Comparative Financial Analysis Essay: Mining Companies - Ausdrill Ltd, BHP Billiton Ltd, And Evolution Mining Ltd.

Items of equity reported by the companies

In this section, go to your companies’ annual reports and save to your computer your firms’ latest annual reports consecutively for last three years. Do not use your companies’ interim financial statements or their concise financial statements. Please read the financial statements (balance sheet, income statement, statement of changes in owner’s equity, cash flow statement) very carefully. Also please read the relevant footnotes of your companies’ financial statements carefully and include information from these footnotes in your answer.

You need to do the following tasks:

(i)From your companies’ financial statements, list each item of equity reported and write your understanding of each item. Discuss any changes in each item of equity for your firms over last three years articulating the reasons for the change.

(ii)From your companies’ financial statements, list each item of liability reported and write your understanding of each item. Discuss any changes in each item of liability for your firms over last three years articulating the reasons for the change.

(iii)Provide a comparative analysis of the debt and equity position of the three firms that you have selected. 

(iv)From the financial statement of your chosen companies, list each item reported in the cash flows statement and write your understanding of each item. Discuss any changes in each item of cash flows statement for your companies over last three years articulating the reasons for the change.

(v)Provide a comparative analysis of your companies’ three broad categories of cash flows (operating activities, investing activities, financing activities) and make a comparative evaluation for three years.

(vi)Also provide a comparative analysis of the three companies that you have selected explaining the insights that you can get from the comparative analysis. 

(vii)What items have been reported in the other comprehensive income statement for each company?

(viii)Why have these items not been reported in Income Statement/Profit and Loss Statements?

(ix)Provide a comparative analysis of the items shown in the other comprehensive income statement section for the three companies. If these items were included in the income statement / profit and loss statements of each company, how would the profit attributable to shareholders of the company be affected?

(x)Should other comprehensive income be included in evaluating the performance of managers of the company?

(xi)What are the tax expenses shown in the latest financial statements of the three companies that you have selected?

(xii)Calculate the effective tax rate for all three companies that you have selected. Effective tax rate is calculated as (income tax expense / earnings before tax). Which one of the companies has the higher effective tax rate?

(xiii)Comment on deferred tax assets/liabilities that is reported in the balance sheet articulating the possible reasons why they have been recorded.

(xiv)Was there any increase or decrease in the deferred tax assets or in the deferred tax liability reported by each of your selected companies?

(xv)Please calculate the cash tax amount for all three companies using the book tax amount, changes in the deferred tax assets and deferred tax liability (please do your own research for your better understanding of these concepts and the method of calculating the cash tax amount the book tax amount.)

(xvi)Calculate the cash tax rate for all three companies. Which company has higher cash tax rate? (Please do your own research to familiarise yourself with how to calculate cash tax rate).

(xvii)Why is the cash tax rate different from the book tax rate?

The assessment considers the business of three different companies which are engaged in the business of mining sector for the purpose of making comparisons regarding the reporting framework which is followed by such business. The companies which are selected for this assessment are Ausdrill Ltd, BHP Billiton Ltd and Evolution Mining Ltd which are all engaged in the business of mining and the core activities of such businesses comprise of extraction of minerals. In order to understand the reporting framework which is followed by these three companies, the annual reports of the companies are considered for the purpose of analysis. The report would also establish which business has provided better disclosures relating to financial accounts.

Ausdrill Ltd is engaged in the business of mining and extracting minerals and the prime area of operations for the country is in Australia. The company has also expanded the operations of the business to the parts of Africa and United Kingdom. The company takes on mining projects and projects which involves drill and blast exploration techniques. The business of Ausdrill Ltd is growing its operation on daily basis.

BHP Billiton ltd can be regarded as one of the Australia’s leading mining businesses and the company has record extraction of mineral process. The company is currently ranked as one of the biggest mining businesses which is operating in Australia. The company was formed due to a merger agreement between the parties and since then the company has done extremely well in terms of performance of the business.

Evolution mining ltd is of the developing mining companies which is operating in Australia and the company extracts gold from the surface. The company owns and operates on gold mines which are fully owned by the company. The company is regarded as the major suppliers for future gold and copper minerals in the country. The company follows a sustainability approach in the production process which is followed by the business.

