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MBA403 Financial And Economic Interpretation And Communication Investments

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  • Course Code: MBA403
  • University: Kaplan Business School
  • Country: United States

Question:

The following questions may assist you with your interpretation and with explaining non-financial aspects of the company from the annual report that may be relevant for the external user. Depending on the entity, some of these may not be contained within the report. You may need to use other sources.
 
• What are the core business area(s) and geographic locations in which the entity operates?
• How have the financial results improved or changed in the specific area?
• Is there evidence from other sources that can verify the trends for the industry?
• What are the entity’s current business strategy or strategies and key points of difference in the target market? Is there a specific skill-set required of employees?
• What is the current and future market potential for the entity? What influence have recent global events apparently had on the entity? In which specific areas?
• Identify strengths of the entity’s management team and how these may benefit the organisation in future financial years.
• What are the remuneration trends from last year to this year for the highest earners?
• Is there a difference in the wages that could be earned in a competitor’s business?
• What is the current management structure and ownership structure?
• Identify strengths of the entity’s management team and how these may benefit the organisation in future financial years.
• What are the remuneration trends from last year to this year for the highest earners?
• Are there other non-wage-related benefits of being an employee at the entity?
 
 

Answer:

Analysis

The key measurement data that will be taken into consideration will be the profitability, liquidity, cash management activity and market related factors for the company.

Gross profit margin – gross profit margin of the company determines the earning available with the firm after paying for the cost of goods sold from the revenues. It further states whether the earnings available after paying off the COGS are sufficient to meet the operational, financial and tax expenses. Looking into the gross margin ratio of the company it can be determined that the gross margin of the company is in improving trend and increased from 39.44% to 60.58% over the years from 2016 to 2018 (Weygandt, Kimmel and Kieso 2015).

Return on capital employed – ROCE measures the profitability of the entity and the efficiencies with which the entity is deploying its assets. Looking into the ROCE of the entity it can be determined that the same for the company is improved from 2016 to 2017 however in 2018 it dropped again from 10.29% to 6.66% (Gitman, Juchau and Flanagan 2015).

Current ratio – current ratio measure the liquidity position of the entity through measuring its short term liabilities against the short term assets. Looking into the current ratio of the entity it can be determined that the same for the company is improved from 2016 to 2017 and in 2018 it dropped again from 3.17 to 2.73 (Bakker and Shepherd 2017).

Quick ratio – quick ratio is also the liquidity ratio that is stricter than the current ratio as it does not consider the liquid assets those take some time to get converted into cash while measures the liquidity. Looking into the quick ratio of the entity it can be determined that the same for the company is improved from 2016 to 2017 and in 2018 it dropped again from 2.18 to 1.91 (Muhammad et al. 2015).

Price to earnings ratio - it determines the relationship among the stock price of the entity and the EPS. Higher PE ratio indicates the investors expect the higher return from their investments. From the PE ratio of the entity it can be determined that it has been increased from -17.23 to 46.62 over the years from 2016 to 2018 (Sari, Nurlaela and Titisari 2018).

Cash flow margin – it measures the efficiency of the entity with regard to converting of sales into cash. It can be used a good indicator for the entity’s earning quality. It can be identified from the calculation table that the cash flow margin of the entity has increased from 0.34 to 0.44 over 20176 to 2017 and dropped it to 0.40 again in 2018 (Islam and Khandaker 2015).

Short – term debt coverage – it represents the entity’s financial position with regard to its ability to meet the short term financial requirements from the available cash of the entity. It can be identified from the calculation table that the short-term debt coverage of the entity has increased from 0.80 to 1.40 over 20176 to 2017 and dropped it to 1.26 again in 2018 (Ehrhardt and Brigham 2016).

 

Resource A

Core business and geographic location

BHP Billiton’s main objective is growing the potash mining business into the core business. It the increasing the investment in the potash mining and looking for divesting its shale gas assets from US

Various geographic location of the business are Australia, Canada, UK, Malaysia, Chile, Singapore, England and London (BHP 2019).

Financial results

Looking into the financial results of the entity it can be identified that company has improved in its profitability aspect and that can be verified through the gross margin. In liquidity context the company has improved in 2016 as compared to 2016 and deteriorated in 2018 again in comparison to 2017. The same trend of liquidity is followed for cash management ratio. However, the market value ratios have been improved that can be verified through PE ratio.

Industry trend

Industry trend can be verified through the data available in IBIS World or Bloomberg.

Business strategy

The company’s business strategy is to create and grow value and growing the cash returns to the shareholders. The employees need right skill and experience for mining industry to work for the entity (BHP 2019).

Market potential

Though the mining companies have good future prospects it is facing tough situation regarding complex socio-political environment, pressurised financial performance and tough operating scenarios.

Strength of management team

The management team of the company headed by CEO Ken MacKenzie who has extensive knowledge and experience in global business. Other management team also have extensive knowledge and experience in their respective fields. It will assist the company in forming better business strategies (BHP 2019).

Remuneration trend

Remuneration for highest earners are is increasing trend as compared to previous year.

Competitors business

Yes, wage difference is there in competitor’s business

Management team

CEO of the company is Ken MacKenzie. Other directors are – Andrew Macenzie, Terry Bowen, Malcolm Broomhead, Anita Frew, Carolyn hewson, Lindsay Maxsted, John Mogford and Shriti Vadera (BHP 2019). 

Conclusion

From the above it can be concluded that the company is improving in its financial aspects in 2017 as compared to 2016. However, the performance deteriorated in 2018. However, the company is able to generate return for the shareholders and the shares of the company are undervalued. Hence, it is recommended that the shareholder can hold their investment in BHP Billiton for future earnings.

 

Reference

Bakker, R.M. and Shepherd, D.A., 2017. Pull the plug or take the plunge: Multiple opportunities and the speed of venturing decisions in the Australian mining industry. Academy of Management Journal, 60(1), pp.130-155.

BHP. 2019. BHP | A leading global resources company. [online] Available at: https://www.bhp.com/ [Accessed 4 Feb. 2019].

Ehrhardt, M.C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage learning.

Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.

Islam, S.Z. and Khandaker, S., 2015. Firm leverage decisions: does industry matter?. The North American Journal of Economics and Finance, 31, pp.94-107.

Muhammad, N., Scrimgeour, F., Reddy, K. and Abidin, S., 2015. The impact of corporate environmental performance on market risk: The Australian industry case. Journal of business ethics, 132(2), pp.347-362.

Sari, R.K., Nurlaela, S. and Titisari, K.H., 2018, August. The Effect of Liquidity Ratio, Profitability Ratio, Company Size, and Leverage on Bond Rating in Construction and Real Estate Company. In Proceeding Ictess (Internasional Conference on Technology, Education and Social Sciences). 

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.

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