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Prepare a brief description of the selected company, outlining the core activities, competitive advantages, and the market in which it operates within and any factors in the company’s history which you consider help present a “picture” of your chosen company

Evaluation of Financial Position using Ratio Analysis

In this report the will be consideration of the macro environment and for that the there will be evaluation which will be made in the context of the financial position. There will be various aspects which will be considered in this and for the proper analyzation, there will be a ratio analysis which will be performed. By the help of this, it will be possible to make the decisions in relation to the various aspects such as the investment will be made accordingly. In order to understand the movements which took place in the share price will be understood appropriately with the help of graphs. There will be the use of the constant dividend growth model in order to ascertain the stock price of the company in the current period. All of this will be performed for BHP Billiton and after the evaluation, there will be certain recommendations which will be provided by which it will be possible to make the improvements in the current system so that growth can be attained.  

BHP Billiton is the company which is having its headquarters in Australia and is considered as one of the largest company dealing in mining and resources. It is operating in various parts of the world and there are around 100000 employees to whom employment is provided by it. The company was incorporated in 1885 and dealing in various products. In this copper, iron ore, uranium and coal are involved and there are various segments which are prepared in accordance with that (Bell, 2017). The main task of the petroleum segment is the development, production, and exploration of the gas and oil. The mining of silver, copper, zinc, and lead is made in the copper segment. The mining in relation to the iron ore is made in the iron ore segment. The main extraction of minerals is made by the company in the operations which have been situated in Australia. There is the logistic chain with the help of which distribution of the products is managed. The operations are mainly carried in America and Australia (BHP Billiton Limited, 2017). The company has attained the success in the long run and is running in a very smooth manner. There are several competitors in the market with which it is required to deal in the most effective manner so that the benefits can be obtained from that.

The ratio analysis is performed so that all of the aspects of the business can be considered and by that the performance of the business can be evaluated (Duchin and Sosyura, 2014). In this,, there will be various calculations and evaluations which will be made by which the overall ascertainment of the position of the business will be made.

Liquidity Ratios

In the business, there are certain aspects which are to be noted and one of them is liquidity in which it will be ascertained that whether the company is effective in the meeting of its obligations (Atieh, 2014). There are various financial elements which will be required to be evaluated in this. The assets and liabilities which are involved in the business which will have to be met are to be ascertained so that proper comparison among them is made and then the decision on the basis of them is taken. The liquidity position will be determined and the final decisions will be made by taking them into consideration (Kirkham, 2012). In this, there are several ratios which are calculated so that proper results are obtained.

The current ratio is the one by which the total current assets that the company is possessing are considered for the payment of current liabilities. They are compared and it is identified that whether they will be sufficient or the challenges will be faced. There is the standard which is set in this and that states that it shall be at 2:1 which means that the assets of the company shall be twice of the liabilities to be taken. The same in the current case is 1.85 and 1.44 for the year 2017 and 2016 respectively (BHP Billiton Limited, 2017). It can be said that there is the increase in the ratio and although the company will be able to meet the liabilities some more improvement is needed. The quick ratio is the one in which the assets which are highly liquid will be taken and inventory will not be involved in this. The ratio will be comparing the quick assets with the current liabilities. They are 1.16 in 2016 and rose to 1.53 in 2017. This shows that the company will be able to manage its resources in the most appropriate manner (BHP Billiton Limited, 2017). So in whole,, the liquidity position of the company is strong and it will not be facing any issues in payment of its liabilities.

The capital structure which is maintained in the company is required to be evaluated so that leverage position of the business can be managed. In the carrying out of the functions, there is the requirement of the funds and it is required that they shall be made available in a proper manner. For that, there are various sources which can be used and it is required that proper evaluation shall be made in this respect (Abdul-Baki, et. al., 2014). There will be equity and debt which will be used and for that the amounts which are involved in them will be considered. The charge is to be met on the debts and so they shall be managed appropriately. For the proper maintenance of the same, there will be various ratios which will be identified.

Capital Structure Ratios

The debt ratio is determined in which total liabilities of the company are compared with the assets and by that the efficiency of the company will be identified (Anuar and Chin, 2016). There is a decline in this which means that the company has reduced the debts and that is good. The debt to equity ratio is also calculated by which the ratio in which they will be maintained are ascertained and this is also declining which means that debt is less than the amount of the equity and so the company is maintaining proper leverage ratios.

These are the ratios which will be determining the efficiency of the company in relation to the utilization of all the resources. In this, there are several aspects which have to be evaluated such as the debtors and creditors position. For that,, there will be the calculation of the various ratios and by that proper decisions will be made in relation to this (Santosuosso, 2014). The company shall be operated in such a manner that it is able to attain all the results in the most effective and efficient manner. By the help of this, the efficiency will be evaluated and that will be beneficial in the long run for the company (Tirkey and Osamah, 2013). The accounts receivable turnover ratio is calculated by which the time's revenue is in comparison to the debtors is ascertained. It will be determining the time's sales can cover the debtors. This is rising from 8.3 to 12.8 in one year which means that there is an improvement in this.

