Financial Statement Analysis Report

Accounting and Finance - NBS8122

Word Count: 1,998 words

 Contents Page

Abstract......................................................................................................................3
Brief history..................................................................................................................................4
Industry description......................................................................................................................4
Exceptional recent events............................................................................................................4
Brief financial information............................................................................................................5
Competitor’s summary: Anglo American PLC.......................................................5
Brief history..................................................................................................................................5
Industry description......................................................................................................................5
Exceptional recent events............................................................................................................5
Brief financial information............................................................................................................6
Evaluation of Financial Statements.........................................................................6
Vertical analysis...........................................................................................................................6
Horizontal analysis.......................................................................................................................7
Liquidity ratios..............................................................................................................................8
Efficiency ratios............................................................................................................................9
Profitability ratios........................................................................................................................10
Solvency ratios...........................................................................................................................11
Investment ratios........................................................................................................................12
Conclusion...............................................................................................................14
Reference list............................................................................................................ 15

Fig. 1 Rio Tinto PLC operations across the world….……………...…………………………….5

Fig. 2 Anglo American PLC operations across the world……………………………………….6
Fig. 3 Vertical analysis of Rio Tinto……………………………………………………………….7
Fig. 4 Vertical analysis of Anglo American……………………………………………………….8
Fig. 5 Horizontal analysis of Rio Tinto…………………………………………………………….8
Fig. 6 Horizontal analysis of Anglo American…………………………………………………….9
Fig. 7 Current Ratio………………………………………………………………………………….9
Fig. 8 Quick Ratio.………………………………………………………………………………….10
Fig. 9 Inventory Turnover……………………………………………………………………….....10
Fig. 10 Trade Receivables Collection…………………………………………………………….11
Fig. 11 ROCE………………………………………………………………………….……………11
Fig. 12 Net Profit Margin…………………………………………………………………………..12
Fig. 13 Capital Gearing………………………………………......……..…………………………12
Fig. 14 Interest Cover…………………………………………............…………………………..13
Fig. 15 Dividend Yield and Cover…………………………………....…………………………...13
Fig. 16 Earnings per share………………………………………….……………………………..14
Fig. 17 Price Earnings Ratio………………………………………………………………….…...14

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Abstract
This report aims to provide a comprehensive financial analysis of Rio Tinto PLC, with
the primary objective of assisting John Doe, a potential investor, in making an informed
decision regarding a possible investment in this company. The analysis includes an
evaluation of the company's financial profitability, solvency, and overall attractiveness as an
investment opportunity, comparing its performance to one of its main competitors, Anglo
American PLC.

The financial analysis of Rio Tinto reveals several key findings, such as the strong
financial performance of the company, its healthy balance sheet, and attractive investment
ratios, like dividend yield and price-earnings ratio, among others, concluding into a
recommendation to invest in the company, as it’s a suitable investment for an investor
looking after income and capital growth.

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Company’s summary: Rio Tinto PLC
Brief history
Rio Tinto is a mining multinational corporation, founded in 1873 after an investor
group bought copper mines in Spain (Rio Tinto, 2023a), and then expanded its operation
into the entire world. After 150 years of operation, the company has grown to become one of
the world’s largest mining corporations, involved in the extraction and processing of a wide
range of minerals, including aluminium, and copper.

Industry description
The mining industry is a substantial economic sector, which, as an article remarks,
contributes around 1% of the GDP of the entire world (Ericsson and Löf, 2019), thanks to the
exploration, extraction, and processing of several minerals. Recent research (Hodge et al.,
2022) highlights that “there are approximately 25,000 mining companies globally”, employing
more than 4 million people across the world (International Labour Organisation, 2023).
Today the company has a presence across 6 continents in 35 countries, employing
more than 54,000 collaborators, however, most of the operations are in Oceania, North
America, and Africa, as described in the company’s website (Rio Tinto, 2023c).

Exceptional recent events

As reported in a press release in July 2023 (Businesswire, 2023), Rio Tinto has
decided to purchase the 57.74% stake of a company called Agua de Falda S.A., and has
agreed to enter a joint venture with CODELCO, the largest copper producer in the world
(CODELCO, 2023) to potentially develop the exploration tenements the company haves in
Chile.

