[Authentic] Assignment – Financial Analysis

Details: Financial Analysis
Historical Performance

In 2016, BHP Billiton reported revenues of $26 billion which was a 31% decline from its 2015 revenues of $34b. The reason for the fall in revenue was attributed to the huge drop in commodity prices (Reuters, 2018). As a result, BHP earnings were wiped out and the company reported a loss of $6.5 billion in 2016 leading to a drop in share prices. According to Figure 7, its Return on Assets and Return on Equity were negative at -5.28% and -11.09% respectively. A negative ROA and/or ROE suggest that the company was operating inefficiently in 2016 (Subramanya & Wild, 2009).
Despite the above, BHP Billiton was still able to cover its short term liabilities using its current assets. In Figure 5 & 7, it shows that BHP had a current ratio of 1:1.44 and quick ratio of 1:1.16 in 2016. Hence, BHP was still considered a liquid company amongst its peers. However, in the same year the company increased its long term debt levels to $33 billion leading to debt to equity ratio of 60% according to Figure 6 & 7. A high ratio suggests that BHP was an above average leverage company (Ro, 2015). Even though a high debt to equity ratio is common with large companies, it could also suggest the company has a lot of debt in its books which is not sustainable. This could lead to solvency problems which could deter investors from the company.
Current Performance
Figure 5: BHP Billiton Liquidity ratios from 2016 to 2018
In 2017 and 2018, BHP was able to recover from its negative outlook from 2016. In 2018, BHP Billiton’s revenues increased by 21% from 2017. Similarly in 2017, revenues increased by 17% increase from 2016 suggesting that the company has been doing well in the current years.
Furthermore, BHP reported a profit after tax of $5.9 billion and $3.7 billion in 2017 and 2018 respectively. Based on Figure 7, its Return on Assets and Return on Equity were positive at 6.91% and 12.76% respectively, suggesting that the company was operating efficiently in 2018. Furthermore, a positive ROA value shows the company is making a good return on its assets (Investing Answers, 2017). Following the good results, BHP Billiton was able to pay dividends amounting to $5.2 billion in 2018 in comparison to 2016.
According to Figure 5, the company was still able to meet its liquidity levels following an improvement in the current and quick ratios which were just above 2:1 by 2018. Furthermore, the company’s debt level fell from $33 billion in 2016 to $24 billion in 2018. This reduced BHP’s debt to equity ratio in 2018 to about 44% as shown in Figure 6. A reduction in debt is good for the company as it makes the level of debt more sustainable while reducing the solvency risk.
Figure 6: BHP Billiton Debt to Equity ratios from 2016 to 2018
The table below summarizes the ratios over the three year period 2016 to 2018.
 
2018
2017
2016
liquidity
 
Quick Ratio
2.24
1.53
1.16
Current Ratio
2.51
1.85
1.44
Profitability
 
ROE
12.76%
10.67%
-11.09%
ROA
6.91%
5.72%
-5.28%
ROC
9.14%
7.28%
-6.75%
EPS
1.39%
2.21%
2.40%
Revenue Growth
20.76%
16.90%
-30.75%
Leverage
 
D/E
44%
48%
60%
Figure 7: Liquidity, Profitability, Efficiency and Leverage Ratios of BHP Billiton over three year period from 2016 to 2018
In summary, in the last year BHP showed increased profitability levels. When observing the 2018 ROE, the owner’s capital has been used effectively to generate additional income. A high ROE is attractive to investors as it suggests that the company can pay dividends in the coming years.
BHP also showed a strong liquid position as observed by its high current and quick ratios. Investors assess these ratios to determine if a company will continue as a going concern. Therefore, a high ratio is a good indicator to investors as such companies are not faced with bankruptcy, like the case of BHP.
Lastly, over the three years BHP’s debt levels have been decreasing. This is a good indicator to investors because if the level of debt is too high, investors will be worried that the company may be faced with a solvency risk.
Future Performance
According to the analyst and Appendix 2, the forecasted sales in 2019 will be 0.56% which will rise to a modest growth of approximately to 1.16% by FY21. The net income is expected to triple from 2019 to 2021 which in turn should increase dividends by 4% in 2021 (Market Screener, 2019)
Overall, BHP appears to be a stable company. There is potential for future growth for investors of BHP, however, we expect this additional returns to be very small. This is mainly attributed to changes in the economic cycles of the mining industry, continuous write downs by BHP and volatile …

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