The assessment requires analysis of reporting framework which is applied by all three companies in the annual report of 2018 in order to estimate which company has a better framework. Some of the significant areas which are considered from the annual report of all three companies are cash flow statements, equity capital used, tax treatments and disclosures and how the same have been presented. The assessment also shows the computation of effective cash rate and effective tax rate of all the three companies.

Items of liability reported by the companies

1. Equities

The owner’s equity of the business represents the equity capital of the business and the funds which are used by the management for the purpose of financing the activities of the business. In order to analyze the equity capital of the business, the annual report of all the companies ios consider for 2018. The items which are shown in the balance sheet of the respective companies are discussed below:

Ausdrill Ltd

The annual report of Ausdrill Ltd shows that the owner’s equity of the business comprises of contributed equity of the business, retained earnings and reserves which are kept aside by the business. The contributed equity of the business represents the capital which belongs to the owners of the business and are collected from the issue of shares of the business. The contributed equity of the business is shown to have significantly increased during the year 2018 and this shows that the business is requiring more funds for better financing of the activities of the business. The contributed equity of the business may have increased for increasing the capital structure of the business or for financing certain projects. Then there is retained earnings which represents profits which are kept aside by the management of a company for ensuring that the business has internal strength to get out of financial situation or for any reinvestment purpose. The retained earnings of the business is shown to have increased significantly from previous year which shows that the business has made significant amount of profits during the year and has therefore effectively put aside certain portion of profits in retained earnings. The balance sheet also shows reserves which are created by the business for some specific purposes and the reserves are created to ensure that the project which is considered by the management can be financed effecticvely. The reserves can also be used for setting off losses of the business and the balance sheet of Ausdrill ltd shows that the reserves are used for similar purpose.

BHP Billiton Ltd

The balance sheet of BHP Billiton also shows similar items which are share capital which is used by the business, retained earnings and reserves and treasury shares. The share capital of the business is the owner’s capital and the same is shown to have divided into the capital which is used by the parent company and also the capital utilized by the subsidiary company. The share capital of the business is shown to have remained unchanged during the three years period which suggest that the management of BHP do not want to alter the capital structure of the business. The retained earnings of the business are shown to have slightly decreased which can be due to some adjustments made by the business. The reserves which are created by the management of the company is also shown to have decreased slightly which can be for setting up certain losses of the business. The reserve balance which is shown to be in the balance sheet of the company for 2018 is $ 2,538 million. The business also has certain treasury shares which are shown in negative in the balance sheet of the business and the same represent short term negotiable instruments which are used by the management of the company.

Comparative analysis of debt and equity position

In the case of this company as well, the balance sheet of the business shows the same items which are equity share capital, reserves and retained earnings of the business. The equity share capital is shown to have increased in 2017 in comparison to 2016 and then same is shown to be constant in 2018. The equity share capital which is shown in the annual reports of the business is $ 2,183,727,000. The retained earnings of the business shows significant improvements from the previous year analysis which suggest that the management has made improvements and generated profits for the business. The reserve balances which is shown represents the losses of the business and the same is shown to have increased significantly during the year which is not a positive sign for the management of the company.

1. Liabilities

In the case of Ausdrill Ltd, the liabilities which are shown in the annual report are trade payables, borrowings of the business, other liabilities, provisions and employee benefit obligations. The trade payables of the business show a tremendous increase which shows that the creditors of the business have increased tremendously during the period and the same is not a positive sign for the business. The borrowings of the business are also shown to have increase which represent the debt capital which is used by the business for financing the activities of the business. The employee benefit obligations of the business refers to the payments which are due to the employees of the business and the same is shown to have increased during the past three years. The non-current liabilities of the business represent the provisions and long-term debts which are taken by the management of the company. The long-term of the business is shown to have increased significantly during the period which signifies that the management of the company is undertaking certain projects.

