BHP Billiton - Financial Accounting for Management - Example

Executive summary Introduction BHP Billiton is a global producer of natural resource; the company is located with its head office in Australia. The company came into existence as a merger between BHP and Billiton in the year 2001 and the combined business focus on Mining ore, steel oil as well as gases. The business as a subsidiary investment in jimblerbar pty limited worth 85% of investment. FINANCIAL STATEMENT ANAYLYSIS –BHP Billiton Company name: BHP Billiton Ltd  BHP Company ticker: ADR Student name : Ratios and Other Analysis Measures Year End (3 years) ROE and DuPont Ratios 2012 2013 2014 ROE (NI / OEavg) 25.14 15.93 12.77 Profitability (NI / Sales ) 21.36 16.49 20.58 Efficiency (Turnover = Sales / Assets avg) 0.49 0.46 0.39 Leverage (Leverage = Assets avg / OEavg) 1.95 1.91 1.83 Additional Profitability Ratios Gross Profit Margin % [(net Rev - COGS) / net Revenue] 63.1 61.9 65.2 Selling General &Administration % (SG&A expense / net Revenue) 14.33 16.47 11.40 Important Expense Percentage* (Important Expense / net Revenue) 8.14 9.56 6.73 Additional Efficiency Ratios AR Turnover (Sales / ARavg) .62 0.49 0.46 Days Receivables Outstanding (DRO) [ARavg / (Sales /365)] 84.76 87.55 92.36 Inventory Turnover (COGS / Inventoryavg) 4.31 4.17 3.95 Days Inventory (DI) [Inventoryavg / (COGS/365)] 84.76 87.55 92.36 AP Turnover (Purchases / APavg) 0.62 0.49 0.46 Days Payables Outstanding (DPO) [365 / (Purchases / Accts Payableavg)] 126.21 118.61 113.77 CASH CONVERSION CYCLE (DI - DPO + DRO) 14.19 -5.39 3.52 PPE Turnover (Sales / Net PPEavg) 0.88 0.67 0.63 Additional Leverage Ratios Debt-to-Equity (total Liabilities / total OE) 0.38 0.42 0.38 Times Interest Earned (Earnings before Interest Expense and Taxes / Interest Exp) 53.20 24.58 37.04 Return on Financial Leverage (ROE - ROA) 14.33 16.47 11.4 LT Debt-to-Assets (LT Debt, including current portion / total Assets ) 0.62 0.49 0.46 Cash Liquidity and Cash Sources & Uses Working Capital (CA - CL) 1,583 -586 4,232 Current Ratio (CA / CL) 0.93 0.97 1.23 Quick Ratio [(Ca s h + ST Securities + AR) / CL)] 0.59 0.65 0.88 OCFCL (Operating CF / CL) 1.96 1.95 1.91 OCFCX (Opera ting CF / Ca pi ta l Expenditures ) 2.21 2.00 1.96 Free Cash Flow (Ca s h from Ops – Net Ca p. Expend.) 4,929 -4,025 8,885 Growth Sales growth [(cy net Rev - py net Rev)/ py net Rev] 6.45 12.88 7.71 NI Growth [(cy NI - py NI )/ py NI ] 15.39 37.92 38.67 From the above ration analysis, it can be observed that the return on equity is declining, from the year 2012 to 2014, In this regards, it implies therefore that the equity holders of the company will been entitled to low amount of dividend. This is due to the fact that the company of having a wrong amount of debt liability to be paid. The profitability trend for the company is declining, this is an identification that the business situation of the company is declining hence posing a risk of liquidity risk since, the working capital of the company will less effective implying that, the daily operation of the business can be financed usi9ng the long term capital. This is a sign of business solvency which must be taken into serious consideration from saving the business. The gross profit margin for the business is improving last year implying that the business performance of the company is reviving from the decline. The impact of the decline in business performance from the global financial crisis, as well as the impact of war in Iraq and other strong oil producing countries in which BHP Billiton has some subsidiary investment. The working capital is as well as growing which is an indication that the company’s liquidity position is growing and consequently, a sign of going concern assumption for the company. The current ratio is more than one which is an indication that the company is have an affective debt management strategies. this is made possible by ensuring that the debt is kept minimal with more current asset and consequently, the impact of effective debt management is that it will lead to effective working capital as observed above and thus it implies therefore that the business working capital is able to meet its debt obligation as and when the fall due. As a result, the capital structure of the company will remain optimal and used to finance long-term capital investment for the business in order to ensure that the company remains strong in a changing business economy and increasing level of strength due to strong capital and improved business growth as reported by the net profit margin. The overall trend in business situation for BHP Billiton therefore depicts a growing tendance as observed by net profit merging, liquidity and efficiency ratio. The impact is that the stock price performance for the business will grow in the stock market leading to business expansion in terms of capital flow. The free cash flow for the business is growing massively implying that the company has some cash to pay dividend, invest as well as reduces its debt and the balance is significant in buying new stock and developing new product. The impact is that the stock price of the company’s share will be effective since, free cash flow issue to value stock pricing. 