BHP Billiton as a Leading Global Resources Company - Case Study Example

Top Down Financial Analysis for BHP Billiton By: Course: Professor: University: City: Date: Introduction BHP Billiton is a leading global resources company. It is among the planet’s top producers of major commodities, such as iron ore, metallurgical coal, copper and uranium, and have substantial interests in conventional and unconventional oil and gas and energy coal. (BHP Annual Report, 2015) BHP Billiton working methodology is to possess and work substantial, long-life, ease, expandable, upstream resources broadened by product, geography, and furthermore, market. Its expanded arrangement of top notch resources gives it versatility and adaptability to upgrade esteem all through the product cycle. It concentrate and process minerals, oil and gas from our generation operations found fundamentally in Australia and the Americas. We offer our items universally with deals and advertising taking put chiefly through Singapore and Houston, United States. As at 30 June 2015, its workforce comprised of roughly 80,000 workers and contractual workers. (BHP Annual Report, 2015) BHP Billiton is managed and operated under a Dual Listed Company (DLC) configuration, operated and run as a one functioning organisation, run by a united board of directors. Its headquarters are situated in Melbourne, Australia. Listed on the Australian Stock Exchange, its stocks are heavily traded in markets like the London Stock Exchange and the Johannesburg Stock Exchange in the United Kingdom and South Africa respectively. (BHP, Strategic Report, 2015) BHP Billiton has an operating model that describes the way the company is organised and places out the links between Businesses, Group Functions and the Marketing team. The businesses are divided into four units, Petroleum and Potash, Copper, Iron Ore and Coal. The group functions support the businesses and operate under a given set of regulations and accountabilities provided by the organisation. Marketing is responsible for securing and ensuring adequate market for the products produced in the business section. There are some core principles that guide the Operating Model, some of which are, mandatory performance requirements, common organisation designs, common systems and processes and common planning and reporting, thus synchronising the organisations performance management system. (BHP, Strategic Report, 2015) Macro-Economic Analysis Macro-economic analysis for any firm is divided into three parts. These parts are the analysis for the global economic environment; economic factors affecting the firm’s industry and the position of the firm in the industry. From these three parts, one is able to analyse the exterior factors that influence the performance of the company in the industry. The macro economic environment set by Australia is one of growth and forward looking. The indicators show that the amount of growth that is growing on in Australia only brings with it good tiding to the individual industry players in the country. Australia has experienced growth its GDP for the last three years and there is an expected growth it the GDP up to the year 2021. However, the reliance on investment capital is showing to be reducing hence the traditional industries continue to grow and control the overall input to the GDP. The unemployment rate though at an all-time high in the 2015, was expected to reduce consistently from 2016 onwards. This only means that the economic situation in Australia would only get better. (World Bank). On the global front however, the economic situation is just afloat. The global growth, 2015, was a disappointment to a lot of development agencies and multinational less alone individual countries, who were looking towards the global economy as an indicator of good expectations ahead. The global economy, grew at a very slow rate of 2.4%. The projected growth for the year was almost 3% and the mark was off even with the continued stabilizing of major commodity exporters. The global economy experienced slower growth in developing countries, hence leading to the overall spill over to the developing countries. However, the projected results for the economic growth in terms of real GDP, is 2.9 for 2016 and grow to 3.1% by the year 2018. (World Bank, 2016). There are three things that influenced the global outlook. The global slowdown and restructuring of the economic business in China that was structured away from investment and manufacturing toward consumption and services, lower energy prices and the consequent lowering of other commodities too, and a gradual hold in monetary policy in the US, considering a very strong dollar thus having multinational and other influential agencies and organisations getting out of economies that are not performing. (IMF, 2016). Lower oil costs strain the financial positions of fuel exporters and weigh on their development prospects, while supporting family request and bringing down business vitality costs in merchants, particularly in cutting edge economies, where value decays are completely gone on to end clients. In spite of the fact that a decrease in oil costs driven by higher oil supply ought to bolster worldwide interest given a higher affinity to spend in oil merchants with respect to oil exporters, in current circumstances a few components has hosed the positive effect of lower oil costs. Above all else, budgetary strains in numerous oil exporters lessen their capacity to smooth the stun, involving a sizable decrease in their