Financial Reporting A Key Resource Company

Question: Describe about the Financial Reporting for A Key Resource Company. Answer: Introduction BHP Billiton BHP Billiton, a key resource company specializes in production of commodities like copper, coal, iron ore etc. It is also involved in activities related to gas, coal, and oil. It has also gained the title of a major producer of items such as iron ore, nickel, silver etc. The company headquarters in Melbourne, Australia and its listing is on the ASX. The company targets on a long-term basis to own low-cost assets that are diversifiable by market and geographical locations. For such purposes, it satisfies the needs and expectations of customers through its growth and resources. The sales initiated through Houston and Singapore but are sold throughout the globe. Incorporated in 1885, it hires nearly 123,800 employees and contractors diversified to more than 130 locations, for such motives. BHPs position is a clear-cut sign of its significant contribution towards achievement of economic growth (BHP Billiton, 2015). Rio Tinto Rio Tinto is a leader in the field mining and mineral processing. It aims to offer strong returns to its shareholders through an effective portfolio. It is headquartered in UK and employs more than 60000 people in its workforce. Established in 1873, its listing is on the ASX and is operative in 40 countries as a whole. With an international presence, it can provide a proper prowess in the right time. On a whole, it pursues an effective portfolio that assists it to develop globally (Rio Tinto, 2015). It aims to offer an enhanced value to customers and to be a most reliable partner. 2. Sources of financing BHP Billiton The total debt accommodating liabilities that were of interest bearing nature and BHP Group issued a four part Global Bond totaling to US$5 billion that consists of Senior Floating Rate Notes of US$ 500. BHP pursues US$ 6 billion commercial papers that are funded by credit facilities of US$6 billion. The financing activities consists of liability proceeds that are interest bearing in nature, liability repayments that are also interest bearing, proceeds from debt-related instruments, ordinary share proceeds, activities of buy-back, dividend payment etc. These activities result in cash flow from financing activities (BHP Billiton, 2015). The equity part consists of treasury shares, share capital, retained earnings, and reserves. The issued share capital consists of shares assisted by treasury, preference, and public shares. Rio Tinto Rio pursues powerful finance availability but not lean to banks and capital markets. It obtained Finance Plc bonds through the group in 2013. This finance limited and finance plc proceeded into an activity that resulted in a sum of US$7.5 billion as syndicate banks borrowers. The group entered into a bilateral agreement (bank facility). In order to manage obligations, Rio issued 1436542 treasury shares and 951 fresh shares. The trustees bought 842000 shares and company registrar bought 1089189 shares for satisfaction of obligations. Retained earnings, share premium account, and reserves form a significant part of the companys share capital (Rio Tinto, 2015). The financing activities comprised of equity dividend payment, repayment of all borrowings, interest purchase (non-controlling), proceeds extracted from further drawings, and other cash flows. Ratio Analysis and comparison a. Profitability Ratio BHP Billiton Net Profit Margin Net profit Margin 2014 2015 Net income 15224 2878 Net sales 56762 44636 26.82076 6.44771 A significant decline in the net profit margin is observable in 2015 due to the inappropriate control of operating profit ratio and operating expenses by the company. Hence, it must consider the same. Return on Total Assets ROTA 2014 2015 PBT 21735 8056 total assets 15413 124580 1.410173 0.064665 The ratio of ROTA declined in 2015 as the company has not efficiently utilized its resources. Such a sign is a poor indicator and hence, company must make ways for change (Williams, 2012). Rio Tinto Net Profit Margin Net profit Margin 2014 2015 Net income 4285 799 Net sales 24337 17980 17.60694 4.443826 The net profit margin of Rio Tinto also declined as it failed to sustain its operating expenses as a whole. ROTA ROTA 2014 2015 PBT 6092 1745 total assets 107827 101303 ROTA 0.056498 0.017226 Rio Tinto witnessed a sharp decline in its ROTA as it failed to utilize its resources properly. Comparison It is observable through the profitability ratio that both BHP Billiton