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Internal and External Business Analysis
The company used in this case is BHP Billiton. It engages in mining and refining of metals. It is listed on the New Yorks Security Exchange. Its total assets were recorded as $102.85 billion in 2012. The company strives to maintain a high market position in an attempt to improve its economic picture. This helps the business entity it to attract more investors. Retained earnings are recorded high every year, and were $ 44.80 billion in 2012. BHP Billiton has been able to maintain high profitability; hence, placing it at a strong position to invest in both research and development processes. It has acquired machinery and a number of alternatives of operations. Comparing 2010 and 2011, the company had doubled the value of its assets, as compared to the value of liabilities. This indicates its strength in solvency. It also explains its adequate financial ability. Retained earnings increased by 18.59% in the year 2011, as compared to year 2010. Moreover, it has been able to carry out several development projects on oil and gas extractions that have been known to contribute 32% of the companys profits. The company has a diversified revenue stream and a steady financial performance. It has been rated as the second one in the high year category, having achieved the level of debt to equity of 154.88 (BHP Billiton, 2012).
Considering the external environment, the company faces strong competition from several other companies. However, the industry itself possesses strong and significant entry barriers that slow competitors from joining the field. It tends to focus on the customers with specific needs and offers solutions to their difficulties. It is a strong leader in the market, which recruits competent personnel. The company defines proper relationships with the external environment that includes regulators, staff, and potential customers. It is able to understand its shareholders by maintaining favorable returns on shares in the form of dividends. It engages into the long term agreements that see it throughout its fiscal operation periods (BHP Billiton, 2012).
Combined Income and Cash Flow Statement
From the data provided in the recent report of income and cash flows, it can be confirmed that incomes, dividends, as well as other capital transactions, explain the change in equity in the recent years. The cash flow statement of the firm starts with similar net income amount that is found in the income statement and is recorded as $ 12, 872 million. Moreover, the companys cash flow statement indicates a change in the cash similar to the difference between cash indicated in the balance sheet in the beginning and in the end of a reporting period.
If there is a huge difference between cash flows and net income, then something wrong is happening in a company, especially in the cash cycle. Cash conversion cycle involves the period, during which assets can be converted into cash. Most companies operate on accrual bases that enhances that both revenues and expenses are recorded immediately they occur, regardless of payment of cash. This may lead to more net income than cash flows. In such a case, I should determine the origin of cash hemorrhage in terms of inventories and receivables among other sources of cash. I should also determine whether the situation is short-term or long-term. Some of the accompanying ideas will be advising the firm to delay payments to most suppliers, sale of securities, as well as reversing charges incurred in prior quarters. This can be done through the restructuring of the reserves. In this case, it might be possible to sell receivables, then that would be a wise idea. This can be done at a discount in order to boost cash flows.
Net income can be higher than the cash collected in case of accrual base accounting, whereby revenues and expenses are recognized once a transaction takes place, regardless of payment in cash or on credit. Therefore, the amount of revenues recorded might exceed the amount of cash received by a company. A company should strive to maintain a small difference between net income and cash flows. Delaying payables and ensuring that all receivables are settled as quickly as possible can also be an alternative.
Technology would play a great role in solving the difference between cash flows and net income recorded by companies. This can be done through credit checking in an attempt to determine whether a client is able to pay bills within the stipulated periods or not. Technology also helps to keep clear records of cash flows and net income, as well as to make comparisons in an attempt to determine any discrepancies. Technology has also introduced the new payment methods, such as use of credit cards that enhance quick settlement of bills. Through adoption of the new methods of payment, a business will be able to gain more control of payments; hence, reducing uncertainties. In this case, the large gap between cash flows and net income will be reduced.
Trend Analysis
|
Operating Ratio |
2013 |
2012 |
2011 |
|
Return on Equity |
15.39% |
23.41% |
41.66% |
|
Return on Assets |
7.87% |
11.93% |
22.98% |
|
Return on investment |
15.39% |
23.41% |
41.66% |
|
Operating profit margin |
29.14% |
32.89% |
44.35% |
|
Net profit margin |
16.49% |
21.35% |
32.96% |
Source: (BHP Billiton, 2012)
Return on assets has been calculated by comparing net income with total assets. Return on equity has been computed by comparing net income with shareholders equity. The return on equity reduced throughout the three years. This deteriorated from 2011 through to 2012 and from 2012 through to 2013. Moreover, return on assets reduced through 2011 to 2012, and from 2012 through to 2013. Return on investments decreased throughout the three years. The same case happened on the operating profit margin. Net profit margin also reduced through the three years. Operating profit margin has been calculated through comparing operating income with revenue. Net profit margin is an indicator of profitability and is calculated by dividing net income on revenue.
Other relevant information can be used to explain changes in revenue, gross margin profits, and operating margin profits. This information includes depreciation on fixed assets that reduces the companys profits. The depreciation is computed on annual basis and is deducted from the incomes. Provisions for bad debts and depreciation also tend to cause changes on the two variables in the company. Moreover, bad debts are contributors to changes on revenues and profits of the company. Bad debts represent those that the firm is uncertain about their settlement. The directors report explains in the annual report all the applied accounting policies and states that they have been applied consistently. In this case, the information continues to suggest that all judgments and estimates are reasonable and prudent (Barnes, Peck, Sheppard, 2012). The directors report can assist to determine the reasons for any adjustments done on revenues and profits throughout a fiscal period.