residential interest. The oil value decay has notably affected interest in oil and gas extraction, additionally subtracting from worldwide total interest. At last, the pickup in utilization in oil shippers has so far been to some degree weaker than confirmation from past scenes of oil value decreases would have proposed, conceivably reflecting kept deleveraging in some of these economies. Constrained go through of value decreases to purchasers may likewise have been a component in a few developing market and creating economies. (IMF) Industry Analysis The mining industry is at its all-time low. Every economy from Cambodia to South Africa is agreeing to this fact. This stems not from the fact that there are replenished minerals and mining material, but rather, the commodity prices are very low. Very many mining companies are closing shop since there are barely any profits. The industry also faces a lot unresolved challenges from a diminishing demand to rising stakeholder’s expectations to a lack of resourcing and monetary providence. At the same time, miners are faced with constantly mutable issues, such as rising dangers from physical and cyber security, ever changing regulatory frameworks, and innovation imperative. (Deloitte, 2016). By the end of 2015, there were several issues facing the mining sector in the global scale. These issues, even though can be summarized into, weak commodity prices, reduced grades and diminished demand from china, they go way past this scope into very distinct challenges facing the mining and energy sector. Labour relations and trying to achieve operational excellence in an every changing political and regulatory environment is a huge challenge. Innovation to the ever dynamic sector has been a critical influence on minors, with more focus on technological optimisation. Understanding of the market needs in relation to the market, and in this case the Chinese market. While also looking at this, there was a massive change in the way the rest of the world demanded commodities and restructure operation towards new found strategies. One the other challenges that faced the mining industry was a lack of financing. This lead to the miners being starved and so the companies were aiming to achieve a means of attracting capital. Lastly, the mining industry was struggling with variable amount of taxes imposed on them, thus having it very hard for the mining companies to compete. Including falling oil and commodity prices, 2015 was not the best year for miners all around the world. (Delloitte, 2015) In Australia, the mining industry was hit too. In 2014, the pump prices for diesel fuel were $1.28, and that of gasoline was $1.23 per litre. This was way less than the price it went for in the 2012 of $1.57 per litre of diesel and $1.39 per litre of gasoline. The population also got full access to non-solid fuel in both the rural and urban areas in 2012. This significantly reduced the market for coal and other solid fuels that BHP was selling to customers in Australia. In 2012, there was also full access to electricity further pumping the profits for the mining companies in Australia. (World Bank, 2014). Analysis of companies using the Porter's five forces model is a tool that endeavours to investigate the level of rivalry inside an industry and business methodology advancement. The five forces are set to achieve five very important metrics for a company’s competition value chain understanding. The five forces aim to evaluate the threats of a new competitor entering the market, threats of substitutes, the bargaining power of the buyers and suppliers and rivalry between competitors. This model would however not need to be implemented fully due to the fact that there are some aspects of the model that are null and void due to their absence. This includes, suppliers, at least of the main mining commodity. Threat of a new entry into the market. There is a major and massive investment that comes with establishing and maintaining a mining company. The threat of a company coming up and challenging the market value and market space that BHP Billiton has already created is very unlikely. However there is a very huge challenge in having already established companies in other markets and geographies moving in to Australia and establishing shop there. These threats in more apparent than not since there are already North American countries already moving in into Australia and trying to establish themselves in Australia. Threat of substitutes. This is the biggest threat facing the mining industry apart from the low prices due to low demand and little supply. Access to electricity and gas fuel all over the most developed parts of the world has reduced the value of comodities and fossil fuel all together. This has led to a reduced demand mining products. Bargaining power of the buyer. Due to the extensive role played by market forces, the United States Energy policy change and a reduced demand from China in all things commodities and fuels, the world experience very reduced fuel prices. (Deloitte, 2016) Rivalry among existing competitors is a real and huge business motivator in the industry. BHP seems to however outperform every other player in the market. It’s Market Cap and net income is $75,310 million and the net income of $1,910 million. This is highest among all its peers. However, its price – earnings ratio is quite low. This translates to low expected earnings in the year. (Morning Star, 2016) Financial analysis is a very important and integral part of a company financial