Rio Tinto Financial Ratios Analysis - Case Study Example

Rio Tinto Financial analysis Name: Lecturer: Course name: Lecturer name: Date: Executive summary Financial analysis expresses to fundamental diagnostic system for assessing the company’s state of financial performance to focus the suitability as well as feasibility for investor decision making speculations[Cly06]. Financial analysis is assessed using the fiscal ratios that measures the company’s financial performance and situation. Financial ratio analysis is constantly depicts the organizational financial data that are used by the potential investors as well as the shareholders as a benchmark in settling on speculation choices in perspective of the distinctive ratios. The organizational liquidity ratios describes the organization financial capacity in meeting the outstanding liabilities while profitability ratios evaluates the company's suitability to deliver inferable shareholders earnings[Bar081]. The effectiveness ratios are used as a piece of business choosing instrument in breaking down the company's proficiency in making use of assets to produce income. Capital structure ratio depicts the organization financial suitability for investment. Table of Contents Executive summary 2 Introduction 4 Profitability ratios 5 Net profit margin 5 Return on Equity 6 Liquidity ratios 7 Current ratio 8 Quick asset ratio 9 Efficiency ratios 10 Asset turnover ratio 10 Day’s debtors 11 Capital structure ratio 12 Debt ratio 12 Market performance analysis 13 Earnings per Share (EPS) 13 Conclusion 14 References 15 Introduction Rio Tinto is the global leading company in mining and metal company. The company's fundamental business is mining of crude materials such as copper, coal iron center, precious stone, uranium and industrial minerals such as titanium dioxide, borates, salt, and gypsum. In decreasing the cost of generation, Rio Tinto Company has enhanced in development as well as using new and propelled innovation to lessen the cost of creation[Dea06]. The company's capacity in change of innovation as relevantly drop the generation cost of the products delivered by the corporation. The company operates in five departments such Energy, Iron, Aluminum, Copper, Diamond and Minerals. Rio joint ventures exploration are situated in United States, Chile, Canada, and Australia. Trend analysis Rio Tinto income statement trend analysis accentuates pragmatic measures of structural flow of income and revenue in four financial years. Sales revenue indicates a subsequent decreasing trend in sustaining the sales income while reducing the cost of sales from 2011 to 2014 financial years[Che08]. This describes an increasing gross earnings as well as profit margin since the decreasing cost of sales accentuates an increasing in earning which accentuates better financial performances. Profitability ratios Profitability ratios are financial ratios which are utilized to assess the company's capacity to generate earnings with respect to the company investments[Bar081]. The profitability ratios are describes below: Net profit margin Profit margin ratio is profitability used in deciding the relativeness of the company's sales income to the earnings before taxes and interest[Dea06]. The profit margin accentuates the company's profitability as a benchmark for decisive base for investors in assessing the comprehensive feasibility to invest in with respect to the competitors working in the same industry. Profit margin ratio is evaluated as follows: Earnings before interest and expense/sales income x 100 2011 2012 2013 2014 EBIT 13,214 -2,431 3,505 9,552 Sales Revenue 60,537 50,942 51,171 47,664 Profit margin ratio 21.83% -4.77% 6.85% 20.04% From the profit margin ratio above, Rio Tinto describes the highest profitability in the financial year 2011 after which the company's profit margin ratio decreases to -4.77% in the subsequent 2012 financial year. Consequently, Rio Tinto describes an effective profitability management system where the profit increases from 6.85% in 2013 to 20.04% in the subsequent financial year. This shows a better management initiative in enhancing the company's profitability hence good for investment. Return on Equity Return on Equity ratio used assessing the organization's efficiency on the shareholders’ investment[Cha08]. Return on Equity unveils the rate of the company's benefits earned in connection to the total sum of shareholder quality invested by the shareholders. It is calculated as percentage of profit after tax / the average shareholders’ equity. 2011 2012 2013 2014 EBIT 13,214 -2,431 3,505 9,552 Shareholder Equity 59,208 58,021 53,502 54,594 Return on Equity 22.32% -4.19% 6.55% 17.50% Rio Tinto return on equity ratio unveils fluctuating financial trend in making use its shareholder’s equity to authenticate the generation of the shareholders earnings. Rio Tinto Company’s return on equity reveals the highest ratio of 22.32% in 2011 and subsequent decrease to -4.19%. The company’s describes an effective utilization of equity to generate earning attributable to the shareholder which shows increasing trend on the amount of earnings from shareholders equity irrespective of decrease in the amount of equity[Pam12]. The company’s initiatives hikes the return on equity from 6.55% to 17.50% in 2013 and 2014 financial years hence indicating that the company’s management enhances control measures over the equity invested to contribute to increase in equity returns from financial years 2012 towards 2014. Liquidity ratios Liquidity ratios describe the ratios that assess the company bent in meeting its short term financial liabilities[Dea06]. It depicts the company's ability of a company to settling off its short-term liabilities on the season of installment. The higher the liquidity ratios indicates better company's edge of safety that the company's is paying the financial outstanding obligation. Current ratio The current ratio assesses the company's capacity to pay off short-term obligation obligations using its current assets. The current ratio measures the firm’s capacity to pay its present obligation over the fiscal year[Bar081]. The company's creditors use this ratio to assess on the practicality of offering short term advance to the company. The current ratio provides the sagacity of the company's proficiency