Comparative Analysis Of BHP Billiton And Rio Tinto’s Equity, Debt, And Cash Flow Statement

Analysis of Equity and Debt Position

In consideration to accomplish the objectives set in this report, BHP Billiton and Rio Tinto are chosen for the reason that these organizations are conducting business within the Australian mining industry (Appuhami and Bhuyan 2015). Focused on the business of the companies, the recent report is centered on evaluating these two companies those are listed within the ASX (Australian Stock Exchange). Several factors those are explained within the financial documents that is considered to encompass cash flow statement, owners’ equity, certain comprehensive income statement along with accounting in consideration to corporate income tax (Gray, Harymawan and Nowland 2016). Focused on the factors, an evaluation of these two organizations has been considered in attaining a suitable accounting system analysis.

Part 1  

Every organization in Australia develop its balance sheet that includes liabilities, assets along with equity and these organizations prepare balance sheet for the year (Gray, Harymawan and Nowland 2016). The balance sheet for the three years indicate that the owner’s equity includes treasury shares, reserves, retained earnings, share capital and share premium account. The share capital is calculated through multiplying the outstanding shares along with the par share. The yearly report of BHP Billiton explained that the share capital of the organization has remained constant at in both the years in 2016 and 2017 at $2,243 million (Tucker and Schaltegger 2016). This has barely decreased in the year 2015 from $2,257 million because of bank loan increase. In addition, recorded BHP Billiton share capital has decreased in the year 2016 by $4,139 million in comparison to year 2015 that is recorded to be $4,174 million. It has considerably increased in the year 2017 for certain capital projects investments by $4,360 million.

Another aspect in the company’s owner’s equity encompass reserves that serves as a part of shares within an organization which is deemed to be an extra amount eliminating share capital (Gray, Harymawan and Nowland 2016). In the company BHP Billiton this is observed to remain at a decreasing trend in contrast to the case of Rio Tinto in which is observed to be increasing. The final aspect encompasses shares belonging to the selected organizations is retained earnings which signifies the income gathered by both BHP Billiton and Rio Tinto through decreasing its shareholders dividend payment. As explained within the yearly financial statements of BHP Billiton, a considerable decline has been observed $49,542 million to $60,044 million over the years from 2015 to 2017 because of decreased dividend payment for the year (Watson 2015). In contrast, in case of Rio Tinto, it is observed that the retained earnings have increased drastically in the three years. This is due to increase in fixed dividend payment to shareholders and increase in company’s profit margin.

Cash flow statement analysis

Part 2

For evaluating the equity and debt position of BHP Billiton and Rio Tinto, the below mentioned ratios are analyzed. Below:

Particulars	Details	BHP Billiton	Rio Tinto
		2015	2016	2017	2015	2016	2017
Total Liabilities	A	$54,035	$58,882	$54,280	$47,436	$43,533	$44,611
Total Assets	B	$124,580	$118,953	$117,006	$91,564	$89,236	$95,726
Total Equity	C	$70,545	$60,071	$62,726	$44,128	$45,730	$51,115
Debt Ratio	A/B	0.43	0.5	0.46	0.52	0.49	0.47
Equity Ratio	C/B	0.57	0.5	0.54	0.48	0.51	0.53
Debt to Equity Ratio	A/C	0.77	0.98	0.87	1.07	0.95	0.87

As indicated in the above table, the companies such as BHP Billiton and Rio Tinto have considered attaining capital through offering certain equity shares within the market. It is gathered that there is a decline in the debt equity ratio for the year 2016 in case of BHP Billiton and this is observed to be decreasing in case of Rio Tinto (Sivathaasan 2016). It is greatly focused by equity shares in such scenario that, a part of finance can be attained through equity shares allotment. In case of these two companies it has also been observed that for the year 2017 the debt equity ratio indicated identical figures and trends (Gray, Harymawan and Nowland 2016). This ratio if observed to be less than 1 is considered to be acceptable and it indicates that the organization has a well-positioned leverage condition. Considering the same, it can also be concluded that for BHP Billiton and Rio Tinto the solvency position is observed to remain at same position in the mining sector of Australia.

