A Detailed Financial Analysis of BHP Billiton

Course	Master of Business Administration (MBA)
Unit Code:	BUS5002
Unit Title:	Business Finance
Term/Semester	S12024

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Executive Summary

A detailed financial analysis has been conducted on the organisation BHP Billiton in this study. The analysis of the financial position of this organisation shows declining profitability, liquidity and solvency levels. Only the efficiency ratios identified for the organisation are good. The main financial strengths for the BHP Group are its strong liquidity position in addition to good operational efficiency. However, there are several financial weaknesses, which can be identified for the organisation, for instance, depleting profitability levels and increasing debt levels. Decreased ability to make interest payments is also one of the main financial weaknesses.

This financial analysis for the organisation has been done based on secondary data collection. A detailed compare and contrast with industry benchmarks helped in observing that both solvency and liquidity ratios are lower as per the industry benchmarks. However, the efficiency ratios and profitability ratios are better. However, the profitability of the organisation can be improved by the means of strong cost control and efficient marketing. Similarly, consolidation of loans, cutting down costs through the implementation of a zero-based budget and curbing extraneous spending can help to lower its debts. Strong credit control in addition to developing a tighter credit control has been recommended to capitalise its strength of good operating efficiency.

Introduction

Analysing the financial position of business organisations is essential in different ways. This report aims to conduct a detailed analysis of the financial position of the BHP Group. The BHP Group, which was formerly known as BHP Billiton, is one of the leading resources companies in the world. This report aims at conducting an in-depth evaluation and analysis on the financial performance that has been accomplished in the BHP Group in the previous three years. In the first place, there will be a discussion on the background of this business organisation along with the scope of the study. The methodology to be used for the study will be discussed and different issues will be identified in the BHP Group based on financial ratios. Followed by this, there will be an identification of the financial strengths and weaknesses of the business organisation followed by a comparison of the organisation’s financial performance. Lastly, recommendations will be provided for the organisation to improve its performance and address financial weaknesses while ending with a conclusion.

Background

The BHP Group is a resources organisation that aims at bringing people as well as resources together so that a better world can be built. It operates in above 90 locations in the world and its products are sold all over the world. Started back in the year 1851, there are above 90000 contractors and employees working in this organisation (BHP, 2024a). BHP is currently the largest mining organisation in the world as per market capitalisation. It is also a leading producer of copper, metallurgical coal and iron ore. The management of the organisation involves its CEO, Mike Henry and its entire board of directors and leaders are held accountable to live for the organisation’s values. Presently, the organisation stands at a position of declining profitability as well as other aspects of finances (BHP, 2024b). The internal and external analysis of the annual accounts statement of the organisation helps in determining that declining sales and increasing costs are being seen in its context due to internal and external factors. Such declining financial position and overall financial status is one of the key issues identified in the context of the BHP Group.

Scope and Methodology

The purpose underlying in this study involves studying the different issues that exist within the BHP Group based on a range of financial ratios. Different categories of ratios such as liquidity, profitability, solvency and efficiency will be used for the analysis of the ratios of the organisation. A detailed discussion will also be made on the theory of financial ratios and how they are useful for conducting the financial analysis of business organisations based on their annual reports and statements. Followed by this, the scope of the study involves an identification of the financial strengths and weaknesses of the business organisation followed by a comparison of the organisation’s financial performance against industry benchmarks.

All these discussions and analysis will be done by collecting data on the numerical results of the organisation the BHP Group for the past three years between 2022 and 2024. The sources of the data collection involve the annual reports of the organisation along with the news articles related to the organisation and its official website. Moreover, websites in which industry benchmark ratios are disclosed will also be used in addition to using a range of books and journal articles. For example, according to BHP (2024b), the financial results of the organisation show a declining trend. Thus, the methodology that is going to be used for this study is secondary data collection and analysis. Lastly, recommendations will be provided for the organisation to improve its performance and address financial weaknesses while ending with a conclusion.

Issues Identified

One of the primary sources from which the financial position as well as performance of business organisations can be evaluated is its financial statements (Palepu et al., 2020). The financial statements and data of business organisations are interpreted in diverse ways through the medium of financial ratios. According to Tracy (2024), financial ratios are the fractions, which are calculated from the figures that are disclosed within the financial statements of business organisations. All these ratios are the main indicators of the financial position of organisations and reflect different aspects of its financial position. For example, profitability ratios are the financial ratio category, which help in the determination of the percentage of profit that is secured from business organisations from assets, sales, equity and other aspects (Fridson & Alvarez, 2022). Similarly, the liquidity ratios are the financial ratio category, which help in the determination of the ability existing in business organisations for meeting all short-term dues and obligations (Olayinka, 2022).

