Brief Introduction of Rio Tinto and BHP Billiton

BHP Billiton Ltd is the world’s leading mining, coal mining, iron ore and gold company. It showed oil retention. Rio Tinto Ltd is being traded again in a similar commercial area and is fertile all year round. This organization focuses mainly on the exploration and processing of mineral resources on Earth. Meanwhile, BHP Billiton expects to maintain a long-term collaboration with its investors to conduct business on a regular basis. Rio Tinto plans to pass on solid and manageable profits to investors (Bhpbilliton.com, 2015).

Trend Analysis

Profit and Loss Account

The wage declaration allows to discover the costs and misfortunes incurred by a club at a given time (Dobie, 2013). BHP Billiton and Rio Tinto currently reflect these mining contracts (Dobie, 2013). Due to the salary structure of the two associations, BHP Billiton has a high percentage of gross profit. This leads to the conclusion that this partnership can fulfill net agreements in correlation with net agreements in general, without making much effort. The final result of BHP Billiton is more than saying that this partnership is becoming more profitable in connection with Rio Tinto.

Horizontal Analysis

A horizontal analysis is created that provides an idea of ​​the net cost and profit of the two associations over a period of time. The level of diversity is determined from all perspectives, suggesting that both partners need to cut costs to achieve future development as quickly as possible.

It is also known as Comparative Analysis or Trend Analysis, is a method that represents varies in amounts of equivalent financial statement items over a time period. It helps in judging the trend in different line items. For doing horizontal analysis, financial statements for two years are used. The previous year statement is used as a base and items on other period statements are compared with the items of base year. The change is represented in dollar and percentage terms.

Formula for Horizontal Analysis:

For doing the Trend Analysis of BHP Billiton, we have used the financial statements for the year ending 30th June 2016, 2015 and 2014. The sales of the company decreased 6.42% in the year 2015 and then increased slightly by 1.90% in year 2016. In spite of decreasing sales, the operating expenses of the company are not increasing. It decreased by 1.51% in year 2015 and 3.85% in year 2016. The net income of the company decreased by 27.47% in the year 2015 and increased by 23.25% in the year 2016.

The amount of common stock remained constant for all the three years whereas retained earnings increased by 7.63% and 11.30% for the year 2015 and 2016 respectively. The total stockholders’ equity increased by 7.28% and 11.99% for the year 2015 and 2016 respectively.

Thus, it can be concluded that company faced few problem in the year 2015, but gradually recovered in the year 2016.

Vertical Analysis

It is also known as Common-Size Analysis is the most common method of financial statement analysis. It shows every element on the account as a proportion of base figure within the statement. For doing this analysis, all specific assets are represented as proportion of total assets. The current liabilities, continuing, stockholders equity are represented as proportion of entire liabilities and stockholders’ equity. In case of income statement, sales is usually used as base figure and other items like cost of goods sold, operating expenditures, gross profit, income tax expense are expressed as proportion of sales. Comparative Common Size statements can also be prepared for making inter-company comparison between different years.

Formula for Vertical Analysis:

For doing the Vertical Analysis of BHP Billiton, we have used the financial statements for the year ending 30^th June 2016, 2015 and 2014. The company is paying nearly 70% of the earnings as operating expenses in all the three years, and thus earning 30% of the earning as operating income. The proportion of financial expense (interest expense) is 1.19%, 2.10% and 1.89% for the year ended 2014, 2015 and 2016 respectively. Income tax Expense consumes roughly 9% of company’s earnings. The net income earned by company is 21.95%, 17.02% and 20.58% for the year ended 2014, 2015 and 2016 respectively.

In all the three years, company has approximately maintained current assets at 15% and non-current assets at 85%. The current liabilities decreased from 17.04% in 2012 to 14.47% in 2015 and finally to 11.93% in 2016.

The proportion of total liabilities and stockholders’ equity remained constant at 49% and 51% respectively for all the three years.

Balance Sheet

The balance sheet shows the monetary situation of BHP Billiton and Rio Tinto. BHP Billiton has more resources to determine that the Rio Tinto-related organization has a higher budget. More resources should be available in the future and responsibilities should generally be limited.

The vertical analysis is so strongly determined by the association that it gives an idea of ​​the advantages and responsibilities of a partnership. Both partnerships need to gain more resources in the future to achieve the success rate as quickly as possible.