Part 3

From the BHP Billiton’s cash flow statement, it has been observed that certain considerable aspects mentioned within the operating cash flows encompass trade, retained earnings along with certain receivables, other payables and trade along with the net finance expense (O’Faircheallaigh 2017). Cash received by these organizations is included with certain receivables and trade in consideration to credit sales conducted. In case of BHP Billiton it is gathered that credit sales have increased from $1,431 million to $1,714 million considerably in the years from 20155 to 2016. In addition, it has observed that there is a significant decrease by $315 million in the year 2017 because of implementing a tough debtor policy. There is a lack of data regarding certain disclosed element explained within these companies’ statement of cash flows (Qu, Percy, Stewart and Hu 2018).

In case of BHP Billiton, a changing trend in cash flow statement is gathered over the years and for Rio Tinto a decreasing trend is observed because of declining bank loans. Moreover, retained earnings for the organization indicates the left amount after it addresses all its shareholders dividends from the attained net income. Through observing the situation of BHP Billiton, it is observed that there has ben decrease in the net income in the year 2016 and conversely, an increase can also be evidenced for the year 2017 because of less operating costs experienced for the year (Saeidi et al. 2015). Within investing cash flows the vital factor considered encompass plant, property and equipment purchase along with significant financial assets sale. Acquiring plant, property and equipment is considered to be the amount experienced to attain an important result in carrying out constant business conducts. In addition, few financial factors gather findings related with organizations economic advantages through selling them. It is also evidenced in a situation of BHP Billiton that the organization has attained decreased asset expenses for the considerable years in cash base increase. In addition, the situation is reverse in case of Rio Tinto because of increased capital projects investments (Schührer 2018). Certain vital factors within financing activities encompass receivables attained from leases, payments for equity dividend to all the organization’s shareholders. Such leases also include sum payable to be offered to the lender to the borrower in compliance with contracts of loan agreements.

Part 4

Other comprehensive income statement analysis

Analyzing the annual report of the organizations, the cash flow statement might be distributed within certain aspects like investing, operating along with financing cash flows (Morton 2018). The comparative evaluation of such segments for BHP Billiton and Rio Tinto is indicated in a table and figure format as represented under:

Particulars	BHP Billiton	Rio Tinto
	2017	2016	2015	2017	2016	2015
Cash flow from operating activities	$16,804	$10,625	$17,794	$13,884	$8,465	$9,383
Cash flow from investing activities	($4,161)	($7,245)	($11,502)	$2,373	$2,104	$4,600
Cash flow from financing activities	($8,276)	$284	($9,133)	$9,141	$7,491	$7,670

It is gathered from the able figures and graph it is evidenced that these organizations have identical trends in consideration to operating cash flows and a figure decrease is observed in case of 2016 and on the other hand an increase is observed in the year 2017. BHP Billiton is observed to gathered increased cash flows for operating activities because of drastic increase in retained earnings rather than identical trends (Gray, Harymawan and Nowland 2016). Conversely, it has been evidenced that a considerable decline has been observe in case of BHP Billiton that there is a decline in the investment activities over three years. In constant, Rio Tinto has attained a superior situation because of increased income from non-current assets and from the financing cash flows it is gathered that the organization has a profitable situation because of decreased shareholder dividend payment in the year 2017 (Gray, Harymawan and Nowland 2016).

Part 5

The analysis of the particular areas needs enhancement as it is observed to be necessary for sustaining regular functionalities flow for these two organizations. In addition, after analyzing in details the ash flow statements for BHP Billiton and Rio Tinto, it is evidenced that BHP Billiton has been successful in attaining increased cash flows from the business conducts in which the Rio Tinto has better business operations (Miglani, Ahmed and Henry 2015). Rio Tinto company has included the business strategy of attaining adequate cash from debtors at a rapid rate and is capable to conduct business activities. In case of attaining decreased capital in investment along with the finance-based activities, cash and cash equivalents is decreased in comparison to Rio Tinto in contrast to BHP Billiton (Kenny and Larson 2018). Therefore, it might be observed that BHP Billiton is having a profitable position in comparison to Rio Tinto within the Australian mining sector.

