Ratio Analysis Annual Published Statements †MyAssignmenthelp.com

Question: Discuss about the Ratio Analysis Annual Published Statements. Answer: Introduction: The current report is based on the analysis of the ratio for RIO Tinto and BHP Billiton. The ratios will be based on the areas of profitability, solvency, liquidity and efficiency ratio. Figures extracted are from the annual published statements of the respective companies. As evident the current ratio for Rio Tinto has represented a rising trend as the company in the year 2012 reported current ratio of 1.42 whereas in the year 2017 the current increased to 1.71 representing that Rio Tinto has been utilizing its assets to meet its debt obligations. Rio Tinto on the other hand reported a strong set of results with higher operating cash flow of US $13.9 billion and reflected a robust operational performance. BHP Billiton in 2012 reported a current ratio of 0.93 however over the span of six years the current ratio stood strongly to 1.85. This provides an overview that BHP Billiton has been able to pay its liabilities. The company posted a strong financial results with positive operating cash flow of US $12.6 billion. Accordingly, the quick ratio for Rio Tinto in 2012 stood 0.96 which subsequently increased to 1.32 in 2014. Though the quick ratio declined in 2016 to 1.27 however in 2017 the quick ratio increased to 1.37. This reflects that the company has sufficient assets to meet its short term obligations. The reason for increase in quick ratio is primarily because of strong underlying EBITDA of US $18.6 billion and with a ten year record margin of 44% in 2017. BHP reported a quick ratio of 0.91 in 2012 which increased over the span of five years to 1.76. BHP reported a higher quick ratio than Rio Tinto as the company has better managed to assets to pay short term obligations. The reason for rise in quick ratio is primarily because of $12.6 billion cash demonstrating a continued progress in both the productivity and efficiency. Rio Tinto reported a debt ratio a lower debt ratio of 0.47 in 2017 reflecting that the company has lower proportion of assets financed by assets. The primary reason for lower debt ratio is because the company took measures of lowering the debt to US $3.8 billion in 2017. BHP Billiton stated a debt ratio of relatively stable debt ratio as the company reported debt ratio of 0.46 in 2017. The debt ratio of BHP Billiton represented a lower percentage of BHPs assets that is offered by debt. Reasonably the lower debt ratio is largely because of reduced net debt to US $9.8 billion from US $16.8 billion. The debt to equity ratio represents the financial ratio that reflects the relative proportion of shareholders equity and debt employed to finance the assets of company (Scott, 2015). The debt to equity ratio for Rio Tinto over the years has relatively been varying as in 2012 the company reported a debt ratio of 1.08 in 2013 and lowest of 0.87 in 2017. There is higher percentage of debt that is used by the company to finance the assets. Furthermore, the increasing bond yields and higher inflation with higher valuation of the US equity market have reduced the volatility and significantly lowered debt for the Rio Tinto. BHP Billiton reported a relatively lower debt to equity ratio as in 2012 the ratio stood 0.93 while in 2017 it reduced to 0.87 representing a lower proportion of shareholders equity and debt employed to finance the assets of company. The underlying equity prices for BHP Billiton has significantly improved the margins and generates a strong cash flow. BHP Billiton lower net debt and in line with the strong financial performance of non-cash adjustment of US $0.6 billion. Inventory Turnover Ratio: The inventory turnover ratio can be defined as the ratio that represents how well the organization is effectively managing its inventory (Weygandt et al., 2015). The inventory turnover ratio for Rio Tinto in 2012 stood lower to 8.31 however over the span of six years it increased to 11.53 in 2017. This represents Rio Tinto relatively slower to convert its inventory to the dollar amount. Despite the slower inventory conversion rate the market sentiments for Rio Tinto chinas supply side reformation were implemented and drop in the global inventory by 10 per cent. Furthermore, the market supply for titanium also improved in 2017 that was supported by lower inventory and tighter supply. BHP Billiton reported an improved inventory turnover ratio of 0.56 in 2012 which further improved in 2017 with the company reporting inventory turnover of 0.33. This represents that the company has been efficient in converting its revenue quickly than Rio Tinto to the dollar amount. The primary reason for reduced inventory ratio is because of reduced cost of Esconda unit by seven per cent resulting in continuous productivity and favourable movements in inventory. The asset turnover ratio is regarded as the efficiency ratio that helps in measuring the ability of the organization in generating sales from its assets by comparing the net sales with the average total assets (Williams, 2014). Rio Tinto reported a relatively stable asset turnover ratio of 0.44 in 2012. Though the ratio fell in 2015 to 0.38 however in 2017 it stood strongly to 0.46. The primary reason for improved asset turnover ratio is because of strong balance sheet, world-class assets and disciplined allocation of capital places Rio Tinto in the unique position of being able to invest in higher value growth and provide superior return from its assets to shareholders. BHP Billiton reported a declining trend of asset turnover ratio. The ratio in 2012 stood 0.65 while in 2017 it felled down to as low as 0.32. This represents that the company has generated lower proportion of sales from its assets. Despite the lower proportion of targeted sales, the first class assets produce significant amount of cash from all the phases and with positive balance sheet and return to shareholders of US $4.4 billion. The profitability ratio is used determine the ability of the business in generating the revenue in comparison to the expenditure and other business costs that are occurred during the particular time period (Weygandt et al., 2015). Net Profit Margin: The net profit margin represents the percentage of revenue that is left over following the expenditure are deducted from the sales. In case of Rio Tinto, the profit margin ratio over the span of five years stood relatively stable. The ratio in 2012 stood 17.56 while in 2017 it increased marginally to 20.25. The primary reason for improved net profit margin is strong underlying earnings of US $8.6 billion and strong net earnings of US $8.8 billion in 2017. BHP Billiton reported a profit margin ratio of 21.21 in 2012 whereas in 2016 the profit margin declined to -19.80 reflecting a fall in the margin of profit for the company. However, in 2017 the margin improved positively to stand 15.95. The primary reason for rise in profit for BHP is because of the US $5.9 billion of attributable profit in 2017 while the underlying attributable profit was US $6.7 billion in 2016. The return on assets indicates how the company is relatively generating profit in respect its total assets (Warren Jones, 2018). In case of Rio Tinto the return on assets stood relatively tumultuous as in 2012 the ratio stood 17.56 while in 2015 it declined to 13.00. The ratio however improved to 20.25 in 2017. BHP reported a return on assets of 13.69 in 2012 however in 2016 the asset declined to -5.19. In the subsequent year of 2017 the asset has improved positively to 5.18. The company has diversified portfolio of deploying technology and exerting capital discipline to extract most and higher return from its assets. The RIO Tinto improve return on assets is primarily because of the company US $50 billion asset with most value creative programs to provide return from the assets. Conclusion: On a conclusive note the analysis can be concluded by stating that Rio Tinto has relatively reported a strong financial performance in respect to BHP Billiton. The current ratio and quick ratio stood strong for Rio Tinto and the profit margin reflects that the company has better ability to generated sales revenue from its assets employed. Reference List: Gitman, L. J., Juchau, R., Flanagan, J. (2015).Principles of managerial finance. Pearson Higher Education AU. Henderson, S., Peirson, G., Herbohn, K., Howieson, B. (2015).Issues in financial accounting. Pearson Higher Education AU. 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