Fundamental Managerial Accounting Concepts

Introduction:

The current study is based on the determination of the financial position of BHP Billiton. The study will take into the considerations the financial performance that has been reported by BHP Billiton by analysing the performance posted for the year 2015-17. To gauge into the financial position of the firm the study will take account of the income statement, statement of financial position and cash flow statement with objective of gaining a detailed understanding of BHP Billiton performance. In addition to this, several ratio analysis will be conducted to gain an additional understanding of the firm’s liquidity, as these ratios will be covering the areas of profitability, capital structure ratios, and liquidity and efficiency ratios.

Income statement analysis:

On analysing the income statement of BHP Billiton it was found that, the revenue reported by the firm for the year 2016 stood $30.9 billion. The revenue reflects the fall in revenue of $13.7 billion from the reported figures of $44.6 billion in the year 2015. The falling revenue was largely responsible for the weaker average price realization across all the major commodities. The total amount of expenses for the year 2016 reduced by $1.5 billion as the expense for the firm stood $35.5 billion for the year ended 2016. The expenses reduced by 4% in comparison to the amount reported in 2015 and a large part of expenses was reduced in the employee benefit expenses (BHP Billiton 2018). Additionally the expenditure on depreciation and amortization also reduced by $497 million in the year 2016.

The profit after taxation from the continuing and discontinued operations, which was attributable to the shareholders of the BHP Billiton, has increased after reporting a loss of $6.4 billion in the financial year of 2016 to a profit of $5.9 billion in the financial year of 2017 (BHP Billiton 2018). Additionally the revenue for BHP Billiton also increased by $7.4 billion or by 24% from the revenue reported in 2016. Thus, the company has significantly gained strength from the loss reported in 2016 with increase in revenue and reduction in expenses for the year 2017 (Asquith and Weiss 2016). 

Statement of financial position:

On considering the statement of financial position, it can be stated that current assets of the firm increased by $1,345 billion as the current assets for the year 2015 stood $16,369 billion that subsequently increased to $17,714 billion. The current liabilities of BHP Billiton has reduced over the year as the current liabilities for the year ended 2016 stood 12340 while in the year 2017 it subsequently reduced by $974 billion to stand at $11,366 (BHP Billiton 2018). The unit cash costs for BHP Billiton copper assets decreased by 4% to US1.15 percent following the idle capacity and other forms of strike related costs that is incurred by the firm (Henderson et al. 2015). Overall BHP Billiton has reported strong assets reflecting the company has been sufficient in utilizing its assets to meet its debt obligations as and when they become due. 

Cash Flow Statement:

The net operating cash flow following interest and tax has reduced in 2016 by $8.7 billion from the figures reported in 2015. The primary reason for such fall in operating cash is due to the decrease in the cash generated from operations. Additionally in 2015, the net financing cash inflows of $248 million represented an increase by $8.6 billion from the financial year of 2015 and this is largely because of the issue of multicurrency hybrid notes during the year 2016 (BHP Billiton 2018). However, in 2017, the cash flow from operations increased by $6.2 billion and the rise is mainly attributable to the higher prices of commodity with constant focus on the cash cost efficiency. The net cash from financing activities in 2017 has increased by $9.4 billion reflecting that BHP Billiton has immensely focused on reduction of debt with $3.3 billion of debt repayment (Warren and Jones 2018). The overall cash flow reported by the firm stood strong in the year 2017 with net increase in cash and cash equivalents of 3,510 billion. 

Financial Ratio Analysis

Profitability Ratios:

The profitability ratios can be defined as those ratios, which helps in representing the financial metrics of an organization (Powers, Crosson and Needles 2014). These ratios are generally used to ascertain whether the organization has been successfully generating revenue against the income reported by the firm. The gross for the firm has been on a rising trend as the company has reported a rising gross profit margin of 66.62% for the year ended 2015. In the subsequent year of 2016 and 2017, the company reported the gross margin of 72.01 and 85.77% respectively (Beatty and Liao 2014). The increase in gross margin can be attributed to the rising trend of sales reported by BHP Billiton as the company reported the sales revenue of $30,912 million for the year 2016 that subsequently increased in the year 2017 to $38,285 million.

The net profit margin on the other hand for the year 2015 stood 4.28% whereas in the following year of 2016 BHP Billiton reported a negative net profit margin of -20.66%. This primarily attributed to the reduction in revenue by US $13 billion or subsequently 31% from the revenues posted in the financial year of 2015. In the following year of 2017, BHP Billiton reported an increasing net profit margin of 15.38% and the rise in net profit margin is largely because of the increase in the revenue of the firm (Board 2015). The operating profit margin for the year 2015 stood 19.4% whereas in the year 2016 the operating profit margin was reported to be negative with figures standing -20.2%. However, the operating margin gained strength as the figures stood positively at 30.7%.

