Analytical review of the financial position and reporting
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The university provides a great deal of resources to help students understand their responsibilities. Information about these services is available at the LASS workshop site. If there are any specific issues relating to plagiarism and or Turning please contact the relevant Module Leader or your Personal Academic Tutor. Executive summary The purpose of this report is to prepare an analytical review of the financial position of BP Billion, using the ratio analysis as a financial instrument.
This review is Sistine to the stakeholders (investors), based on the latest available annual financial statement, to identify and reconcile the group’s profit position and identify trends in the business performance. The company’s performance is analyzed more deeply using ratio analysis. In addition, we will compare the group main indicators with the respective figures of close competitors such as ROI Tint, Vale S. A. And Alcoa Inc. As well as Mining Industry and Energy Sector average coefficients (Scimitars 2014).
Background Information BP Billion was set up in 2001 as a result of a Dual Listed Company (DEL) merger twine Broken Hill Proprietary Company known as BP Limited, an Australian-listed company, and Billion Pl, a I-J-Existed company (BP Billion 2013). Although the companies have preserved their separate ownership structures both are run by the almost identical committees of directors and one managing body. It is a leading global resource company and its major business units are: Copper; Iron Ore; Manganese and Nickel; Coal; and Aluminum, Petroleum and Potash.
The aim of the group is to provide long-term shareholder value through the development, acquisition and marketing of natural resources. Despite the continuing recession the group has continued to retain its market position with capitalization US $147 billion at 30 June 2013, revenue US $66 billion and net profit US $11 billion for 2013 financial year and there are now 128 thousand employees and contractors working in 140 subdivisions in 26 countries (BP Billion 2013). This year the group announced the appointment of Andrew Mackenzie as CEO who replaced Marcus Slippers.
The company being a participant of the Voluntary Principles on Security and Human Rights (2014) conducts the corporate procedures and policies in concordance with hose principles to provide security for its operations. The recent study suggested that the 90 fossil fuel marketers (Goldenberg 2013) are in charge of two-thirds of the greenhouse gas emissions produced in the industrial age and BP is in this list. According to the management’s statement Just the tenth of the emissions are from direct operations, while the rest are from outsourced goods (Hannah 2013).
In 2011 BP Billion initiated with University College London the foundation of two energy institutions aimed at teaching and research of sustainable use of the environment and resources (CUL 2011). Basis of preparation The financial information for the year ended 30 June 2013 has been prepared on a going concern basis in accordance with Australian Accounting Standards that is an Australian equivalent of International Financial Reporting Standards (FIRS) and FIRS and their interpretations as adopted by European Union effective as the reporting date.
The principles of accounting for DEL merger were adopted under I-J and Australian Generally Accepted Accounting Practice (GAP) and the consolidated financial statement is compiled as follows: Assets and liabilities of the BP Billion PL and BP Billion Limited Group were consolidated at the date of the merger at their book value; Results for the period ended 30 June 2013 comprise the consolidated data of the both entities.
A number of new standards and interpretations have not yet entered into force, and their demands are not taken into account in preparing the consolidated financial statements: FIRS 11 В«Joint ArrangementsВ» modifications were not applied but will have an impact on financial years commencing from 1 July 2013. The company will recognize its share on a single line in entities where it does not meet with the revised definition of Joint control. AFRICA 20 В«Striping Costs in the Production Phase of a Surface MineВ» modifies the policies for production striping and applies to annual periods starting on 1 January 2013.
The company disclosed the effect of adjustments at the transitional date of 1 July 2011. Ratio Analysis External factors and trends affecting to the group’s financial outcomes The major external trends and factors have had a considerable impact on the company financial position and ratios and the next section disclosures them. Commodity prices. Metal commodity prices were decreased in comparison with the previous year as a result of apply growing faster than demand. For instance the average price of Iron Ore decreased 16% from IIS$1 51 /DMS to IIS$127/DMS, Aluminum decreased from IIS$334/ DMS to US$327/DMS according to the Note 3. . 1 of the Financial Statement (BP Billion 2013). Metal products share in aggregate revenues exceeded 63% whereas crude oil and gas totaled 20%. Metallurgical coal price decreased 31% from IIS$239/t to IIS$1 59/t mostly driven by low growth rates of global pig iron production. Conversely energy commodities’ price were affected positively namely crude oil price increased by 8% driven by Chinese demand growth in the first half of the year followed by moderate improvements in macroeconomics in the United States later. In whole the price effect reduced underlying BIT by IIS$8. Billion but partially offset by increased sales volumes. Exchange rate. Other substantial risk influencing profitability ratio is exchange rate as majority of sales are denominated in US dollars as well as this currency plays major part in the group financial activities. Operating costs are primordially influenced by changes in local currencies such as South African rand, Chilean peso and Australian dollar. Overall the Australian dollar, Brazilian real and South African rand ended the financial year weaker against the US dollar, while the Chilean peso strengthened.
Product demand and supply. Global demand and supply for the products is a crucial factor of market prices, and fluctuations in commodity supply and demand influence the group performances, including asset values and cash flow. The company forecast relatively balanced growth over the long term as large developed economies, such as the US, grow despite fiscal challenges and China also shows the development of its economy. Operating costs. As the product prices are regulated by the global commodity markets controlling production costs is a key task of the management.
The company could reduce external services by IIS$2 billion and third party purchases by IIS$O. 7 billion, government royalties by IIS$O. 4 billion and exploration and evaluation expenses by IIS$O. 6 billion. But these reductions were offset by higher impairment charges of IIS$I . 9 billion, additional depreciation charges of IIS$O. 5 billion, decrease in foreign exchange incomes of IIS$O. 2 billion as it was shown in Note 3. 4. 4 of the annual report (BP Billion 2013). Capital and exploration expenditures.
