Strategic Changes & Firm Performance: BHP Billiton Analysis - Case Study Example

Strategic Changes & Firm Performance: BHP Analysis Student’s Name Institution Introduction BHP Billiton is a renowned leader in the business related to resource explorations across the globe. It is considered one of the globe’s leader in the production of such mineral commodities as iron ore, energy based and metallurgical coal, oil, gas, and also, aluminum ores. The company’s immediate workforce is made up of approximately 12,800 employees as well as contractors that operate within 141 locations that are distributed across 26 countries. The company’s immediate group functionalities are basically established within Melbourne, London and Singapore. Income Statement Analysis For income statement analysis, the items under analysis are; revenues, expenses of the firm excluding finance costs and also, the profits from operations. The research took to analyzing revenue item because it is one of the primary measures of the manner for which a firm operates within a given environment. It postulates whether a firm is able to make enough sales revenues that are needed for attaining stable cash flows needed in conducting the day-to-day operations. Profits from operations are analyzed in order to determine the proportion of a firm’s primary revenues that is able to be translated to profits. Profits are used to pay-off a company’s immediate commitments as the remainder is used as a source of internal capital that sis needed for maximizing the shareholder’s wealth. Significantly, expenses from operations are analyzed in order to ascertain the proportion of costs that are attributed to executing tasks and operations of a firm. Expenses are used to depict whether a firm is able to translate a huge revenue-base into significant profits. The company’s revenue deteriorates from the period between 2011 and 2013 from 20.62% in 2011 to 0.68% in 2012 and later to -8.66% in the financial year ending 2013. This decrease in revenues can be attributed to relatively stable expense costs that relate to administration within the same period. It can also be attributed to poor marketing and pricing strategies for the company’s commodities hence a poor level of sales. The firm’s profits from operations deteriorate significantly in the period between 2011 and 2013. The profits decreases from 58.83% in 2011 to -25.35% in 2012 and later falls to -19.06% in the financial period ending 2013. This relative decrease in the level of profits is an indication that most of the firm’s immediate revenues are consumed up as expense costs hence translation to profits is minimal. The company’s expenses excluding net finance costs also improves significantly for the three year period from 21.5% in 2011 to 22.06% and later fall to 3.02% in the financial ending 2013. For this case, it seems that BHP is trying to reduce the level of expenses however; the reduction does not influence the sales revenue into producing significant profits. The decrease can be attributed to the company making stringent efforts to eliminate unnecessary expenses that is causing a great surge in the level of profits. Balance Sheet Analysis For the balance sheet analysis, the three items to be analyzed include; cash and cash equivalents, property, plant and equipment and the total equity. Cash and cash equivalents are analyzed since they postulate the current position of a firm in regards to meeting its short-term obligations whenever they fall due. Property, plant and equipment are analyzed since they are a perfect item that can be used to postulate the future position of a firm in regards to operations. These non-current assets are utilized for a longer period of time and thus, they are depended on most of a firm’s immediate operations. Total equity is analyzed for purpose of establishing the stability of the firm in terms of its liquidity. Also, equities postulate whether a firm has been able to maximize shareholders’ wealth in good time. The firm’s cash and cash equivalents improves significantly in the period between 2011 and 2013 from -19.04% in 2011 to -52.58% in 2012 and later to 26.75% in 2013. This improvement is an indication that the company has resorted to holding sufficient cash resource to meet up with short-term commitments as they fall due. The firm postulates a percentage decrease of its property, plant and equipment from 23.20% in 2011 to 8.06% in 2013 respectively. This deterioration postulates that the firm has not been able invest on its capital assets for future survival hence a great likelihood that future operations will be put on hold due to faulty and non-operational equipment. The company’s total equity postulates a deteriorating pattern in the period between 2011 and 2013 from 16.97% in 2011 to 16.04% and later deteriorates to 7.28% in 2013. The decrease can be attributed to lower retained earnings and also, ineffective policies in regards to reserves. Cash Flow Statement Analysis The company’s net investing activities deteriorate significantly for the period between 2011 and 2013 from 64.88% to -44.21% respectively. The deterioration can be attributed to increased cash outflows from investing activities in the period between 2011 and 2012. It can also be attributed to reduced investments made to subsidiaries, operations and other controlled entities. Significantly, the reduction can also be perceived as having been caused by increased purchase of intangibles by nearly double in the period between 2011 and 2013. Ratio Analysis A. Solvency Ratios The firm’s debt-to-equity ratio increases from 0.28 to 0.49 in the period between 2011 and 2013 respectively. This is an indication that the firm is making efforts to strike a balance for its sources of funds as a way of strengthening its control capacity. The firm’s long-term debt ratio also increases from 0.22 to 0.42 in the same period. This is an indication that the company is making intensive efforts as a way of ensuring that its long-term debt is reduced significantly. It also means that it is trying to eliminate long-term debt as a significant proportion of its capital base hence reduce interest costs attributed to repaying off the debt in the future. B. Leverage Ratios The firm’s equity multiplier ratio improves significantly from 1.81 to 1.95 in the period between 2011 and 2013 respectively. This is an indication that most of the company’s immediate level of equities is financed by the shareholders. This also means that the firm is eliminating debt financing for its equities given that they pose a higher risk of repossession in cases of repossession and also, they bear a great burden in terms of interest costs repaid with the principal amount. The firm’s total debt ratio improves from 0.45 to 0.49 in the period between 2011 and 2013 respectively. This is an indication that BHP’s level of assets that are financed by debtors has been reduced significantly as a way of ensuring that it does not utilize a significant portion of its revenue base to repay the interest costs associated with the acquisition of these assets using debt platform. C. Profitability Ratios The firm’s profit margin improves significantly from 3.00 to 5.96 in the period between 2011 and 2013 respectively. This is an indication that a significant proportion of the company’s sales are able to be translated to enormous net income amounts. This might be attributed to significant reduction of such expenses as marketing and administration costs. On the other hand, the firm’s return on assets ratio decreases significantly from 0.7 to 0.48 in the period between 2011 and 2013 respectively. This is an indication that the firm utilizes a huge proportion of its asset-base in order to affect sales. This might be attributed to poor maintenance of these assets as well as a lack of efficient and skilled personnel. D. Operational Efficiency Ratios The firm’s asset turnover ratio deteriorates significantly from 0.23 to 0.08 in the period between 2011 and 2013 respectively. This is an indication that the company has continued to lose its capacity to use its assets to post sales. The company’s working capital ratio also deteriorates from 1.28 to 0.97 in the period between 2011 and 2013 respectively. This is an indication that the firm has lost a substantial level of capacity to meet its short-term commitments as and whenever they fall due. This can be attributed to disproportionate increase in current liabilities visa vie its current assets. Question 6 One of the important items, which are not included within the income statement, is the cost of goods sold, which is a crucial component that can be used for computing inventory turnover; a perfect ratio that postulates the capacity of a firm to translate inventories to sales revenues. Another item that is not included within the financial statement is the administration fees, which can be used to postulate the costs attributed to managing activities of the firm. In conclusion, it can be seen that BHP, leverage, profitability, operational efficiency and solvency ratios postulate an unhealthy position of the firm. Therefore, potential investors should not make investments given that there is minimal guarantee for enjoying dividends any time soon. Read More