and Rio Tinto failed to deliver a proper profitability ratio. Both the companies witnessed a decline in ROTA and the net profit margin and hence, both must make ways for change (Parrino et. al, 2012). Liquidity Ratio BHP Quick Ratio Quick Ratio 2014 2015 Quick assets 16,283 12,077 Current liabilities 18,064 12,853 Quick ratio 0.901406 0.939625 BHP is approximately closer to the standard quick ratio of 1:1. An increment is observable in 2015 that depicts that BHP has enough resources to discharge its obligations (Northington, 2011). Current Ratio Current Ratio 2014 2015 Current asset 22296 16369 Current liabilities 18064 12853 Current ratio 1.23427812 1.2735548 An enhancement of current ratio is observable in 2015 that portrays BHP is solvent and is capable of meeting its obligations with flexibility and simplicity (Needles Powers, 2013). Rio Tinto Quick Ratio Quick ratio 2014 2015 Quick assets 16463 14349 Current liabilities 12220 11980 1.347218 1.197746 A significant decline in the quick ratio of Rio Tinto is observable that depicts that it does not pursue enough resources. Moreover, the ratios are near to standard ratio and it will definitely assist Rio in achieving desired outcomes (Melville, 2013). Current Ratio Current ratio 2014 2015 Current assets 20813 18273 Current liabilities 12220 11980 A decreased current ratio of Rio Tinto suggests that it will encounter problems in meeting the obligations. However, the decrease is less and is attributable to decline in current assets (Melville, 2013). Comparison In relation to liquidity ratio, it is observable that BHP is in a good position to meet its debt obligations because its quick and current ratios have increased towards standard ratios but the opposite is in Rio Tintos case. c. Market performance BHP Earnings per share 2014 2015 EPS 249.3 120.7 A decline in the companys EPS suggests poor company performance in relation to factor of earnings (Horngren, 2013). Dividend per share Dividend per share 2014 2015 118 124 An increment of DPS in 2015 suggests shareholder benefits because of profits made by BHP. However, other ratios have disappointed in comparison to 2014. Rio Tinto DPS DPS 2014 2015 103.09 144.91 An increase in DPS suggests shareholder benefits due to significant profits earned by Rio in 2015 (Horngren, 2013). EPS EPS 2014 2015 238.2 43.8 A decline of EPS depicts a bad indicator for Rio Tinto, as shareholder benefits will be less. However, when it comes to profitability measurement, this can be considerable as a best indicator. It is notable that this EPS is not entirely for 2015 and hence, figures can vary (Gibson, 2010). Comparison Both the companies have witnessed increment in DPS that indicates better scenarios for obtaining profit by them. Furthermore, such good profits imply payment to shareholders as dividend (Gibson, 2010). The dividend enhanced and EPS declined in case of both the companies but such decline was more in Rios case. On a whole, BHP is better. Capital structure BHP Equity ratio Equity ratio 2014 2015 Shareholder fund 79143 64768 total assets 151413 124580 Equity ratio 0.522696 0.519891 A decline in equity ratio of BHP is observable here and it suggests that creditors of BHP are at huge risk as its resources have burnt out towards interest payment (Libby et. al, 2011). Debt equity ratio Debt equity ratio 2014 2015 Total liabilities 66031 54035 Shareholder equity 79143 64768 Debt equity ratio 0.83432521 0.8342854 It is observable that the company has taken no further debt from markets and continued activities from resources it pursues. In other words, a little reliance is on debt, which is a good indicator. Rio Tinto Equity ratio Equity ratio 2014 2015 Shareholder fund 46285 42647 total assets 107827 101303 Equity ratio 0.429252 0.420985 A low equity ratio is observable that depicts efficiency of capital structure. Furthermore, it declined in 2015 that suggests high risks, thereby creating problems in taking of loans and huge sum expended for interest payment. Debt equity ratio Debt equity ratio 2014 2015 Total liabilities 53233 50670 Shareholder equity 46285 42647 Debt equity ratio 1.150113 1.188126 An increment in debt equity ratio suggests increase in debt. Rios reliability on debt is high and this is an issue because lender claims will be more when debts are high (Kaplan, 2011). Comparison In relation to the above, the capital structure of BHP is better with equity and less reliance on debt but lower equity ratio indicates problems especially for lenders. Rio has higher debt equity ratio that