2. Long-term solvency of the company over the last three years Debt to equity ratio From the above data analysis. The company depict an increasing ratio in debt to equity ratio implying that, the business more stable financially since there is low debt equity ratio. In this regards, the company will be able to save more funds and to invest in other profitable venture to earn more returns to the business. In this regards, the company creditors are less risky since they are assured of their debt repayment by the company. Debt ratio The ratio measure the percentage of liabilities to asset and consequently it shows the ability of the company to pay its debt using the asset. From the above data analysis, it can be observed that the debt ratio of the company is declining which is a good indication that the company is stable due to low level debt and its repayment (Barry J. Epstein, 2009).This ratio is a good indication to the creditors that company’s debt can be repaid comfortable without affecting the working capital and liquidity risk of the business. This is a good indication that the going concern assumption of the business is effective. Equity ratio The equity ratio for the business is higher which is ideal for the business since, an improved investment level by stakeholders depict that the business is available venture due to the fact that many investors are willing to fund the business operation which is a positive indication to the creditors that the company is able to pay their debt as and when they fall due for repayment. The company assume more of equity financing since, this is a cheaper source to the business unlike debt financing (Barry J. Epstein, 2009). 3. Liquidity position of the company as at the latest financial year Liquidity risk is the risk that the company will be in a good position to meet its short terms financial debt as and when they fall due. The liquidity analysis for BHP Billiton provides the following summary. Current ratio From the above data analysis, the current ratio of the company is increasing. This implies therefore that the ratio of current asset to current liability is growing which implies therefore that the business is stable and will attract more investors and creditors to the business since, the liability of the company is minimal and reducing and consequently the company is having less to pay in terms of debt (Bruce Mackenzie, 2013). As a result, strong current ratio would lead to effective working capital management which will enhance the capital base for the company as well as encourage wider market shares in terms of investment. Working capital The working capital for the business is growing each financial period which implies that the company efficiency in terms of managing cash is enhanced. The implication is that presence of more cash would provide an opportunity for growing the business since, the company will be in a good position to diversify its investment portfolio in order to minimise investment risk and improves the returns. It can as well be realized that the current ratio for the business is improving and consequently, the level of debt is declining hence giving the company can opportunity to capitalize on the available cash to earn more returns from investment (Collings, 2015). Free cash flow The free cash flow for BHP Billiton is as well as growing and consequently, the stock price for the company is improving since, investor’s values the company’s worth using the free cash flow available the creditors of the company also perceive the company has a going concern since, the debt will be paid as and when they fall due. This is due to the fact that presence of free cash would mean that the company is managing their debt level well and consequently it is kept below the acceptable standard which provide and assurance as to the company going concern assumption. In this regards, more investors will be attracted to the business whi9ch will lead to more capital for investment as well as an increase in the level of stock price ion the stock market for the company (CCh, 2010). Quick ratio The company depict a growing trend in quick ratio as observed ion the above table. This implies therefore that the company is having an effective inventory management and consequently, there is constant inventory turnover which is an indication that the business is performing better in terms of sales revenue since; there is always inverse relationship between the number of inventory turnover and sales turnovers. The transaction provides therefore a significant proof that BHP Billiton is improving in terms of business performance due to the fact that the business is experience growth in efficiency in business operation. The quick receivable balances as well as the payables balances also confirms the efficiency of the magnitude to which controlling inventory has lead to improved business performance for BHP Billiton. 4. The quality of the financial statements. The financial statement of BHP Billiton is of highest quality since, it complies with the Australian accounting standards board requirement as well as the general acceptable accounting principle as far as accounting and disclosure of financial statement is concern. The analysis of the financial statement provides the following accepted accounting standards compliance. The national reporting and regulatory environment The national reporting and regulatory environment is the Australian Accounting standard board (AASB) which is authorized to supervise and to ensure conformity with the accepted accounting principles by corporations in Australian. Accounting items Accounting for Asset depreciation and impairment The BHP Billiton account for its asset at historic cost basis while assuming the reducing balance method of depreciation its asset in order to ascertain the written down value of the asset at the end of financial period. Impairment of goodwill The company test for goodwill impairment under the AASB 135 guideline (Impairment of asset). The standard provides that the business is evaluated with the worth as well as the carrying amount inclusive of the goodwill. The surplus of the fair value from the book value of the asset calculates the value of fair value of reporting unit. The business then computes the value of impaired asset as well as account for loss in the income statement as expense to the business. This methodology is in compliance with the accepted accounting standard as far as impairment of goodwill is concern as well as