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# Business Accounting Ratio analysis is one of the many tools that can be used to evaluate financial performance of business entities - Essay Example

Summary
As a diversified mining company, BHP Billiton plc (or “BHP”) extracts and processes minerals, oil and gas from its worldwide production operations with primary locations primarily in Australia, the Americas and southern Africa. BHP is operating under nine customer sector…

## Extract of sampleBusiness Accounting Ratio analysis is one of the many tools that can be used to evaluate financial performance of business entities

Download file to see previous pages... Having produced 137.2 million barrels of oil equivalent for one year as of the fiscal year ended June 30, 2009, BHP is not surprising selling its crude oil production to refiners worldwide at market prices (Reuters.com, 2010a).
The following ratios are needed for purposes of evaluating BHP: Gross Profit/Profitability ratio, Return on Capital Employed. Gearing Ratio, Liquidity ratio/acid test ration and Price earnings ratio. Each is computed and explained below using data from The Annual Report of BHP for 2009 (BHP, 2010) and London Stock Exchange (2010).
Return on equity (ROE) is computed by dividing Net income to Total Equity, Return on Sales or Net Profit Margin is computed by dividing Net income to Total Revenues, while Gross Profit ratio is from dividing gross profit with Total Revenues. The data used to compute the ratios are found in Appendix A.
This also measures the company’s profitability and efficiency of the company for the past two years. The formula is to Earnings before tax (EBIT) as numerator and to have Capital Employed, which is equivalent to Total Assets less Current liabilities as denominator. Below is the resulting ratio. The data used to compute the ratios are found in Appendix A.
This also measures the company’s financial leverage for the past two years by dividing Total liabilities to Total equity. Below is the resulting ratio. The data used to compute the ratios are found in Appendix A.
This measures the company’s capacity to pay its maturing obligations for the current year. This current ratio is computed by dividing Current assets to Current liabilities while Acid test ration is by dividing Quick assets to Current liabilities. Quick assets equals current assets less inventory, prepaid expenses and other current assets. Below are the resulting ratios. The data used to compute the ratios are found in Appendix A
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