signifies high reliance on debt and low equity ratio also create problems for creditors. Framework BHP Billiton BHP pursues a powerful corporate planning that allows it to meet the challenges of the external environment, thereby facilitating in an enhanced average return (Brigham Daves, 2012). The beginning stage rests the creation of a central case that assists in assessment of bottom up strategies. Furthermore, the designed planning of corporate procedures assists in outshining several uncertainties prevalent in the international scenario. Nevertheless, the framework supports in establishing external factors that comprises political, technical and governance. Even the compliance and governance procedures make sure that review of internal control is appropriate (BHP Billiton, 2015). Therefore, this designed framework assists in mitigating risks and providing an effective solution. Rio Tinto Rio Tinto emphasizes risk dealing a relevant portion of creating and protecting value. The risk management framework identifies leaders as significant and assists in providing perfect guidance. Rios framework aims for such a way so that risks are controllable to a desired stage (Rio Tinto, 2015). Summary Findings Both Rio Tinto and BHP belong to a similar industry but the significant part that requires explanation is the maintenance of internal policies. Both the companies choose a varied framework. Secondly, the long-term finance is observable by way of bonds. Both companies pursue varied management and therefore, they pursue varied strategic tools. Besides, the ratio analysis outcomes will be different in different scenarios (Choi Meek, 2011). Thirdly, the ascribable profit of BHP Billiton stood at US$ 13.8 billion and the net operating cash reported at US$ 25.4 billion. These advantageous results are attributable to the increased production and cost effectiveness measures of the company. The company received A credit rating and its balance sheet depicted strong results too due to the fact that it invested in high return schemes. On the other hand, Rio created sustainable shareholder returns in 2014 by providing vital commodities. A powerful and operational performance is observable through the annual report. The net cash from operating activities reported at US$14.3 billion while the underlying earnings stood at US$9.3 billion. Fourthly, Furthermore, the company at enhanced prices sold assets worth US$ 6.7 billion. The company also did an effective contribution towards the environment and communities that made it very popular. Moreover, in relation to recordable injury, the company noted a significant decline of nine percent. The significant increase of two percent in the revenues made the figure US$ 67.2 billion (BHP Billiton, 2015). On the contrary, in the case of Rio, the capex decreased to US$8.2 billion and economic contribution reported at US$230 billion. In 2014, the company had paid 204.5 US cents per share that is 15 cents higher to that of 2013. The net debt decreased from US$18055 to US$12495, thereby indicating low reliance on debt (Rio Tinto, 2015). Recommendation/ Forecast It is clearly observable that both companies are striving to obtain their goals but they have to encounter various difficulties for the same. Since, not all standards are sustainable; ratio analysis can result in variations in the results. Moreover, the ratios of both companies suggest that they pursue a potential to increase their position in the market through their strategies. To ensure a better performance it is important for both the companies to stress on capital structure. However, Rio needs to strengthen its balance sheet and various other ratio while BHP has strong fundamentals that can help it to attain a strong position. In the coming years both the companies can further strengthen their hold on the market as the fundamentals are strong. 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Melville, A 2013, International Financial Reporting A Practical Guide, Pearson, Education Limited, UK Needles, B. Powers, M 2013, Principles of Financial Accounting, Cengage Learning. Series: Cengage Learning. Northington, S 2011, Finance, New York, NY: Ferguson's. Parrino, R., Kidwell, D. Bates, T 2012, Fundamentals of corporate finance, Hoboken, NJ: Wiley Williams, J 2012, Financial accounting, New York: McGraw-Hill/Irwin. Rio Tinto 2015, Rio Tinto Annual Report and accounts 2015, viewed 24 September 2016, https://www.riotinto.com/documents/150806_Rio_Tinto_delivers_first_half_underlying_earnings_of__2.9_billion.pdf.