Common rental

The Proclamation of Income helps to demonstrate homework money, contribute and finance global exercises (DRURY, 2013). Rio Tinto has a better net result in correlation with BHP Billiton. In fact, BHP Billiton generates negative sales that will not be positive in the coming.

A vertical survey is carried out showing the money generated by the activities, the contribution and the financing in general. This test takes into account the absolute numbers and the coordination of the equivalent that was shown for the two associations.

Profitability Ratio

Return on Assets

This ratio shows the net income earned by the total assets that are employed into the business. It represents how efficiently the company is managing and expending its assets. BHP Billiton has maintained return on assets in the range of 8%-12% during all three years, which can be considered as satisfactory number.

Return on Assets = Net Income / Total Assets

Wealth is one of the proportions of benefits that measures total compensation with full-time resources (Larkin and DiTommaso, 2013). This percentage makes it possible to assess a company’s dominance in managing its profits, determining the profits for a given year. BHP Billiton aims at low resource gains over the two years. This indicates that this organization does not redeem its money the last time it receives a profit. If Rio Tinto occurs, the return on investment over the years is very low, which is not capable of generating a final profit. Without a doubt, Rio Tinto is in a better position and can use its advantages convincingly.

Net profit margin

The net benefit advantage is one of the productivity indicators that can be used to calculate net income relative to the age of wages in a given year (Datar et al. 2013). This percentage indicates the number of offers remaining after determining the cost of a given activity. BHP Billiton recorded a total net profit of 0.04 in 2015. This shows that the organization cannot properly manage its revenues. This organization should work best for larger shares as quickly as possible. Rio Tinto has a net profit of 0.13%, which shows that it has a position of correlation with BHP Billiton.

Liquidity Ratio

These are computed to examine the capability of the business to reimburse its present liabilities. Liquidity ratios represent the cash position of the company and capability to convert other current assets into cash so as to reimburse the current liabilities. The liquidity ratios computed for BHP Billiton are Current ratio, Quick Ratio and Cash Ratio.

Current Ratio

It calculates the capability of the company to reimburse its current liabilities by using its current assets. It is useful for creditors as it will give them an idea about the liquidity of company. Higher the current ratio, more favorable it is.

Current Ratio = Current Assets / Current Liabilities

For BHP Billiton, the current ratio improved continuously from 0.93 in 2012 to 0.94 in 2015 and then finally to 1.23 in 2016. It implies that for the year 2015 and 2016, the current assets were lower than current liabilities and in 2014 current assets are marginally higher than the current liabilities.

The current report is a liquidity report that measures the liquidity position of a specific association. This percentage is estimated by separating short-term assets from short-term liabilities. These fees help to show the transitional obligations of a particular club. The perfect ratio is 2: 1. BHP Billiton has current rates of 1.23: 1 and 1.27: 1 in 2014 and 2015 individually. This shows that the company must improve its processes to fulfill its short-term commitments in the most productive way. Rio Tinto shows the current rates of 1.46: 1 and 1.72: 1 individually in 2014 and 2015. This shows that Rio Tinto is in a better position and can effectively fulfill its transition obligations without making much effort (Riotinto .com, 2015).

Quick ratio

It calculates the capability of the company to reimburse its current liabilities by using its quick assets. Quick Assets are the assets that can be changed into cash in a period of 3 months. Examples of Quick Assets are cash, cash equivalents, saleable safeties, temporary investments as well as current accounts receivable. Higher the quick ratio, more favorable it is.

Quick Ratio = (Current Assets – Inventory – Prepaid Expenses) / Current Liabilities

For BHP Billiton, quick ratio remained stagnant at 0.65 for the year 2015 and 2016 and then increased to 0.90 for the year 2016. The liquidity position of the company is in very bad stage because the quick assets are lower than current liabilities.

The summary report is one of the liquidity measures that help to manage short-term liabilities linked to solid resources. This report helps to estimate the liquidity position of a specific association. BHP Billiton had a rapid participation of 0.51 and 0.55 in 2014 and 2015. This shows that this organization has sufficient profits quickly to distribute the liabilities among the company. Such an organization should not participate in the auction of distant resources as capital resources of a structure. Rio Tinto has a rapid proportion of 0.78 and 1.07 in 2014 and 2015. Rio Tinto has a better correlation with BHP Billiton. This organization can easily fulfill its current obligations to take care of its agile resources for future reasons (Zack, 2013).

Capital Structure

Debt to Equity ratio

Debt-Equity Ratio offers evaluation among total debt and total equity engaged in the business. Greater debt to equity denotes that company is relying more debt in contrast to equity. Lower the debt equity ratio, well it is as it specifies that the corporation is economically secure and free of risk.