Part 6

In consideration to BHP Billiton and Rio Tinto, certain considerable factors are explained under:

• Retained earnings
• Translation of foreign currency
• Cash flow hedge

Part 7

Transfer of foreign currency is used to alter the foreign subsidiaries of the parent organization within the reporting currency as observed by researchers namely, Juric, O’Connell, Rankin and Birt (2018) This is employed in a connected way in a situation where foreign business company’s currency is observed and the statements related with the foreign organizations are calculated repeatedly in reporting amount associated with the parent organization. In addition, transfer of cash is employed in suitable loss and profit recording. In order to employing the cash flow, hedge an organization makes attempts to record all the necessary profits and losses. In order to decrease the threat that can take place from variations in cash flow of financial assets or liabilities because of certain liability reversals (Linnenluecke et al. 2017). This includes interest rate along with debt tool. Lastly, it is evidenced from the retained earnings that part of net income retained through offering all the necessary dividend payments to shareholders is necessary for investing within capital projects in upcoming years.

Part 8

Corporate income tax analysis

It is recognized that a detailed view regarding the net earnings might be explained as other comprehensive income. Generally, certain differences within business operations were indicated as the external major functionalities or significantly volatile were transferred to the shareholder’s equity (Islam, Khan, Hughes and Ali 2017). In contrast, it is observed from both the case Rio Tinto and BHP Billiton use of statement for linking the actual details on figures related with the identified aspects. In alignment with increase of foreign currency translation, Rio Tinto is in a suitable position in comparison to the other company. Conversely, such elements are explained within the other comprehensive income statement (Jones 2016). This further facilitates legitimate along with detailed representation of necessary business drivers that cannot be declared in the statement of income.

Part 9

Through observing the comprehensive income statement, it is likely to recognize some important factors. This is because of the cause that it might facilitate in revealing manners in which BHP Billiton and Rio Tinto are controlling their investments and if there are any chances for drastic losses in upcoming years. Therefore, in consideration to such statement a specialist might attain a better analysis of an organizations’ investment’s fair value (Honggowati, Rahmawati, Aryani and Probohudono 2017). Through including all these factors including other comprehensive income statement might be might be included in analyzing managerial operations.

Part 10

Any organization might sustain any expenses associated with selling expenses, advertisement and for continuing every operation along with the necessary expenses. Along with such expenses, federal, municipal along with state governments have a necessary practice for organizations for experiencing tax-based costs and for this reason it is deemed as liabilities (Bellis 2016). The calculation of tax liabilities is carried out through increasing chargeable tax rate with having profit before tax and distinguishing certain aspects such as liabilities and tax assets and non-deductible aspects. The selected organizations are observed to be devoid of experiencing tax expenses. BHP Billiton has attained $3,933 million in the year 2017. Conversely, in the year 2016, it is observed that a tax profit of $1,297 million is gathered in the year 2016 because of loss before tax. Considering the same, Rio Tinto has experienced tax expense of $1,567 million and $3,965 million considerably for the years for the years 2016 and 2017 (Fonseca, McAllister and Fitzpatrick 2014).

Part 11

For the companies BHP Billiton and Rio Tinto, the productive tax rate for the years from 2016 to 2017 in the below mentioned table.

Particulars	BHP Billiton	Rio Tinto
2017	2016	2016	2017
Earnings/loss before tax	$              10,322	-$               7,259	$                6,343	$              12,816
Income tax expense/benefit	$                3,933	-$               1,297	$                1,567	$                3,965
Effective tax rate	38%	18%	25%	31%

Part 12

Conclusion

It is considered that the organizations attain certain deferred tax assets at the time they attain increased tax expenses or prepaid tax expenses on financial assets. In contrast to that, deferred tax liabilities take place because of the variations in carrying amount tax along with profit for organizations (Gray, Harymawan and Nowland 2016). The major cause for identifying the implementation of deferred tax is because of additional depreciation payment along with difference profits resulting in decreased payments in tax.