health check-up. This analysis helps the management of the company, various departments, the board of directors, board of managers, lenders and interested investors make decisions on matters finance and the well-being of the company. This analysis also helps the various members of staff in developing and accessing KPI’s, for example the sales team or the accounts team. This analysis goes further to influence decision of external parties such as auditors and valuation experts make various decisions. (White, 2003). Financial analysis is used to identify and access all aspects of a company’s performance, liquidity, and financial position. Credit officers use this analysis to compare a particular company against its peers in the same industry, to look at the operating performance and capital structure, to determine if a company is responsible for its funding or if there is need to have external sources of capital, and finally to determine the realness and relevant of a company’s operating structure. Equity managers and Company Financial Officers (CFOs) use this analysis to determine the status check of the general health of a company financial stand. They use this analysis also to determine the longevity of their capital investments and their capability to bring in revenue into the company. A company future performance is a function of industry performance, competitive situation, past performance, its past performance in relation to its peers and the general strategic plan of the organisation. From Financial analysis various parties are able to get various companies positions on various aspects of the company. These include; Basic Business Model, this explains how the company makes its money and how it intends to continue making it; Operating performance of the company looks at the company in terms of profitability and its performance in relation to its competitors; Liquidity performances look at how the company intends to meet its financial obligations; Cash flow structure of the company informs the stake holders on whether the organisation operations generate surplus cash or whether it is using more cash that it is creating; Capital structure of the company can be seen from this analysis by determining how the organisation intends to meet its short term and long term financial obligations. (Rees, 1990) Ratio Analysis The ratio analysis is quite straight forward from the calculations. The current ratio shows that the company can pay its debts while the quick ratio shows that the company can pay almost all its debts in the cash it has at hand. The efficiency ratios show that the company produces a fresh bunch of its inventory in almost a month, telling us that the time between dispatch of one order and the next is a little over a month. This can be seen from the 40 days it takes the company to collect all sales made on credit. Leverage ratios show that the company is heavily dependent on debt financing. However, the ratios also show that the company is in its second stage of growing out of debt financing into asset and equity financing. The profitability on the other hand, shows a worrying trend. With the gross profit margin being at 0.87 and the net profit margin at 0.1 only shows that the company has a lot of taxes and interests to pay. The interests are accumulated due to the extensive use of debt financing. This trend affects the amount retained and amount paid to the shareholders as dividends. Valuations The valuation of the Billiton Limited is from metrics from various players in the market. The market premium is gotten from the performance of the Australian market over the last week, while the risk free rate is the rate given for a three month bond floated by Australia’s treasury department. The beta value was pre-calculated. The plowback metric is however the source of the readings made from the calculations. This is because the value of plowback is at -245.4, due to the fact that the fact that the value of net income and the value of the amount offered up to shareholders differ by far. By this it is meant that the value of the shareholders by far supersedes the value of the net income. This leads to a largely abnormal figure leading to the valuations being all distorted. It is however a better looking tomorrow as far as mining is concern as the industry ventures into new and exciting markets. References BHP Billiton Limited, Resourcing Global Growth Annual Report 2015 BHP Billiton Limited, Resourcing Global Growth Annual Report 2014 World Bank, 2015, Australia Data Analysis, http://data.worldbank.org/country/australia International Monetary Fund, 2015, Australia Economic Overview, http://www.imf.org/external/pubs/ft/weo/2016/01/weodata/weoselser.aspx?c=193&t=1 Deloitte, 2016, tracking the trends 2016, The Top Ten Issues Mining Companies will Face in the coming year Department of Industry and Science (2015), 2015 Australian energy update, Canberra, August. PWC 2015, Aussie Mine, 2015, Going for Gold. White, G. I., Sondhi, A. C., & Fried, D. (2003). The analysis and use of financial Statements (Vol. 1). John Wiley & Sons. Rees, W. P. (1990). Financial analysis. Prentice-Hall. Lev, B., & Sunder, S. (1979). Methodological issues in the use of financial ratios. Journal of Accounting and Economics, 1(3), 187-210. Yahoo Finance/ BHP 2016, http://finance.yahoo.com/q/is?s=BHP+Income+Statement&annual Google Finance/ BHP https://www.google.com/finance?q=NYSE%3ABHP&ei=jsIwV4CFKMqOsAGlkICgBg London Stock Exchange, 2016, http://www.londonstockexchange.com/home/homepage.htm Read More