In this context, Asutay & Ubaidillah (2024) mentioned that efficiency ratios are the financial ratio category, which helps in the determination of the effectiveness with which business organisations manage their assets and debts. However, solvency ratios indicate are the financial ratio category, which help in the determination of the soundness in an organisation’s capacity to address all its long-term financial obligations (DAHIYAT, Weshah & Aldahiyat, 2021). The following is a detailed analysis of all these areas of the financial position of the BHP Group based on ratios –

Type of ratio	Formula	Calculation of ratios
		2024	2023	2022
Profitability ratios
Operating profit margin	Operating income / Total sales revenues × 100	17537 / 55658 × 100 = 31.50849833 = 31.51	22932 / 53817 × 100 = 42.61107085 = 42.61	34106 / 65098 × 100 = 52.39177855 = 52.39
Net profit margin	Net income / Total sales revenues × 100	9601 / 55658 × 100 = 17.25%	14324 / 53817 × 100 = 26.62%	22400 / 65098 × 100 = 34.41%
Return on assets	Net profit / Average total assets x 100	9601 / 102362 × 100 = 9.37945722 = 9.38%	14324 / 101296 × 100 = 14.1407361 = 14.14%	22400 / 95166 × 100 = 23.5378181 = 23.54%
Return on ordinary equity	Net profit / Average total equity x 100	9601 / 49120 × 100 = 19.5460098 = 19.55%	14324 / 48530 × 100 = 29.5157634 = 29.52%	2400 / 48766 × 100 = 45.9336423 = 45.93%
Efficiency ratios
Asset turnover	Net sales / Average total assets	55658 / 102362 = 0.543736934 = 0.54 times	53817 / 101296 = 0.531284552 = 0.53 times	65098 / 95166 = 0.684046823 = 0.68 times
Inventory turnover days	Average stock in hand / Cost of Sales × Total working days in a year	5828 / 36750 × 365 days = 57.88353741 = 57.88 days	5220 / 31873 × 365 days = 59.77786842 = 59.78 days	4935 / 32371 × 365 days = 55.64471286 = 55.64 days
Accounts receivable turnover	Total sales revenues / Accounts receivable (or debtors)	55658 / 5169 = 10.76765332 = 10.77 times	53817 / 4594 = 11.71462778 = 11.71 times	65098 / 5426 = 11.99741983 = 12 times
Accounts receivable days	Accounts receivable (or debtors) / Total sales revenues × Number of days working	5828 / 36750 × 365 days = 33.89782242 = 33.9 days	5828 / 36750 × 365 days = 31.15762677 = 31.16 days	5828 / 36750 × 365 days = 30.42320809 = 30.42 days
Accounts payable turnover	Cost of Sales / Accounts payable (or debtors)	36750 / 6719 = 5.469563923 = 5.47	31873 / 6296 = 5.062420584 = 5.06	32371 / 6687 = 4.8408853 = 4.84
Accounts payable days	Accounts payable (or debtors) / Cost of Sales × Total working days in a year	6719 / 36750 × 365 days = 66.73292517 = 66.73 days	6296 / 31873 × 365 days = 72.09989646 = 72.1 days	6687 / 32371 × 365 days = 75.39943159 = 75.4 days
Liquidity ratios
Current ratio	Current assets / Current liabilities	24338 / 14296 = 1.702434247 = 1.70	23351 / 19043 = 1.22622486 = 1.23	28664 / 16919 = 1.694189964 = 1.69
Acid test ratio	Current assets - Stock in hand / Current liabilities	24338 – 5828 / 14296 = 1.294767767 = 1.29	23351 – 5220 / 19043 = 0.952108386 = 0.95	28664 – 4935 / 16919 = 1.402506058 = 1.40
Solvency ratios
Interest cover ratio	Income before interests and taxes / Interest expenses	1489 / 9601 = 6.447951645 = 6.45	1531 / 14324 = 9.355976486 = 9.36	969 / 22400 = 23.11661507 = 23.12
Debt to equity ratio	Total debts / Total shareholders’ equity	53242 / 49120 = 1.083916938 = 1.08	52766 / 48530 = 1.087286215 = 1.09	46400 / 48766 = 0.95148259 = 0.95
Debt to total assets	Total debts / Total assets x 100	53242 / 102362 = 52.0134425 = 52.01	52766 / 101296 = 52.0909019 = 52.09	46400 / 95166 = 48.756909 = 48.76

Figure 1: Ratios of BHP Group

(Source: Created by the learner)