BHP Billiton Ltd

The annual report of the business shows the similar liabilities which are shown for Ausdrill ltd. The major liabilities which are shown in the financial statements are trade payables, interest bearing liabilities, current tax payable for the business and deferred income. The non-current section of the liabilities also represents the similar liabilities but the different is that they are long term in nature. The trade payables of the business are shown to have $ 5,977 million and the same represent the creditors of the business. The provisions which are shown in the annual report are created for expected liabilities of the business. The current tax liability refers to the tax liability which needs to be incurred by the business during the current year. In addition to this, the management of the company has kept certain liabilities for sale as well.

Items reported in the cash flows statement

Evolution Mining Ltd

The liabilities which are shown in the annual reports of the business are classified as current and non-current liabilities of the business. The current liabilities of the business shows that the components which are included are trade payables which represents the creditors of the business and the same is shown to have decreased slightly which can be regarded as positive sign for the management of the company. Then there is interest bearing securities which have increased significantly during the year and the same shows the loan capital which is used by the business in financing the activities of the business. The current tax liabilities which are shown form part of the tax assessment and same is shown to have increased due to some temporary difference. The liabilities of the business also include non-current liabilities which mainly comprise of provisions and long-term debts which are taken by the business.

The debt position of the business represents the total debts which is used by the business in the capital structure of the business. In the case of Ausdrill Ltd, the short-term and long-term borrowings of the business has increased and the borrowings of the business for the year 2018 is shown to be $ 401,216,000. In the case of BHP Billiton ltd, the borrowings of the business is shown to have reduced significantly which suggest that the management of the company is trying to reduce the overall debt capital which is used by the business and the same is shown in the annual report of the business as $ 24,069 million. The balance sheet of Evolution Mining ltd shows that there has been a reduction in the interest-bearing liabilities of the business and the which is shown in the annual report is shown to be $ 292,470. The analysis of debt position suggest that the business of Ausdrill ltd is relying more on debt capital as they have enhanced the debt of the business even through BHP Billiton and Evolution mining has higher debts capital.

The cash flow statement of the business comprises of the cash from operating activities, cash from investing activities and cash from financing activities of the business. The cash from operating activities mainly comprise of cash which can be generated from operations. In the case of Ausdrill Ltd, the main cash inflows for the business is from the receipts from the customers of the business while the main cash out flow of the business is from cash payments which is made to the creditors. The cash receipts from the customers of the business is shown to have increased significantly increased from previous two years which suggest that the management of the company has increased the scale of operations of the business. The cash from investing activities of Ausdrill ltd shows the purchase and sales of assets of the business and the balance which is represented by cash from investing activities is shown to be negative which is due to the purchase of plant and equipment which is undertaken by the management of the company during the year. The cash from investing activities of the business shows a positive balance which is mainly due to the shares which is issued by the business during the period and the same was not issued in previous year.

Comparative analysis of cash flows

In the case of BHP Billiton ltd, the cash flow statement is prepared in the standard format comprising of cash from operating activities, cash from investing activities and cash from financing activities. The cash which is generated from operation has increased during the period of 2018 which is mainly due to the increase in profits of the business. The net operating cash flows of the business is shown to be $ 18,461 which is significantly higher than previous two years. The cash from investing activities of the business comprises of purchases which is made by the business and the exploration expenditure which is undertaken by the business. The investing activities of the business are shown to be negative which is due to the purchases and expenditure of the business. The financing activities of the business is also shown to be negative which is mainly due to the repayment of interest bearing liabilities of the business and also due to lumpsum dividend payments which is undertaken by the management of the company.

In the case of Evolution Mining ltd, the annual report shows the cash flow statement prepared as per the conceptual framework followed by most of the businesses. The cash from operating activities of the business is shown to have improved tremendously as the scale of sales of the business have tremendously increased during the period and the same is considered to be a positive sign for the business. The cash from investing activities of the business shows the payments and purchase which is made by the management of the company during the period for machinery and exploration projects. The cash from financing activities of the business shows that amount of expenses which is undertaken by the management is shown to negative and the management of the business is shown to have repaid long-term loans and also undertake various expenses which comes under the head of financing activities of the business.

The cash flow statement of the business is represented in the graphs which are provided below and the same effectively shows the cash position of the business and the cash flows which are undertaken by the business.

