Introduction The technique of fundamental analysis is

Introduction The technique of fundamental analysis is

Introduction

The technique of fundamental analysis is largely used by the investors to gain an analysis into the present and future performance of a business entity. The method of fundamental analysis is used for evaluation of the performance of an entity for examining its intrinsic value through analysis of its related economic and financial factors. This is done mainly by conducting top-down and bottom-up analysis that helps in developing an insight into the forecasted future performance of an entity by evaluation of the related economic and financial factors. This report has conducted the fundamental analysis of two ASX listed companies, that are, BHP Billion and Rio Tinto, leading mining companies within Australia. This is carried out by the use of top-down and bottom-up analysis for identifying the macro and micro economic factors that can cause a directional change in the value of a company.

Top-Down Analysis

The overall review of market conditions is followed by narrowing the approach to specific entities for analyzing the impact of identified factors on their future performance. The top-down analysis for analyzing the macro-economic condition impacting the performance of selected companies is conducted by evaluation of the overall economic environment of Australia. This is carried out by an evaluation of the following macro-economic factors that helps in developing an insight into the overall economic environment of Australia as follows:

Current Interest and Inflation Rate

The central bank of Australia is emphasizing on maintaining the interest rate slow within the country

RBA is targeting to keep the inflation within the range of 2 to 3 per cent in the future period of time. This is largely due to overcoming completely the after effects of the global financial crisis on the Australian economy and to foster its continued growth and development.



Bottom up Analysis

Fundamental analysis requires measuring the financial performance of individual stocks in the selected industry. It can be performed through applying the bottom up approach of fundamental analysis. Top down analysis has provided the information of market condition, GDP growth, interest rate and other important macro criteria that govern the performance of particular industry in same market. In order to perform the bottom up analysis it has been decided to apply ratio analysis method.

Ratio Analysis of Mining Companies of Australia

In order to perform the bottom up analysis, ratio analysis of BHP Billiton and Rio Tinto has been carried out for year 2016 and 2017. Ratio analysis will evaluate profitability, leverage position and market growth of both the selected companies.

Financial data used to calculate all the ratios have been provided in below table

Financial data

BHP Billiton

Rio Tinto

 

2017

2016

2017

2016

 

Amount in $ million

Net Profit

$ 6,222.00

$ (6,207.00)

$ 8,851.00

$ 4,776.00

Sales

$ 38,285.00

$ 30,912.00

$ 40,030.00

$ 33,781.00

Owner's Equity

$ 62,726.00

$ 60,071.00

$ 51,115.00

$ 45,730.00

Earning before interest and tax

$ 11,753.00

$ (6,235.00)

$ 14,474.00

$ 7,116.00

Expenses paid for interest

$ 1,574.00

$ 1,161.00

$ 848.00

$ 1,111.00

Total Liabilities

$ 54,280.00

$ 58,882.00

$ 44,611.00

$ 43,533.00

Total Assets

$ 117,006.00

$ 118,953.00

$ 95,726.00

$ 89,263.00



Profitability performance of BHP Billiton and Rio Tinto

Profitability analysis means evaluating the performance of company to earn the revenue through proper allocation of resources in the profitable business. Some of major profitability ratios are return on equity, return on assets and net profit ratio.

Profitbaility Ratios

BHP Billiton

Rio Tinto

 

2017

2016

2017

2016

Net Profit Ratio

16.25%

-20.08%

22.11%

14.14%

Return on Equity

9.92%

-10.33%

17.32%

10.44%

Return on Assets

5.32%

-5.22%

9.25%

5.35%

Return on Equity: It is most important financial ratio among all the ratios as it measures the profitability metrics of the company. The purpose of calculating this ratio is to measure how much a company is profitable for the shareholders (Owners of the company) for their total investment. It tells the value of net income gained by the company as the percentage of shareholder equity.

Formula: Net profit /Shareholder’s Equity

On the