The return on equity for BHP Billiton during the year 2015 was 2.95 and in the subsequent year of 2016, the return on equity posted by BHP Billiton was -11.76. Again, the fall in return on equity is largely because of decline in revenue with weaker average realised prices across all the main commodities (Deegan 2016). Considering the return on asset for the year 2015 the company reported ROA of 1.53% whereas in the year 2016 the return on asset stood negatively at -5.37%. Though the return on asset gained, strength in the subsequent year of 2017 with 5.03% the steady trends is largely because of higher amount of net profit reported from strong sale of commodities across the regions.

Liquidity Ratios:

Liquidity ratios can be defined as those ratios that is conducted among the liquid assets and liabilities of the organization (Zeff 2016). In context of the BHP Billiton the liquidity ratios namely the Current ratio, Quick Ratio and Cash Ratio is calculated to perform an analysis of the liquid assets and the liabilities stated by BHP Billiton. The current ratio reported by BHP Billiton has been on a rising trend as the company posted a strong current ratio of 1.27 for the year 2015 and the following year of 2016, the current ratio increased to 1.44.

Subsequently in the concluded year of 2017, the current ratio stood 1.85 respectively. The quick ratio on the other hand also reflected the strong upward rising trend as the quick ratio for 2015 stood 0.92, which subsequently increased to 1.15 in 2016. During the year 2017, the current ratio strongly stood at 1.52 reflecting BHP Billiton has sufficiently used its current assets to meet its short-term debt liabilities (Hermason, Edwards and Maher 2016). The cash ratio stood marginally lower in the year 2015 to 0.53. However, in the subsequent year of 2016 and 2017 the cash ratio increased to 0.85 and 1.25 respectively. The increase in cash ratio is primarily attributable to the cash and cash equivalents as in 2016 the cash and cash equivalent stood $10440 million whereas in 2017 it increased to 14225. Overall, the company has been able to maintain its liquidity position in meeting its short-term business obligations by sufficiently using the current assets and liabilities.

Capital structure ratio:

The capital structure ratio can be defined as that ratio that helps in reflecting the ability of the firm increasing its value from the capital employed (Cadden and Schneider 2014). As evident from the analysis the debt ratio for the firm has somewhat been steady as the debt ratio for the year 2015 was 2.08. The debt ratio though marginally declined in the year 2016 to 1.84 but in the following year, it increased to 1.96 representing higher borrowing instances. Considering the equity ratio, during the year 2015 the equity ratio stood 0.52 while it marginally fell to 0.46 in the year 2016 to 0.46. In the concluding year of 2017, the equity ratio stood for BHP Billiton to 0.49. The debt to equity ratio on the other hand stood 0.92 for the year ended 2015 while in the subsequent year of 2016 the debt to equity ratio rose to 1.19 (Williams 2014). The rise in debt equity is because of the impairment and expenditure of US $272 million.

Efficiency ratios:

The efficiency ratio is used to measure the effectiveness of the organization in determining whether the firm has been successfully making the use of assets and liabilities (Edmonds et al. 2016). As evident that the accounts receivable ratios for BHP Billiton during the year 2015 stood 8.96 whereas in the year of 2016 the accounts receivable ratio was 8.31. In the recently concluded year of 2017 the accounts receivable ratio reportable by the firm was 12.63 with a sharp rise from the previous year of 2016. The asset turnover ratio has been somewhat low as the figure reported for the year ended 2015 and 2016 stood 0.36 and 0.26 respectively (Pratt 2016). Whereas in the year 2017 the asset turnover ratio reported by the firm was 0.33. The inventory turnover ratio though reflects an improving trend as the time taken by BHP Billiton to rotate its inventory has been gradually decreasing.

The inventory turnover ratio for the year ended 2015 stood 2.89, which improved in the following years of 2016 and 2017 to 2.25, and 1.54 respectively. The working capital ratio for the year 2015 stood 1.27 whereas for the year ended 2016 and 2017 the working capital turnover ratio stood 1.85. Overall, by taking into the considerations the efficiency ratio it can be stated that BHP Billiton has been effective in mobilizing and making an efficient use of its relative assets in proportion of the liabilities (Tricker and Tricker 2015). This is because the analysis represents that BHP Billiton has been successfully able to pay its liabilities from the reportable assets of the firm.     

Conclusion:

On a decisive note the study, suggest that the general performance of the BHP Billiton has been growing as the business has made advancement in technologies and constant innovation so that it can reshape the operational strategy and market overall. The company has been able to change the customer expectation with segmented goods from corner to corner to its zone of processes. The financial analysis signifies that the corporation has performed well in the marketplace by improving its proceeds from operations.

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