Part 13

From analysis of the BHP Billiton case it is recognized that there is a decrease in deferred tax assets in 2017 in comparison to year 2016 that is from $5,788 million to $6,147 million. This condition is observed to be identical in deferred tax liabilities as this has reduced to $3,765 million from $4,324 that is from the year 2016 to 2017. Conversely, there has been an increase in deferred tax liability that is from $3,121 million to $3,628 million that is from the year 2016 to year 2017 (Guthrie and Parker 2016).

Part 14

Particulars	BHP Billiton	Rio Tinto
2017	2016	2016	2017
Income tax expense/benefit	$                3,933	-$               1,297	$                1,567	$                3,965
Change in deferred tax assets	$                3,286	-$                  359	$                   419	-$                  333
Change in deferred tax liabilities	-$                  777	-$                  559	$                   165	$                   507
Cash tax expense	$                7,996	-$                1,097	$                1,821	$                3,125

Part 15

The figures and facts indicated in the table below explained that the cash tax rate in case of BHP Billiton Limited has drastically increased in the year 2017 in comparison to 2016 from 20.32% to 33.26%. An identical trend is observed in the Rio Tinto situation in which the cash tax rate is indicated to be increased in the year 2017 in comparison to 2016 that is from 22.08% to 27.39% (Duff 2016). In addition, there is a drastic increase in case of BHP Billiton and for this reason, the cash tax rate is increased for BHP Billiton in contrast to Rio Tinto.

Particulars	BHP Billiton	Rio Tinto
2017	2016	2016	2017
Current income taxes	$                3,933	-$               1,297	$                1,567	$                3,965
Taxes paid on other income	$                     24	-$                    30	-$                      4	$                       1
Unlevered cash taxes	$                3,909	-$               1,267	$                1,571	$                3,964
Operating income/loss	$              11,753	-$               6,235	$                7,116	$              14,474
Cash tax rate	33.26%	20.32%	22.08%	27.39%

Part 16

The orgaanzations those have its business operations in Australia employ both the book tax rate and the cash tax rate that are considered as considerable factors. Through analyzing the annual report of Rio Tinto and BHP Billiton, there is fair difference between the income tax expenses along with income tax payments significant maintained (Bryce, Ali and Mather 2015). This is based on the fact that there is certain deferred tax assets existence. In contrast, certain differences between cash tax expenses along with real amount of the paid income tax.

Such variation is deemed to be the impact of income tax benefit that is attained along with loss experienced in the selected organizations everyday operations. One more fact that can be recognized in case of variances within the laws associated with financial as well as certain aspects of tax accounting. In this regard, it is deemed important to consider certain costs associated with the likely depreciation costs that is present in BHP Billiton and Rio Tinto. From the changes in depreciation rate, there is observed to remain a radiance among financial along with activities of tax accounting. For this reason, every cost is associated with depreciation that might either decrease to increase (Carnegie and O’Connell 2014). These serve as the important causes associated with depreciation that might consider certain important factors behind such variations among the book tax and cash tax rate for Rio Tinto and BHP Billiton.

Conclusion 

For attaining the objectives set in this report, BHP Billiton and Rio Tinto are chosen for the reason that these organizations are conducting business within the Australian mining industry. It is gathered from the paper that in the company BHP Billiton owner’s equity is observed to remain at a decreasing trend in contrast to the case of Rio Tinto in which is observed to be increasing. The final aspect encompasses shares belonging to the selected organizations is retained earnings which signifies the income gathered by both BHP Billiton and Rio Tinto through decreasing its shareholders dividend payment. Moreover, it is observed from both the case Rio Tinto and BHP Billiton use of statement for linking the actual details on figures related with the identified aspects. In alignment with increase of foreign currency translation, Rio Tinto is in a suitable position in comparison to the other company. It is also concluded from the report that in case of variances within the laws associated with financial as well as certain aspects of tax accounting. In this regard, it is deemed important to consider certain costs associated with the likely depreciation costs that is present in BHP Billiton and Rio Tinto.

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