performance of the company’s net worth is benchmark with other corroboration worldwide. Accounting of asset on an historic cost basis According to the income statement for BHP Billiton limited, it can be observed that the venture in oil and gas are accounted for at fair value. The cost comprise of acquisition of asset, transfer of equity due to gain or loss for sell of qualifying asset like property plant and equipment. The residual value and useful life of the asset is evaluated as well as significant changes are accounted for in the comprehensive annual report (Gee, 2006). The annual report 2014/15 is superior as well as reliable by users of the reports since, the company publish the annual report that is in conformity with the accounting standards such as disclosure of the sustainability report in its annual report which is mandatory by generally accepted accounting principle (GAAP) as well as the Australian Accounting Standard Board (AASB).The integrated financial report entails an inclusive information as well as the governance report that is deem significant by users of the annual report and also conformity with international financial reporting standards (IFRS). Whether the firm’s accounts are comparable with their major worldwide competitors The annual report of BHP Billiton provides sufficient and reliable figures that are comparable with other worldwide corporations due to the fact that, the annual report is prepared in accordance with GAAP and AASB. The standard requires that every corporation must adhere to the accounting standards in accounting for its transaction as well as publishing the annual report. According to AASB 10 (Consolidated financial statement), it provides guidelines to which presentation of comprehensive financial statement is published by a corporation that control more than one entity as with the case of BHP Billiton. The standards provides that a corporation shall disclose the following The specifications of the comprehensive financial statement set out in AASB 127 The comprehensive as well as separate financial statement in case of group accounts Interpretation of special purpose entities The financial reprot of BHP Biliton is therfore in conformity with AASB 127 and AASB 13 and 10 due to the fact that the year report depict the fair value assesment by relaizng as well as accountign for revalaution reserves. Therfore, the going concern for the busines is reliable and ideal implying that the books of account can be relied upon by uses of the report for decision making. The equity capital of the bsuines is comprable with those of the globale corporationin the same sectors because, it can be reliazed that the statement of income for BHP Billiton portray a strong liquity postion because there is a growht in the level of change in equity capital as depcited from the company’s increeased retained earning , the revalautin reserve also and the ordinary share capital . The income statement portray a profit for the fiancial year ending june 2015 because there is decline in operating cost and consequently leading to a reduction in the level of risk to the company’s profit margin.the compay must therfore make certain that the operating cost is always kept below the acceptbale level so as to guarantee that only the relevant cost are incurred in te normal course of bsuines and accounted for in the income statemtn. The annual report for 2015 for BHP billiotn is therefore in conformity with the[accounting standard on discourse of the annual report since, the business provide an integrated financial statement that as well entail the corporate governance report’s As a result, the annual report for BHJP Billiton is of high quality and can be relied upon by users of the report in making an informed investment decision of whether to invest in the business or not based on the growth in profit margin, liquidity ratio as well as efficiency ratios since, this are the basic ratios that determines the company’s growth (Gupta, 2008). Conclusion The general performance of BHP Billiton is quite impressive and growing. This contributed by growth in economy due to decline in recession as well as investment in subsidiaries. This factors lead to growth in profit margin, decline in debt ratio as well as improved free cash flow that provides an opportunity for expansion by investing in viable investment opportunity that will yield more returns to the business. An investor should therefore consider investing BHP Billiton since, the company is a going concern as well as the stock pricing in the market is effective due to large amount of free cash flow. This as a result would attract more equity investor who will fund the business as well as increase the capital base of the company and consequently reducing the risk in case of economic inflation and fierce competition. The quality of the financial statement for BHP Billiton is superior since, the company provides a published annual report that is in conformity with Australian accounting standards as well as the general accepted accounting principle which ensure that the business provide a true and view state of the company which might not be misleading to the users of the annual report. Reference list accounting, I.a.A.p.c.t.l., 2015. Financial Accounting Standard Board. Barry J. Epstein, ‎.N.‎.M.B., 2009. Wiley GAAP 2010: Interpretation and Application of. Barry J. Epstein, R.N.S.M.B., 2009. Wiley GAAP 2010: Interpretation and Application of Generally Accepted Accounting Principles. 6th ed. New york: John Wiley & Sons. Sydney: PHI Learning Pvt. Ltd., 2012. Bruce Mackenzie, ‎.C.‎.N., 2013. Wiley IFRS 2013: Interpretation and Application of. Cch , 2009. Australian Master Accountants Guide - Page 290. CCh, 2010. Australian Master Financial Planning Guide 2010/11 - Page 457. Collings, S., 2015. 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