The collection period is determined which shows the number of days which will be taken in the collection process. There are 44.1 days for 2016 and 28.3 for 2017 which shows that company is taking fewer days and that is good for the company as the amount will be recovered early (BHP Billiton Limited, 2017). The total assets turnover ratio is the same in both the years and there is no change which is taking place in this. The payable ratio is also calculated and that is raising which shows that the sales to the creditor are reducing. The time which will be taken in the payment process is declining and this will be representing that company will be able to make the payments in less time by which the goodwill be made and also the cost which is incurred will be saved. The inventory turnover is the the same and that shows that the company is constant with its inventories.

Profitability Ratios

All the businesses are carried with the main aim of maximizing the profits and so it shall be considered and all the aspects in relation to this will have to be evaluated (GOYAL, 2016). The performance of the company will be determined by this as the earnings which are made will be evaluated. There will be the inclusion of the returns and the mounts of the capital and assets on which the comparison will be made. There are many such ratios which will be helping in this and they will be helping in the determination of the profitability position of the company. The net profit of the company is increasing as the company was facing losses in the past year. The rate of net profit margin is 26.96% which will be positive for the company. It can be said that the company is maintaining the profits ineffective manner (BHP Billiton Limited, 2017). The return which is made on the assets and capital are also ascertained and they are also growing and by that, it can be said that the company is maximizing its returns and also covered all the losses which have been made in the past.

Particulars

Formulas

2017

2016

Earnings available for shareholders

5890

-6385

Total number of shares

5323

5322

EPS

Earnings/total shares

1.11

-1.20

The position of the company in the market shall be strong and for that,, it will be required that the factors which will be representing this shall be evaluated (Khan and Khokhar, 2015). By this, the factors of the market will be considered. The earnings which will be made on per share are determined and for that, the earnings and a total number of shares are taken into account. The EPS is rising and it will be creating the strong position in the market as the shareholders will be willing to make the investment in the business to earn more.

The graphs which are presented above are representing the movements which are taking place in the share prices of the company. There are various fluctuations which take place and also the comparison has been made with the all ordinaries index. It can be seen that prices are continuously changing. There was a decline in the January 2016 and after that, the rise started. The prices from this level are growing at a continuous pace and in that several times some downfall has been experienced (Ergun, 2012). There are several such factors which are responsible for this and that include the macro factors. The conditions which are prevailing in the market are considered as by that the level of the uncertainty is determined. There was some decline in the mid-2017 and then again the increase was noted (Dissanayake and Wickramasinghe, 2016).

Analysis of Share Prices

For the proper evaluation of the changes the comparison is made with the all ordinaries index by which the proper conclusion can be made and then such decision is made which will be helping in the attainment of the growth and success (Sharif, et. al., 2015). It can be noted that there is the same level at which this has been maintained and the prices of the company are below that level. The company is making the increase but in all ordinaries,, there is no such improvement which is noted (Suriani, et. al., 2015). There are the scopes for the further rise and they will be achieved so that business can be carried in a successful manner for the long term. 

The market price of the share is required to be calculated so that the position of the business can be evaluated. There are several such methods which can be used for this purpose as various approaches have been specified. Out of them, one is the constant dividend growth model in which the company will be taking a rate at which the growth will be made and it will be assumed that it remains constant in all the circumstances (Aduda and Kimathi, 2011). In this, there is no consideration which is made for the changes which are taking place. The return which is made is considered and also the dividend that is paid in the current year is used to ascertain the dividend which will be received in future after addition of the growth element (Ivanovski, et. al., 2015). The formula which will be used under this and the calculations to be made in this respect are represented below.

Required Rate of return (ke) =9%

Dividend Growth rate (g) =4%

Current dividend (D0) =0.856

Value of share (p0) = D0 (1+g)/Ke - g

Share price = 0.856 (1+.04) / 0.09-0.04

Value of share = 0.89024/0.05

Current share price as per dividend growth model =$17.80

Original current share price = $31.30

From the calculations which are made above it can be noted that the price which is calculated as per the constant dividend growth rate model and the actual price in the market is different. The actual price is $31.3 whereas as per the model is $17.8. The reason for the difference is the aspects and assumptions which are made in the model. According to that there will be no increase or decrease in the dividend which is made and it will be remaining constant but this is not the case in the market in real. In the economy, there are various changes which will be taking place due to the factors which are involved and it is necessary for the company to consider them (Acheampong and Agalega, 2013). They are the ones which show that market conditions and fluctuations. The variation which is identified is due to this as the maturity in the market is not constant. There will always be some amount of the difference which will be present among them and that can never be eliminated completely due to the above-identified reasons. 

Conclusion 

The report which is presented above elucidates about all the aspects which are there which helps in the evaluation of the position and performance of the company. The overview of the BHP has been provided in the first part by which all the areas in which operations are carried are identified. Also, the other information in relation to the company is determined. The ratios analysis has been performed by which the performance of the company is measured and in that,, all of the required aspects such as liquidity, efficiency, leverage position, and market position are taken into account. With the help of that proper decisions are made by the company for the coming period. The changes which are taking place in the company in relation to the stock price is also included in which the graph is representing the information. By that proper evaluation is made and also the comparison is made with the all ordinaries index. There is the calculation of the market price by the use of the constant dividend growth model and then it has been compared with the actual price in order to determine the variation and the reason for the same. 

