Financial Performance Periods Contraction -Myassignmenthelp.Com

Question: Discuss About The Financial Performance Periods Contraction? Answer: Introduction: The report is prepared to analyze the liquidity, profitability, market performance and capital structure of two mining companies in Australia. Analysis of financial position is done in terms of ratios computation. Interpretations of ratios have been done with references to theoretical concepts that have assisted in the evaluation of operation and performance of companies. Two companies that are selected are BHP Billiton Limited and Rio Tinto Limited being the peer. BHP Billiton is one o the top listed public company that derives majority of its income from its division of metal ore mining (Bhp.com 2018). Operations of company are done through its divisions such as coal, iron ore and potash and petroleum. Rio Tinto is one of the largest mining and metal corporations operating in Australia. Main business of Rio Tinto is the production of several minerals such as diamonds, bauxite, iron ore, gypsum, uranium and borates. Discussion: Ratio analysis and ratio figures of BHP Billiton and Rio Tinto limited: BHP Billiton Rio Tinto Limited 2016 2015 2016 2015 Current ratio 1.435 1.274 1.611 1.548 Return on equity ratio -0.114 0.042 0.118 -0.023 Debt ratio 0.495 0.434 0.560 0.592 Price earnings ratio -28.625 6.808 14.218 -112.617 Evaluation of liquidity position of firms: Liquidity positions of both the companies are analyzed by the computation of current ratio for two financial year period. Current ratio enables business to analyze their level of risks and requirement of working capital. Current ratio depicts the ability of organizations to clear their short-term obligations. This particular ratio for BHP Billiton limited stood at 1.435 and 1.274 in financial year 2016 and 2015 respectively. It is indicative of the fact that liquidity position of company has increased in recent years. Increase in current ratio of BH Billiton indicates the employment of more conservative approach to working capital management and improvement in liquidity position of company (Agosto et al. 2016). On other hand, ratio for Rio Tinto Limited stood at 1.611 and 1.548 for year 2016 and 2015 indicating increase liquidity position. Therefore, there has been improvement in the liquidity position of both the companies. However, ratios for both the companies have improved but cu rrent ratios for Rio Tinto is comparatively higher than that of BHP Billiton Limited. Since, the companies operating in mining industry, is required to maintain a standard current ratio of 2 (Ibisworld.com.au.aib.idm.oclc.org 2018). Therefore, from the perspective of industry standard, liquidity position of Rio Tinto is favorable compared to BHP Billiton limited. The reason behind the higher current ratio is attributable to the fact that current liabilities of Rio Tinto limited are significantly lower than BHP Billiton. However, there has been decrease in current assets along with increase in current liabilities. On other hand, current assets of BHP Billiton have increased in year along with decline in current liabilities. Improvement in liquidity position is indicative of the fact that company has adopt more efficient management practices and maintains a strong working capital cycle (Cavusgil et al. 2014). Evaluation of profitability position of firms: Profitability position of companies has been analyzed by the evaluation of return on equity. Investors prefer higher value of return on equity as this depicts that company is efficient in generating income. Ability of organization to generate profits from the investment of shareholders is depicted by return on equity ratio. Investors always prefer higher return on equity compared to lower return on ratio (Uechi et al. 2015). In order to check the trend of ROE, investor is required to compare companies. It can be seen from the figures of return on equity that profitability position of BHP Billiton as well as Rio Tinto has improved in the recent years. Return on equity of BHP Billiton stood at 0.042 and -.114 for the year 2015 and 2016 respectively. It indicates that return on equity ratio has worsened and negative returns have been contributed to shareholders. The reason is attributable to decline in total value of shareholders equity and negative net income generation (Mason et al. 2 015). On other hand, ratio for Rio Tinto limited stood at -0.023 and .118 for year 2015 and 2016 respectively. This figure depicts that ratio has increased in recent years. This improvement in return on equity is because Rio Tinto has generated a positive net income in year 2016 compared to negative income in year 2015. Moreover, the value of shareholders equity has also increased by considerable amount in year 2016 that has lead to an improvement in return on equity. From the above graph, it can be seen that the position of organizations in terms of return on equity has reversed. ROE of Rio Tinto Limited was negative in year 2015 that has improved in recent year to a positive value. BHP Billiton situation in terms of ROE has reduced in year 2016 compared to favorable position in year 2015. The component ROE of BHP Billiton Limited that is favorable is total value of shareholders equity and net income is inferior component. Negative value of ROE depicts that funds of investors are not utilized effectively. Management of organization is not effective in generating returns from investors funds (Zhang and Moffat 2015). Higher value of ROE for Rio Tinto depicts that the funds of shareholders are utilized effectively and management is effective in making use of equity financing for funding the growth and operations of company (Titman et al. 2017). Therefore, position of Rio Tinto Limited has improved in year 2016 and has provided better returns to its shareholders. Evaluation of capital structure position of firms: Positions of capital structure of companies have been analyzed by the evaluation of debt and solvency position of companies. The financial leverage of company is measured using debt ratio that depicts the ability of business to pay off its debt and continue its operation. Long-term financial sustainability of business is indicated by the value of debt ratio (Muhammad et al. 2015). Debt ratio of BHP Billiton has increased from 0.434 in year 2015 to 0.495 in year 2016 respectively. Solvency position of company has increased in the recent year that is not regarded as favorable from