The analysis of all the categories or groups of ratios computed in the above section for the BHP Group helps in identifying that there has been a great deterioration in the organisation’s profitability. This reduction is not only in terms of operating profit or net profit but also in terms of the profit generation from equity and assets. A reduction can also be seen within the liquidity ratios of this organisation in the previous three years. Between 2022 and 2024, the organisation also shows a depleting level of solvency. However, on an overall basis, even after the decline in profits, an average level of profitability exists within the business organisation. At the same time, it can be determined that the liquidity ratios have depleted from 2022 to 2024 but an average liquidity is still maintained in its context. The solvency ratios reflect an average capacity of making interest payments. However, the debts of the organisation are much higher relative to its equity. The efficiency ratios of the business organisation help in determining that there has been an improvement all the efficiency ratios from 2022 to 2024 except for the asset turnover. Thus, on an overall basis, the ratios help in determining declining trends in the financial position of the BHP Group. Increasing trends can be identified only in its efficiency ratios.

However, apart from financial ratios, one of the key elements that can help in the analysis of an organisation’s financial position is its financial statements. According to Schroeder, Clark & Cathey (2022), the examination of the financial statements of business organisations is helpful for developing insights regarding how they utilise their organisational resources best. It also shows the manner in which an organisation’s financial position and health is examined, thereby measuring its overall success. Income statements are the financial statements or documents, which assist in the summarisation of the revenues, expenditures and profitability of organisations over a particular timeframe (Rao, 2021). This financial statement of the BHP Group assists in identifying that there has been a decrease of 9440 million USD in the revenues of the organisation from 2022 to 2024 (BHP, 2024b). Moreover, a huge increase of 4379 million USD has occurred in the organisation’s costs due to which its operating profit has decreased by 16569 million USD. A decrease of 12799 million USD can also be observed in the net profit of the organisation.

Balance sheets are the financial statements or documents, which assist in the analysis of the financial position existing in organisations based on the value of their assets, debts and equity (Zadorozhnyi, Ometsinska & Muravskyi, 2021). This financial statement of the BHP Group assists in identifying that there has been an increase of 7196 million USD in the total assets of the organisation from 2022 to 2024 (BHP, 2023). On the other hand, the total equity of the organisation has grown and improved by 354 million USD. However, the total liabilities of the BHP Group show an increase of 6842 million USD from 2022 to 2024. Thus, from both these financial statements, it can be determined that the financial position of the organisation has undergone a decline during the previous three years.

Cash flow statements are the financial statements or documents, which assist in the determination and tracking of the cash flows occurring in business organisations over a period (Muniroh & Yuliati, 2021). This financial statement of the BHP Group assists in identifying that there has been a decrease of 8620 million USD in the cash flow from operations of the organisation from 2022 to 2024 (BHP, 2024b). On the other hand, there has been a decrease of 1803 million USD in the cash flow from investing activities. The cash flow from financing activities shows an increase of 11098 million during the previous three years. However, if the closing cash and cash equivalents of the organisation are considered, it can be identified that there has been a decrease of 4738 million USD from 2022 to 2024 (BHP, 2023). Thus, even the cash flow statement shows that the financial position of the BHP Group has depleted considerably during the previous three years.

2. Analysis

a. Identification of Strengths and Weaknesses

There are different ways in which financial statement analysis as well as financial ratio analysis is useful. According to Agustina & Suprayitno (2020), the analysis of the financial statements of business organisations in addition to the analysis of their ratios is helpful for the evaluation of their financial strengths and weaknesses. Financial strengths indicate the areas in which the financial performance and position of business organisations are the best. On However, financial weaknesses reveal the areas in which organisations show the poorest performance. The foremost financial strengths, which can be determined for the BHP Group, are its strong position of liquidity as well as efficient operating efficiency. This facilitates the identification of the fact that the organisation has an excellent ability of addressing all its short-term debts with the usage of short-term assets in addition to quick assets. Moreover, a stable operating efficiency can be seen within the BHP Group considering its inventory management. Efficient operational efficiency is also seen in terms of the management of receivables as well as payables.

However, the various financial weaknesses, which one can identify for the BHP Group, involve the organisation’s deteriorating profitability levels. In the preceding three years, there has been a turn down of about 40% within the organisation’s operating profit margin. Aon the contrary, a reduction of about 60% is observed in its net profit margin between 2022 and 2023. Above 60% decrease can be seen within the return on assets of the organisation along with about 57.45% decrease in its return on ordinary equity. Increasing levels of debt is one more financial weakness of this business organisation. Between 2022 and 2023, the debt to equity ratio has undergone a decline by about 14%.