The recommendations are to be provided so that all the shortcomings can be eliminated and improvement in the performance is made. The company will be required to increase its current ratio by making the investment in current assets or by reduction of the liabilities. The other ratios which determine the efficiency show that operations are effective but a further opportunity for growth is there which shall be used. The fluctuations are determined and for the controlling of them, all the factors which are responsible for this shall be taken into consideration by the company so that they can be eliminated and proper results are attained. The measurement of the performance can also be made by the setting of the incentives and targets which are to be attained and that improvement will be made and better results will be attained. 

References 

  • Abdul-Baki, Z., Uthman, A.B. and Sannia, M. (2014). Financial ratios as performance measure: A comparison of IFRS and Nigerian GAAP. Accounting and Management Information Systems. 13(1), pp.82.
  • Acheampong, P. and Agalega, E. (2013). Examining the Dividend Growth Model for Stock Valuation: Evidence from Selected Stock on the Ghana Stock Exchange. Research Journal of Finance and Accounting. 4(8), pp.112-120.
  • Aduda, J.O. and Kimathi, H. (2011). The applicability of the Constant dividend model for companies listed at the Nairobi Stock Exchange. Journal of Financial Studies & Research. 11, pp.1-33.
  • Anuar, H. and Chin, O. (2016). The Development of Debt to Equity Ratio in Capital Structure Model: A Case of Micro Franchising. Procedia Economics and Finance. 35, pp.274-280.
  • ASX (2018). BHP Billiton Limited [Online]. Available at: https://www.asx.com.au/asx/share-price-research/company/BHP [Accessed On 9 September 2018].
  • Atieh, S.H. (2014). Liquidity Analysis Using Cash Flow Ratios as Compared to Traditional Ratios in the Pharmaceutical Sector in Jordan. International Journal of Financial Research. 5(3), pp.146.
  • Bell, T. (2017). Company Profile: BHP Billiton [Online]. Available at https://www.thebalance.com/company-profile-bhp-billiton-2340279 [Accessed on 9September 2018].
  • BHP Billiton Limited (2017). Annual Report [Online]. Available at: https://www.bhp.com/-/media/documents/investors/annual-reports/2017/bhpannualreport2017.pdf?la=en [Accessed On 9 September 2018]
  • Dissanayake, S. and Wickramasinghe, M. (2016). Earnings Fluctuation on Share Price Volatility. Account and Financial Management Journal. 1(5), pp.360-368.
  • Duchin, R. and Sosyura, D. (2014). Safer ratios, riskier portfolios: Banks? response to government aid. Journal of Financial Economics. 113(1), pp.1-28.
  • Ergun, U. (2012). Internal determinants of the stock price movements on a sector basis. International Research Journal of Finance and Economics. 92.
  • GOYAL, P.K. (2016). A STUDY OF RATIO ANALYSIS AS A TECHNIQUE OF FINANCIAL PERFORMANCE EVALUATION. KAAV INTERNATIONAL JOURNAL OF LAW , FINANCE & INDUSTRIAL RELATIONS. 3(2), pp.56-65.
  • Ivanovski, Z., Ivanovska, N. and Narimanov, Z. (2015). Application of dividend discount model valuation at Macedonian Stock Exchange. UTMS Journal of Economic.6(1), pp.147-154.
  • Khan, M.N. and Khokhar, I. (2015). The effect of selected financial ratios on profitability: an empirical analysis of listed firms of the cement sector in Saudi Arabia. Quarterly Journal of Econometrics Research. 1(1), pp.1-12.
  • Kirkham, R. (2012). Liquidity analysis using cash flow ratios and traditional ratios: The telecommunications sector in Australia. Journal of New Business Ideas & Trends. 10(1), pp.1-13.
  • Market Index (2018). BHP Billiton Limited Chart [Online].Available at: https://www.marketindex.com.au/asx/bhp [Accessed On 9 September 2018].
  • Santosuosso, P. (2014). Do Efficiency Ratios Help Investors to Explore Firm Performances? Evidence from Italian Listed Firms. International Business Research. 7(12), pp.111.
  • Sharif, T., Purohit, H. and Pillai, R. (2015). Analysis of Factors Affecting Share Prices: The Case of Bahrain Stock Exchange. International Journal of Economics and Finance. 7(3), pp.207.
  • Suriani, S., Kumar, M.D., Jamil, F. and Muneer, S. (2015). Impact of exchange rate on the stock market. International Journal of Economics and Financial Issues. 5(1S), pp.385-388.
  • Turkey, M.R. and Osamah, M. (2013). Ratio Analysis used to compare the performance of Tata Steel and Jindal Steel. (A comparative study). IOSR Journal of Business and Management. 13(5), pp.65-69.
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