Financial Analysis for Rio Tinto - Example

FINANCIAL ANALYSIS: RIO TINTO By Student’s Name Code + Course Name Professor’s Name University Cite, State Date Introduction Rio Tinto is a multinational company that engages fully in the searching, mining and processing of mineral resources as a way of making profits and maximizing its existing stakeholders’ value. It has employed an approximate 71,000 people that work in different stations across the 40 countries of operations. The company generates revenues from its current five product groups that include; aluminium, copper, diamond & minerals, iron ore and energy product groups, which are positioned in different countries of operations. This paper examines the ratio analysis of this company in order to establish whether or not it enjoys improved performance for the four-year period between 2011 and 2014. A. Profitability Ratios Year /Ratios 2011 2012 2013 2014 Operating margin = (operating income or loss /sales or revenues) 13,940/60,537*100% =23.02% (1,153)/ 50,967*100% = -2.26% 7,430/51,171*100% =14.52% 11,346/47,664*100% =23.8% Net Margin = Net income/sales 6,775/60,537*100% =11.19% (2,997)/ 50,967*100% = -5.88% 1,079/51,171*100% =2.11% 6,499/47,664*100% =13.64% ROA =Net Income/total assets 6,775/119,545 =0.06 (2,997)/ 117,573 =-0.03 1,079/111,025 =0.01 6,499/107,827 =0.06 ROE= net income/total equity 6,775/59,208 =0.11 (2,997)/ 58,021 = -0.51 1,079/53,502 =0.02 6,499/54,594 =0.12 Analysis: Rio Tinto’s 23.02% operating margin decreases significantly in the period between 2011 and 2012 but later on, increases again. The current improvement in this ratio is an indication that the firm’s primary business is making profits from each of amount of sales posted. The net margin ratio increases within this four-year period with a negative value in 2012. The increase indicates that it has devised effective policies to curb unnecessary expenses hence allowing it to enjoy substantial level of income. This can also be attributed to intensive marketing campaigns like advertisements, which has resulted to increase in sales revenues. Both the ROE and ROA also decreases between 2011 and 2012 respectively before increasing again in the next two years. The increase is an indication that Rio Tinto has devised effective ways of ensuring that assets and stakeholders’ equity have all been put into efficient use hence allowing imminent income growth. B. Asset Efficiency Ratio Year /Ratios 2011 2012 2013 2014 Total Asset Turnover Ratio= Revenues/ Total Assets 60,537/119,545 =0.51 50,967/117,573 =0.43 51,171/111,025 =0.46 47,664/107,827 =0.44 Fixed Asset Turnover ratio= revenues/ totals fixed asset 60,537/97,559 =0.62 50,967/97,380 = 0.52 51,171/88,743 =0.58 47,664/86,702 =0.55 The total asset turnover ratio decreases within the four-year period from 0.51 to 0.44 in 2011 and 2014 respectively just as the fixed asset turnover ratio that decreases from 0.62 to 0.55 within the same period. These decreases is an indication that Rio Tinto’s management has not devised effective ways of ensuring that the current asset-base is being put into optimum use especially for mining purposes. There is also a possibility that Rio Tinto operates on old and worn-out mining equipment and should thus make efforts to employ advanced technologies into their mining operations. C. Liquidity Ratio Year /Ratios 2011 2012 2013 2014 Current ratio= current assets/ current liabilities 21,898/14,966 =1.46 19,223/13,821 =1.39 21,330/15,190 =1.40 20,813/12,220 =1.70 Quick ratio= (cash + accounts receivables + short-term or marketable securities/ current liabilities 9,670+6,058+585 /14,966 =1.09 7,082+5,319+533 /13,821 =0.94 10,216+4,667+710 /15,190 =1.03 12,423+417+3,623 /12,220 =1.34 Liquidity Analysis Rio Tinto’s current ratio increased within the four-year period from 1.46 to 1.70 in 2011 and 2014 respectively. The increase is an indication that the firm is making efforts to ensure that it can pay most of its short term commitments when they come due. Subsequently, the quick ratio increases from 1.09 to 1.34 within the same period. The increase is better for the company because it ascertains its capacity to pay-off near-term obligations whenever the fall due even without having to sell its existing inventory amounts. D. Capital Structure Ratio Year /Ratios 2011 2012 2013 2014 Debt/equity ratio= total debt/total equity 1,447+20,357 /59,208 =0.37 24,591+2,228 /58,021 =0.46 3,926+24,625 /53,502 =0.53 22,535+2,684 /54,594 =0.46 Interest coverage=operating income/interest expense 13,940/497 =28.04 (1,153)/ 276 =-4.17 7,430/507 =14.65 11,346/649 =17.48 Analysis: The company’s debt/equity ratio increases slightly from 0.37 to 0.46 in the four-year period between 2011 and 2014 respectively. The slight increase in the ratio is an indication that the firm has continued to depend on debt funds as opposed to stakeholders’ equity, which is a risky affair given that the control of operations can be transferred to the creditors like banks. It can also lead to more money being used to pay-off interest expenses while limiting its ability to expand into other sections of investment. However, given that the ratio falls below 1, it can be said that Rio Tinto still ensures that owners’ funds are preferred to debt funds. The interest coverage ratio decreases from 28.04 to 17.48 within the four-year period. Despite the decrease, the company still manages to ensure that it sustains the capacity to pay debt owed to financial institutions in due time. E. Market Performance Ratios Year /Ratios 2011 2012 2013 2014 EPS= net income/ common shares outstanding 6,775/1,923.1 =3.52 (2,997)/ 1,849.1 =-1.62 1,079/1,847.3 =0.58 6,499/ 1,848.4 =3.51 P/E= market price per share/ EPS 3125/3.52 =887.78 3511.5/-1.62 =2167.59 3409.5/0.58 =5878.44 3209/3.51 =914.24 The company’s earnings per share remain at a reasonable position; 3.52 and 3.51 in the period between 2011 and 2014 respectively. This ratio value is an indication that Rio Tinto apportions a significant portion of its profits to each of the common stock held at any given moment. This has the ability to improve the company’s image and reputation for possible investments. Subsequently, the company’s price per earnings ratio increases significantly within the period from 887.78 to 914.24 in 2011 and 2014 respectively. The increase in the ratio is an indication that potential investors think that future operations of the company would be fairly-better in comparison to its existing performance. In essence, this has the effect of attracting potential investors. Conclusion & Recommendation In overall, Rio Tinto has a distinctive performance structure. The company’s profitability seems to stabilising after going through challenging financial times in 2012. The company continued to make efforts to ensure that it posts reliable sales revenues that could easily be translated to profits. The asset efficiency ratios postulate a decreasing pattern, which means that the management still has a long to go in terms of ensuring that the existing asset-base is put into effective and efficient use. The liquidity position is somewhat stable but it is important that Rio Tinto makes effort to stabilise it within the recommended standard range of 2:1. The capital structure of the firm is somehow balanced as it seeks to improve its debt/equity ratio. Currently, it utilises owner’s equity for its investment options as opposed to debt funds. Finally, the company’s market performance indicates that it has a better prospect of future performances in relation to the current level. References List Rio Tinto 2014. Annual Reports. Retrieved on August 28, 2015 from http://www.riotinto.com/documents/RT_Annual_report_2014.pdf Rio Tinto 2012. Annual Reports. Retrieved on August 28, 2015 from http://www.riotinto.com/documents/rio_tinto_2012_annual_report.pdf Read More