Debt Equity Ratio = Debt / Equity

BHP Billiton maintained the debt equity ratio of approximately 95% for all the three years, indicating that the company maintains equal proportion of debt and equity.

The Debt-Equity Ratio is a percentage of solubility that can be used to assess the ability of the association to continue in the years to come. It is advised that the club has a higher proportional value obligation, as this will help finance the speculator for future reasons. During a review with the two organizations, Rio Tinto was more obliged to individually assess the proportion of 1.42 and 1.32 in 2014 and 2015. This shows that this association will receive more credit. This will help investors get bank advances as soon as possible. BHP Billiton has a lower value ratio obligation, which suggests that it is more financially stable in the Rio Tinto test (Bhpbilliton.com, 2015).

Equity Ratio

It calculates the company’s whole liabilities as a proportion of its total assets. It represents how much assets the firm must sell so as to meet all of its liabilities. This ratio assists the creditors and investors in evaluating the overall debt burden of company. Higher the debt ratio, high is the risk involved in the company.

Debt Ratio = Total Debt / Total Assets

BHP Billiton maintained the debt ratio of approximately 49% for all the three years, indicating that the company maintains almost equal proportion of debt and equity.

The debt to equity ratio is one of the solubility ratios by which the total sum of benefits can be estimated. The owners of speculations correlated with the total value and all the resources of an association recognize this advantage (Larkin and DiTommaso, 2013). BHP Billiton has a higher share of value than Rio Tinto for fiscal years 2014 and 2015. At this point, BHP Billiton appreciates the excellent conditions. It is important to understand how a high level of speculation shows that investors are investing resources in the specific organization. This condition will prompt financial specialists to invest resources in BHP Billiton as well as in potential tenants. This indicates that the organization is less precarious and that it is easier to make future loans in general.

Market Performance

Earnings per share

Earnings per share is one of the market reports that can be used to calculate the net profit of ordinary shares in general. This percentage is one of the types of productivity that quantifies the ability to associate more effectively with the age of income (Zack, 2013). The figure above shows that BHP Billiton had the highest earnings per share in 2014. It is preferable for the association to generate earnings per share, as this means the productivity position of a specific association. BHP Billiton is becoming increasingly profitable in its relationship with Rio Tinto and can offer its investors more benefits without much effort.

Dividends per share

Dividends per share are used to estimate the total salary for a given year (Soin and Collier, 2013). This report highlights the benefits of an organization that helps keep the store active for future reasons. Currently, consistency in relation to high or low is generally significant.

Highlighting the changes identified in the ratio and its reasons

Quantitative analysis of Rio Tinto and BHP Billiton

Quantitative analysis is performed by calculating the proportions of BHP Billiton and Rio Tinto. In the critical analysis, it is easy to understand that Rio Tinto thinks it is profitable compared to BHP Billiton. Several changes must be made in the two companies so that they can generate sales in future commercial activities.

The profitability index is calculated to understand the position of the two companies in the financial market. It is recommended that Rio Tinto and BHP Billiton find new strategies to increase their sales for future purposes.

The liquidity ratio measures a company’s ability to make short-term commitments for future purposes. Rio Tinto has a better liquidity position than BHP Billiton. This is due to the fact that Rio Tinto has a high percentage of short and quick term assets, which facilitates the fulfillment of short term commitments.

The capital structure or the solvency ratio must be high to finance investors and receive bank loans for future purposes. BHP Billiton has a high credit rating, which allows it to obtain bank loans more quickly than Rio Tinto in all other cases.

Market performance helps determine a specific organization’s profitable position. BHP Billiton has several dividends and a earnings per share index that allows the company to distribute profits to its shareholders.

It is important to note that both companies operate in the same sector. Therefore, it is important to plan innovative ideas. Management must try to change and implement a new competitive advantage so that companies can remain in the global market.

Conclusion

At the end of the study, BHP Billiton was better positioned in terms of profitability and solvency than Rio Tinto. It is recommended that the organization acquire more assets and reduce its liabilities in the future. Efforts must be made to maintain the inventory for future use. Inventory controls are essential for a company to achieve future growth rates in the near future.

Recommendations

Investors are encouraged to invest in BHP Billiton as it is more profitable than BHP Billiton. In addition, Rio Tinto must invest in its competitors to generate more sales for its companies.

References

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