investors point of view. This increment in debt ratio is because of increase in amount of total liabilities and decrease in amount of total assets. Value of debt ratio for Rio Tinto stood at 0.592 in year 2015 as against .560 in year 2016 respectively. This fall in debt ratio is attributable to declining total liabilities of company in recent years. Nonetheless, there has been fall in total assets of Rio Tinto limited (Hong et al. 2015). Now, when comparing the solvency position of both BHP Billiton and its peer that is Rio Tinto limited, it can be seen that solvency position of BHP Billiton is better compared to Rio Tinto Limited. It is so because although the value of total liabilities BHP Billiton is more than Rio Tinto limited, the total amount of assets that has led to lower debt ratio. From the above graph, debt ratio of Rio Tinto has decreased in recent years and that of BHP Billiton has increased. Nevertheless, total value of debt ratio has for BHP Billiton ratio is lower than its competitor is and this is illustrative of the fact of better solvency position of company. Lower ratio of BHP Billiton assets of company is sufficient to meet their obligations. However, this might result in restricted growth of company indicated by underutilization of major finance source (Karadag 2015). Higher debt ratio of Rio Tinto is indication of high risks for both the equity investors and debt holder of company. It would make it difficult for company to obtain finance for raising money at good terms. Evaluation of market performance of firms: Market performance of organizations is analyzed by the evaluation of price earnings ratio. An increase in the price earnings ratio of the company is indicative of the fact that the market value of company is increasing. This particular ratio is used by investors for evaluating the fair market value of stock of company. It is expected that companies with higher earnings have appreciation in the future value of stocks and higher dividends. Price earnings ratio of BHP Billiton for the two financial years stood at -28.65 in year 2016 and 6.808 in year 2015 respectively. It is suggested by figure that price earnings ratio of the company has become negative. This decline in ratio is because of loss per share attributed to shareholders of company. This negative value is usually indication of poor future and current performance of company and this might be associated with poor investment (Gitman et al. 2015). Moreover, it also anticipates that there will be lower growth and performance in fu ture and will not make investors to invest in the company. On other hand, price earnings ratio of Rio Tinto Limited has improved in recent years and this anticipates improvement in performance of company in future. Value of ratio stood at 14.218 in year 2016 compared to -112.617 in year 2015. This improvement in ratio is attributable to positive earnings per share of 2.57 in year 2016 as against negative value of 0.47 in 2015 respectively. However, market price per share has reduced from 52.93 in 2015 as against 36.54 in year 2016. This higher value makes investors anticipate higher growth and better performance of company in upcoming years (Biddle et al. 2016). Conclusion: From the analysis of above figures of different ratio, it can be inferred that the overall financial performance of Rio Tinto is better than BHP Billiton. Rio Tinto Limited in terms of profitability position, liquidity position and market structure has outperformed BHP Billiton Limited. Management of Rio Tinto limited is more efficient in generating income using their total available assets (Lodhia and Hess 2014). Moreover, the ability of current assets of organization is more efficient for fulfilling their current obligations compared to BHP Billiton Limited. The only factor that is not favorable supporting the financial position of company is its solvency position (Dudin et al. 2014). However, the total liabilities of BHP Billiton have increased but it is increasingly finance by the availability of total assets. Therefore, performance of BHP Billiton is lower than that of Rio Tinto followed by the negative mining industry growth of -1.7 million. Furthermore, it is commendable to no te that current growth rate of revenue of industry is negative at -2.8% (Hosseinzadeh et al. 2018). Nevertheless, the revenue generation of both the mining companies is positive. In the nutshell, it can be concluded that overall financial performance of BHP Billiton Limited is not surpassing Rio Tinto Limited. Calculation of share price of BHP Billiton using assumed values: Particulars Amount Risk Free Rate of Return A 2% Market Risk Premium B 7% Beta C 1.285 Cost of Capital D=A+(BxC) 11.00% Dividend paid per share E 2.2 Dividend Growth Rate F 4% Expected Dividend G=Ex(1+F) 2.288 Market Value of Shares H=G/(D-F) 32.70908 In this particular assignment, the selected company is BHP Billiton that has market share price of 34.35. On other hand, the calculated share price of company is done by using dividend discount model. Valuation of price of stock using this model is based on the theory that future payment of dividend is discounted the present value. This particular model only focuses dividend declared by company for computing the share price (Cornell 2015). Valuation of stock of company is done on future dividends net present value. However, market share price takes into consideration several other factors for the computation of share price (Uechi et al. 2015). This is the reason why there is difference between the calculated figures and actual share price of company. Furthermore, the share price calculated is based on assumed figures about market risk premium, growth rate and beta of company that is not relevant. Calculated of bond price traded in the market: Particulars Amount Face Value A $ 1,000 Coupon Rate B 5.75% No. of Payments in a year C 2 Coupon Payments D=(AxB)/C $ 28.75 Years to Maturity E 10 Market Rate p.a. F 2.37% Semi-Annual Market Rate G=F/2 1.19% Total Nos. of Payments H=CxE 20 Price to Bond I=Dx[1-(1/(1+G)^H)]/G+[A/(1+G)^H] $ 1,299 References list: Agosto, A., Mainini, A. and Moretto, E., 2016. Covariance of random stock prices in the Stochastic Dividend Discount Model.arXiv preprint arXiv:1609.03029. Bhp.com. (2018). [online] Available at: https://www.bhp.com/-/media/bhp/documents/investors/annual-reports/2016/bhpbillitonannualreport2016.pdf?la=en [Accessed 10 Feb. 2018]. 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