It means that during all these three years, the debt levels existing within the business organisation have increased considerably. The increase within debts can also be observed from the organisation’s balance sheet analysis. This is because there has been a huge increase in the organisation’s total liabilities. Because of the increase in debt levels, the business organisation is also having a declining capacity for making interest payments. This can be identified due to a decline of 72% in the organisation’s interest cover. A declining ability for meeting interest payments is also one of the financial weaknesses of the BHP Group.

b. Comparison and Benchmarking

One of the primary means by which the financial performance achieved in a business organisation and its financial position can be compared is through benchmarking (Business News Daily, 2024). As opined by Bartz-Beielstein et al. (2020), benchmarking is a particular method allowing business organisations in terms of conducting a comparison of their performance, products along with services with top competitors. To conduct a comparison of the financial position accomplished in the BHP Group, the following is a comparison of the organisation’s most recent year’s performance with a range of relevant industry benchmarks –

	BHP Group	Benchmark
Profitability ratios
Operating profit margin	31.51%	-17.8%
Net profit margin	17.25%	-36.08%
Return on assets	9.38%	-3.02%
Return on ordinary equity	19.55%	-4.5%
Efficiency ratios
Asset turnover	0.54 times	0.69 times
Inventory turnover days	57.88 days	37.71 days
Accounts receivable turnover	10.77 times	48.13 times
Accounts receivable days	33.9 days	7.58 days
Accounts payable turnover	5.47 times	35.25 times
Accounts payable days	66.73 days	10.35 days
Liquidity ratios
Current ratio	1.7	2.87
Acid test ratio	1.29	2.02
Solvency ratios
Interest cover ratio	6.45	17.00
Debt to equity ratio	1.08	0.46
Debt to total assets	52.01%	42.66%

Figure 2: Comparison with benchmarks

(Source: BHP, 2024b and Investing.com, 2024)

The detailed compare and contrast of the financial ratios achieved in the BHP Group with industry benchmarks assists in observing that both the profitability ratios of this organisation are negative as per the industry benchmarks. Hence, relative to the benchmark, the organisation shows a much better profit generating capacity. However, if the efficiency ratios and liquidity ratios are of the organisation are compared, it can be observed that both this group of ratios have poorer performance than the industry. A similar result can be observed in the case of solvency ratios. Thus, benchmarking the ratios of the organisation provides valuable insights regarding the organisation’s poor performance in addition to areas of improvement. As per the benchmarks, liquidity and solvency are the two most important areas where the financial performance and position of the organisation needs to be improved.

Recommendations

Depending on the analysis of the financial performance and position of the BHP Group, it can be forecasted that the profitability of the organisation will decline further in the upcoming years. This is because the entire mining industry of the country is showing a negative profitability as per industry benchmarks. However, over the previous three years, it can be seen that the total debts of the organisation are increasing from 2022 to 2024. Due to the increase in the debt levels of the organisation, its liquidity as well as solvency is projected to decline in the future. On the other hand, if the efficiency ratios are considered, it can be projected that these ratios are going to be stable in the future years. This is because over the previous three years, stability can be observed in the organisation’s efficiency of managing inventories, receivables and payables. The following are the key recommendations provided for the BHP Group for addressing its weaknesses and capitalising its strengths –

• The profitability of the organisation is recommended on being improved in the future years by the means of strong cost control and efficient marketing to secure good sales revenue. Increased sales and profits will automatically lead to the improvement of its interest cover.

• To reduce the debt levels of the organisation, it is recommended on consolidation of loans, cutting down costs through the implementation of a zero-based budget and curbing extraneous spending.

• The efficiency of the organisation is recommended on being improved further through the means of establishing strong credit control in addition to developing a tighter credit control.

Conclusion

Therefore, the discussions that have been made within this study, helps to conclude that the financial position of the BHP Group is presently unstable. The analysis of its financial position indicated declining profitability, liquidity and solvency levels. However, the efficiency ratios of the organisation are good. On the contrary, it can be observed that the main financial strengths that can be identified for the BHP Group are its strong liquidity position as well as good operational efficiency. The financial weaknesses that can be identified for the organisation are the depleting profitability levels, increasing debt levels and decreased capacity to make interest payments. A detailed compare and contrast of the financial ratios achieved in the BHP Group with industry benchmarks assists in observing that both solvency and liquidity ratios of this organisation are lower as per the industry benchmarks. However, the recommendations provided can be helpful in terms of enhancing the organisation’s performance in the future.

References

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Appendixes

Figure 3: Income Statement of BHP Group

(Source: BHP, 2024b)

Figure 4: Balance sheet of BHP Group

(Source: BHP, 2024b)

Figure 5: Cash Flow Statement of BHP Group

(Source: BHP, 2024b)