This item increased almost 77% in the previous 2012 year from IIS$13 billion in 2011 to IIS$23 billion. It related to investments in project pipeline, especially in Petroleum, Iron Ore and Coal divisions. The management concentrated on monitoring capital and exploration expenses in the reporting year and it reduced by IIS$O. 7 billion. Interest rates. The company financial performances are sensitive to alterations of interest rates as the majority of company borrowings are based on floating interest rates (see the Note 29 of the financial statement).
Based on the net debt position as at 30 June 2013, taking into account interest rate swaps, cross currency interest rate swaps and captions, it is estimated that a one percentage point increase in the US LABOR interest rate will decrease the company’s equity and profit after taxation by US $136 million. Profitability ratio In this year Return of capital fell by 26% as against 2012 year and equaled 17% (see Appendix 3). Firstly, it associates with the reduction of Gross profit by 19% or almost IIS$4. Billion as the income fell by 9% (see Appendix 1), namely Coal unit’s revenue reduced by IIS$2. Billion, Iron Ore income by IIS$2. 4 billion (see the section В«Commodity pricesВ»). In any case it should be noted that this figure is considerably high than the close competitors’ results: Vale S. E. (2014) showed 14%, ROI Tint (2014) 5% (see Appendix 3). The details of calculations are given in the Appendix 4. Gross profit margin ratio equaled 29% although that is less by 11% as compared to 2012 (see Appendix 3).
This can be explained by disproportionate decrease of production costs by 4% billion (see the section В«operating costsВ») with respect to revenues (see the section В«Commodity pricesВ»). But it corresponds with the respective average ratio of Metal Mining Industry (Scimitars 2014). Vale S. E. ‘s figure exceeded with 30% Gross margin (see Appendix 2) but its Net profit margin totaled Just 1% due to extremely high interest expenses (see Appendix 2) whereas BP Billion demonstrated consistent performances with 17% Net profit margin.
Net profit margin for 2013 totaled 17% as against 22% for previous year chiefly due to decrease of the amount of Gross profit (see the previous paragraph) and increase of financial expenses by 60% (see the section В«lintiest ratesВ»). In spite of this the company’s result is outstanding in comparison with the industry index (2%) as well as immediate rivals (ROI Tint – 2%, Vale S. A. – 1%). Efficiency ratios Asset turnover ratio of the last year decreased by 17% and totaled 0. 6.
This is due to the fact that the amount of total assets were increased as additional construction expenses were capitalized to the sum of IIS$20 billion, and decrease of total revenue of the group for reasons described earlier (see the section В«Commodity pricesВ»). At the same time the group continues to use its assets efficiently in comparison with lose rivals 0. 5 for ROI Tint (2014) and Vale (2014) 0. 4 (see Appendix 3) as well as the average industry figure (0. 4). The details of calculations are given in the Appendix 5.
With respect to Receivable turnover ratio it has not been changed and equaled 9 that is in the middle of ROI Tint and Vale’s coefficients (10 and 7 respectively). The decrease in Trade and other receivables correlated with the same trend in the revenues of the last two years (see the section В«Commodity pricesВ»). Interestingly, the industry average ratio did reach 12 (see Appendix 3). Inventory turnover has slightly en decreased by 6% and totaled 11 that is twice better than industry figure (5) and close rivals (8 and 10 respectively).
The number of employees increased by 7% and totaled almost 50 thousand. It together with the revenue reduction resulted to Revenue per Employee ratio that decreased by 14% and equaled IIS$I ,332 thousand per employee. At the same time this performance significantly exceeded the industry average ratio (IIS$486 thousand) as well as close competitors (ROI Tint with IIS$775 thousand and Vale S. E. With IIS$583 thousand). It can be explained by diversified cuisines structure of the group as the average Energy sector Revenue per Employee totals US$1,896 thousand at the same period of time (see Appendix 3).
Liquidity ratio The current ratio totals 1 that indicates that the group has enough short-term assets to cover its short-term debt. It is advisable to improve this performance further (0. 9 for previous 2012 year) as for instance the industry (1. 9) and major market players (ROI Tint 1. 4, Vale S. E. 2. 5) demonstrated better short-term financial health. The details of calculations are given in the Appendix 6. Quick ratio also remains worse Han competitors. But it corresponded with the industry average figure 0. 6 and seemed enough (see Appendix 3).
Financial gearing The Gearing ratio has slightly been changed and totaled 39% and it indicates relatively prudent attitude of the management and low degree of creditor’s funds (see Appendix 1). For example the same coefficient for both of close rivals’ equaled 44% whereas the industry average figure exceeded 150%. The details of calculations are given in the Appendix 7. The performance of interest cover ratio was felt by 56% due to impact of interest rates (see the section В«lintiest ratesВ»). Even so it showed due to low gearing and high gross profit of the group (see the respective analyses).
Investment ratio Price per earning for 2013 equaled as 12 and became worse as against 8. 8 for previous period. It associates with the reduction of earning per share by almost 30% (see Appendix 1). But dividend yield with 8% is positive as compared to rivals (ROI Tint 4%, Vale S. E. 1%) and average industry ratio (2%). Conclusion Based on the review above we can see that BP Billion is a highly profitable company that provided consistently strong operating performance during the analyzed period of time. The total dividend for 2013 was increased by 4% to IIS$116 cents per share (BP Billion 2013).
The low gearing ratio in comparison with rivals indicates the group’s financial strength and invulnerability to downturns in the business cycle that is important particularly in the last years. The high efficiency ratios witnessed how well the group used its assets and liabilities internally relative to the others. Also we saw its importance because an improvement in these ratios translated to improved profitability. Though the current ratio is relatively lower than he industry average likely the group will not experience any difficulty meeting current obligations.