The above graphs effective represents the cash flow position of each of the businesses which are considered for this assessment. On the basis of the graphs which are represented, comparisons can be made effectively.

The cash flow from operating activities of BHP Billiton is shown to be better that the estimates which is achieved by both Ausdrill ltd and Evolution Mining which is mainly due to the higher scale of operations in which BHP Billiton ltd is engaged. The cash floe from investing activities is shown to be better for Evolution Mining which is mainly due to the fact that the company has not made that much purchases as BHP or Ausdrill ltd. The cash from financing activities is shown to be more for Ausdrill ltd and the same is shown to be positive.

Comparative analysis of the three companies

The items which are reported in the business of Ausdrill ltd are shown exchange losses, exchange gains of the business, income from continued and discontinued operations of the business. In case of BHP Billiton ltd, the items which are shown in comprehensive statement are cash flow hedges, exchange losses, exchange gains, non-controlling interest of the business. In the case of Evolution Mining Ltd, the items which are included as comprehensive items are Changes in the fair value of available-for-sale financial assets, Changes in the fair value of cash flow hedges, Exchange differences on translation of foreign operations.

The items are generally shown separately and not included in the profit and loss statement is because the items are of extraordinary nature and the same is not related to day to day activity of the business. The items are therefore disclosed separately in another account; however, a company can show it together with the profit and loss statement.

As per analysis of the financial statements of all the three companies which are considered for this assessment, the comprehensive items which are included in the annual reports are similar to one another. The common items which are included in all three comprehensive statement are exchange gains and losses, revaluation differences, cash flow hedges. The analysis of comprehensive statement which is shown in the annual reports shows that items are more in case of BHP Billiton ltd than any other businesses which is considered for the assessment.

The performance of the business would be affected by the comprehensive items which are represented in the annual reports of the business which is mainly due to the fact that such items are non-recurring in nature and therefore cannot be considered for any decision-making process.

The taxes expenses which is shown for Ausdrill Ltd, BHP Billiton Ltd and Evolution Mining Ltd as per the annual reports of the business is $ 14,730,000, $ 7,007 million, $ 75,546,000. These figures are represented in the profit and loss statement.

The Deferred tax assets for Ausdrill ltd is shown to be $ 24,947,000 and the deferred tax assets of the business is shown to be $ 35,549,000. In case of BHP, the deferred tax liabilities and deferred tax assets of the business are shown to be $ 3472 and $ 4041 million. In the case of Evolution Mining, the deferred tax assets of the business are shown be $ 419,000. The main reason due to which the deferred tax assets and liabilities arises in the first place is due to the temporary difference in treatment of tax or carry forward of tax from previous years. There is an increase in the deferred tax assets and liabilities of all the companies slightly which may be due to adjustments made.

Items reported in the other comprehensive income statement

The cash tax rate and cash tax amount of BHP Billiton Ltd is much more than both the companies which are considered in the assessment.

The main difference between cash tax rate and book tax rate is that cash tax rate is estimated on current year basis while on the other hand book tax rate is estimated on the basis of current and future year. It is also to be remembered that cash tax rate makes adjustments with certain items from computation of the same.

Conclusion

The above discussion effectively shows the analysis which is conducted for Ausdrill Ltd, BHP Billiton Ltd and Evolution Mining Ltd. The above analysis shows that the scale of operations in which BHP Billiton is operating is much more than Ausdrill Ltd and Evolution Mining Ltd. The cash flow statement is shown to be better for BHP Billiton ltd with significant improvements in the cash inflows of the business. The assessment also includes comparative study about the reporting framework of cash flow statement of the business. The assessment further includes computation of cash tax rate and effective tax rate for all the three companies.

Reference

"Annual Reports : Ausdrill". 2019. Ausdrill.Com.Au. Accessed January 17 2019. https://www.ausdrill.com.au/investors/annual-reports.html.

"BHP | Reports And Presentations". 2018. BHP. Accessed January 17 2019. https://www.bhp.com/media-and-insights/reports-and-presentations?q0_r=category%3DAnnual%2BReports.

"Evolution Mining – Australian Gold Company". 2019. Evolutionmining.Com.Au. Accessed January 17 2019. https://evolutionmining.com.au/.

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