and its capacity in changing its item to cash. 2011 2012 2013 2014 Current assets 21,898 19,223 21,330 20,813 Current liabilities 13,821 14,966 15,190 12,220 Current ratio 1.58 1.28 1.40 1.70 From the tables above, Rio Tinto current heightens an increasing liquidity in meeting its current financial liabilities in exhausting its current assets. Rio current ratio describes an improvement in utilizing its current assets for paying the current financial liabilities from 1.58 in 2011, 1.28 in 2012, 1.40 in 2013 and 1.70 in 2015 financial year. However, Rio Tinto increasing current ratio describes a stable company’s liquidity state within the four successive years ending 2014 financial year. Quick asset ratio Quick asset ratio refers to the liquidity ratio which endows the company’s aptitude in meeting its current financial obligation using its current assets without making use of the company’s inventory[Cly06]. Quick asset ratio unveils the essence of financial state in meeting a threshold of settling obligation in absence of company’s inventory. 2011 2012 2013 2014 Current assets 21,898 19,223 21,330 20,813 Current liabilities - inventory 13821-5,307 14966-6,136 15190-5,737 12220-4,350 Quick asset ratio 2.57 2.18 2.26 2.64 From the tables above, Rio Tinto describes high company’s liquidity trend in backing it its current financial liabilities in utilizing the current assets without the inventory[Che08]. The company Quick acid test ratio depicts Rio Tinto improves its utilization of current assets in paying current financial obligations from 2.57 in 2011, 2.18 in 2012, 2.26 in 2013, and 2.64 in 2014 financial years. Rio Tinto ratio accentuates a steadfast company’s liquidity state in four successive years ending 2014 financial year. Efficiency ratios Assets efficiency ratios measure how profitability the organization uses advantages for make pay from of offers. Assets efficiency ratio gives examination between the organization's advantages for the sales income salary[Cha08]. These ratios demonstrate the organization's capability in using its advantages for produce revenues incomes. Asset turnover ratio Asset turnover ratio describes the company's general effectiveness making use of the invested assets in generating earnings to the business[Bar081]. Asset turnover ratios ascertains the viability of the firm in making benefit which substantiates the company's effectiveness in compensating its operational expenses. 2011 2012 2013 2014 Sales revenue 60,537 50,942 51,171 47,664 Total assets 119,545 117,573 111,025 107,827 Assets turnover ratio 0.51 0.43 0.46 0.44 From the tables above, Rio Tinto heightens an average financial efficiency in generating earnings which are attributable to the shareholders through turnover. In 2011 financial year Rio Tinto assets turnover shows highest of 0.51 followed with an insignificant decreases in subsequent year 2012 to 0.43. Subsequently, in 2013 the assets turnover ratio increase to 0.46 and decreases insignificantly by 0.2 to 0.44 in financial year 2014. Rio Tinto management heightens on the expansion company’s own assets which result to increase the sales revenue hence substantiating the viability for investment. Day’s debtors Day’s debtors determines the company’s average period of time to which it takes to collect money for the trade debtors[Pam12]. Effective debtors turnover ratio accentuates the pragmatic measure which enhance realization of the within a shorter time as compared to the time the company pay’s it debt to creditor. 2011 2012 2013 2014 Accounts receivables 6,058 5,319 4,667 3,623 Sales revenue 60,537 50,942 51,171 47,664 Debtors turnover (days) 37 38 33 28 From the table above, Rio Tinto shows a predetermine company’s efficiency in collecting of cash held by trade debtors[Dea06]. The lesser the number of days taken in collecting cash held by trade debtors describes an increasing efficiency increasing the firm’s financial strength. In financial year 2011 debtors’ turnover ratios is 37 days with a slight increase to 38 days in 2012 and to a reduction 33 days after which the Rio Tinto increases its efficiency to 28 days in financial year 2014. Rio Tinto describing the cumulative increasing efficiency in collecting cash hence heightens on its efficiency and improved liquidity since cash held are collected in time during the four financial years Capital structure ratio Debt ratio Debt ratio assesses the rate at which dollars of liabilities exist per 1$ of assets[Che08]. When debt ratio exceeds 50%, it describes that the company funds its investments in assets by depending more on debt as compared to equity. Debt ratio = 2011 2012 2013 2014 Total liabilities 60,337 59,552 57,523 53,233 Total assets 119,545 117,573 111,025 107,827 Debt ratio 50% 51% 52% 49% From the above figures, it is revealed that Rio Tinto debt ratio reveals an average unveils a fluctuating financial leverage but dilapidated since the company reveals more investment in form of debt more that its equity. Rio Tinto debt ratio shows 50%, 51%, 52% and 49% in 2011 to 2014 financial years[Cha08]. This shows that the company funded its investments in assets by relying averagely on equity and equity hence viable for investing. Market performance analysis Earnings per Share (EPS) Earnings per share is calculated by dividing net profit available to ordinary shareholders divide by weighted number of ordinary shares on issue. Earnings per share increased from negative 161.7 in 2011, 303 in 2012 which decreases in financial year 2013 to 198.4 and highest increase in 2014 financial year to 353.1 hence describing better shareholders returns[Bar081]. Conclusion Based on the Rio Tinto financial ratios analysis, the company expresses better performances as well as functional management control initiatives in promoting effective financial return objectives as well as efficiency in generating revenue. Rio Tinto pragmatic performances embraces within the company’s framework describes ideal financial structural measure which indicates the potential improvement and better return on investment hence guarantees potential and current investors of their investment returns. References Cly06: , (Clyde Stickney, 2006), Bar081: , (Barnes, 2008), Dea06: , (Deakin, 2006), Che08: , (Chen, 2008), Cha08: , (Charles& Walter, 2008), Pam12: , (Pamela & Frank, 2012), Read More