51,000 people (Rio Tinto, 2016). It has its headquarters in the UK. With a presence on a global scale, the group has efficiency in terms of providing correct expertise. The main achievement of the company is with respect to the sustainable development. The group functions in a manner that is containing long-term benefits for the customers and the society as a whole. Strategic advantages like access to the huge and best quality bauxite make it immensely successful. Trend The position of Rio Tinto stands strong due to the strong balance sheet, assets of world class and containing strong drivers of performance. The talented employees are an asset when it comes to the period of volatility (Rio Tinto, 2016). Along with the strong infrastructure and an emerging economy, the long-term perspective of the industry is strong. The company has strong discipline in terms of capital and has strong tamed the capital expenditure. The capital expenditure was reduced from US$4.7 billion in 2015 to the US $3 billion in 2016. The net debt was decreased considerably from US$13.8 billion to the US $9.6 billion. Framework Rio Tinto is mainly engaged with risk management that is important for the smooth running of the organization. It helps in creation, as well as an increment in the value. The risk structure provides a general idea that the company stresses on leaders for the creation of value by the management of the business. The framework provides a general idea that the risk management is another important aspect on how to create value. It is vital for the smooth functioning of the company (Albrecht et. al, 2011). The importance of identification and management of risk rests with every employee and the leaders in the organization. Finance Sources From the annual report, it is clear that the financial resources or access to the company are not limited or constrained. In 2013, bonds were issued by Rio Tinto. Further, it associated with finance limited that helped in the creation of additional amount that stands at $7.5 billion. Moreover, the group has strong links with the bank and of a bilateral nature. To ensure a strong momentum, Rio issued 1,436,542 shares from treasury and 951 allotments of new shares were done. The purchase by trustees stood at 842000 shares (Rio Tinto, 2016). Further, the registrar purchased 1,089,189 shares so that obligations can be honored. The share capital comprised of reserves retained earnings, and share premium. Also, the financing structure consisted of payment related to dividend from the equity shares, repayment of borrowings, and purchase of interest that appears to be of non-controlling nature. Capital Structure and financial ratio The capital structure of Rio Tinto clearly indicates that it is a debt ridden company as in all the five years the debt equity ratio exceeds 1. This means that the company has an over reliance on debt. The equity ratio projects that the equity is below 0.50 that does not boast a strong picture. Hence, a major chunk of profit will go towards interest payment (Graham Smart, 2012). Financial ratio Going by the computation, it can be commented that Rio Tinto has liquidity as projected by the current and the quick ratio. The current ratio is next to the standard ratio of 2:1 implying a perfect ratio. However, the quick ratio is above 1:1 meaning the funds of the company can be invested elsewhere and income can be generated (Libby et. al, 2011). The gross profit of the company is properly balanced. However, there have been fluctuations in the past five years. However, the net profit margin indicates that the company falters when it comes to the management of expenses. It has fluctuated in all the five years and been negative too. BHP Billiton has higher exposure to Oil and Gas The earnings of Rio is majorly concentrated from the aluminum and iron ore that provides a great contribution to earnings of $1.12 billion and $3.95 billion that was projected in the year 2015 and the total earnings stood at $4.54 billion. It needs to be noted that Rio was linked to operation in copper and coal that led to an inflow of $274 million of segment earnings the previous year. On the other hand, BHP earnings come from the iron ore and have strong fundamentals in coal, as well as copper (BHP, 2016). This indicates that both the companies have a strong concentration on iron ore and even in coal and copper. The presence of energy can be witnessed in the case of BHP while Rio lacks in this regard. The sensitivity of the change in profit to price changes of BHP can be answered through the following. The profit after tax of BHP has increased by $600 million if the crude price will increase by $10 per barrel. In the short-term, the exposure of BHP to energy is inefficient because the crude prices have declined to a considerable extent. Hence, the concentration is one iron ore. Flexibility The balance sheet of both the companies is strong or effective in nature with low cost of production that helps both the companies to cater to the demand of the stakeholders. It enables both these companies to consider the supply that is in excess. Therefore, it can be said that both the companies have strong fundamentals and better results can be attained in this regard (Melville, 2013). Management of Capital When it comes to investors of Rio and BHP it can be said that the investors were dejected owing to the deficit in the capital return. The capital management of BHP is weak and hence, far from attainment of the apex (Northington, 2011). On the other hand, Rio Tinto stresses mainly on the shareholder return. However, the capex of Rio declined at a strong pace as compared to BHP. Strategies of Credit BHP stresses mainly on maintenance of a strong credit rating that is A whereas Rio is ready to forgo one grade of credit rating so that the growth strategies can be executed. Approximately 80% of the Rio earnings is generated through the operations of iron ore and the decline in the prices of iron ore is structural in feature meaning that it does not disturb the momentum of the company (Rio Tinto, 2016). The initiatives of productivity and weakness in the local currency may give support to the company. On the contrary, the prices of shares of BHP are getting swayed by the petroleum product exposure Findings Both the companies are debt ridden and hence heavily rely on debt. Therefore, investment in such companies is prone to risk as the company needs to pay huge interest for the debt undertaken (Lapsley, 2012). The profitability of both the companies has undergone immense change. the fluctuation has happened as it both the companies are under the mineral resource group. The external scenario heavily influences the scenario (Correia al, 2005). If the share price of BHP surges there will be more capital gain to the investors as compared to Rio. The ability to bounce back is more prominent in the case of BHP as it has more strong fundamentals as compared to Rio Tinto. Recommendation The above report signifies that both the companies are into the fierce competition and whenever there is a downfall in the marketing; the market condition of both the countries has plunged. It is, therefore, evident that the market scenario plays a leading role in the progress of the both the company. Going by the overall report, it can be commented that both the companies should not be considered for investment as it is running under huge debt. The ratio analysis is a clear indicator of that. Debt ridden companies are prone to heavy drawbacks and hence, must be avoided. References Albrecht, W, Stice, E Stice, J 2011, Financial accounting, Mason, OH: Thomson/South-Western. BHP Billiton 2016, BHP Billiton Annual Report and accounts 2016, viewed 11 September 2017 https://www.bhp.com/investor-centre/annual-reporting-2016 Brealey, R, Myers, S. and Allen, F 2011, Principles of corporate finance, New York: McGraw-Hill/Irwin. Brealey, R. A, Myers, S. A Marcus, A. J., 2015. Fundamentals of Corporate Finance, 8th ed. Australia: McGraw-Hill Irwin. Correia, C, Mayall, P, O'Grady, B Pang, J 2005, Corporate Financial Management, 2nd ed. Perth: Skystone Investments Pty Ltd. Davies, T Crawford, I 2012, Financial accounting, Harlow, England: Pearson.. Graham, J Smart, S 2012, Introduction to corporate finance, Australia: South-Western Cengage Learning. Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W: Pearson Australia Group. Lapsley, I. 2012, Commentary: Financial Accountability Management, Qualitative Research in Accounting Management, vol. 9, no.3, pp. 291-292. Libby, R, Libby, P Short, D 2011,Financial accounting, New York: McGraw-Hill/Irwin. Melville, A 2013, International Financial Reporting A Practical Guide, Pearson, Education Limited, UK Northington, S 2011, Finance. New York, NY: Ferguson's. Rio Tinto 2016, Rio Tinto Annual Report and accounts 2016, viewed 11 September 2017 https://www.riotinto.com/documents/RT_2016_Annual_report.pdf