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 Brief financial information
According to the company’s annual report for the 2022 fiscal year (Rio Tinto, 2023a),
Rio Tinto last year had a net income of US$13 billion. Despite the above, the company had a
negative net cash flow of US$6 billion, however, this was influenced because of the US$11.7
billion that the company paid last year in dividends. Nevertheless, even with the negative
cash flow, the company still ended the 2022 with US$6.7 billion in cash on its balance sheet.

Competitor’s summary: Anglo American PLC

Brief history
In 1917 the entrepreneur Ernest Oppenheimer established Anglo American with its
first gold mine located in South Africa (Anglo American, 2023b), and throughout its 100-year
existence, the company has converted itself into a global mining giant. Today the company
has numerous operations across the world dedicated to the exploration, extraction, and
processing of various minerals, as shown on the company’s website (Anglo American,
2023d).

Industry description
Anglo American competes in the same global mining industry that Rio Tinto, briefly
described previously, however, there are differences within the commodity portfolio in which
Anglo American specializes, like platinum, coal, and manganese, which are not part of the
minerals that Rio Tinto extracts (Anglo American, 2023b). Today the company operates in
15 countries across 6 continents, with more than 64,000 employees, however, South Africa
represents 65% of the company’s headcount, with operations dedicated to the processing of
diamonds, copper, and manganese (Anglo American, 2023b).

Exceptional recent events

During the last months, Anglo American has been going through a re-organisation
process in the senior management team, and the company explained, through a press
release (Anglo American, 2023a), that the refreshing seeks to consolidate a “new generation
of leadership”.

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 Brief financial information
As stated in the company’s 2022 Annual Report (Anglo American, 2023b), Anglo
American’s last year’s net profit amounted to US$7.6 billion, and paid US$5.3 billion in
dividends to its shareholders, which relates to the fact that Anglo American had last year a
negative cash flow of US$ 0.4 billion, which didn’t have an extraordinary impact on the cash
the company had by the end of the year, which totalled US$ 8.4 billion.

Evaluation of Financial Statements

Vertical analysis
As shown in Figure 3, the net operating costs of Rio Tinto, expressed as a
percentage of the revenues, have been decreasing from 2018 until 2022 (Bloomberg,
2023b), when in that year there was a break in that declining trend, explained because of the
impact of the rising inflation on 2022, influencing to higher energy prices, like diesel, which
significantly affected the cost of transport, as the company’s 2022 annual report explains
(Rio Tinto, 2023a).

The drop in last year’s net earnings can be explained because of the fall in
commodities prices, at which the company sells its production, such as iron ore and copper.
Despite all the above, the net profit of last year is still within the average of the last 5 years,
meaning Rio Tinto maintains its ability to achieve profits.

Even when the trends of the previous years’ performance of Anglo American may be
like Rio Tinto, as shown in Figure 4, the causes seem to be different, as the 2022 Annual
Report (Anglo American, 2023b) highlights lower production, and lower mineral grades as
reasons for the decline in the company’s underlying earnings. Nevertheless, compared to
Anglo American, Rio Tinto has had higher results over the last 5 years.

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 Horizontal analysis
Regarding the evolution of Rio Tinto’s performance over the last years, illustrated in
Figure 5, it is clear that despite when revenues have been increasing with time, so have the
operating costs (Bloomberg, 2023b), therefor both operating profit and net income of 2022
are within the last 5 years average, yet there is a significant decrease in 2022 performance
compared to 2021, considered a record year inside the organisation, mainly because of the
global economy recovery post COVID-19, which resulted in price strengthening for the
commodities traded by the company (Rio Tinto, 2022).

In terms of operating profit and net income, Anglo American, compared to Rio Tinto,
has been having a better evolution of its performance during the last 5-year (Bloomberg,
2023a), however, there is also a decrease in last year’s outcome compared to 2021, as the

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pandemic in 2020 affected both Anglo American and Rio Tinto similarly, and the demand for
commodities increased in 2021 while the developed world and China recovered from the
recession caused by COVID (Anglo American, 2022).

Liquidity ratios
Regarding the liquidity of Rio Tinto, during the previous last 5 years the Current Ratio
of the company shows that it has a significant buffer to cover its debt, as the ratio has been
above the level of 1.5:1 since 2018 (Bloomberg, 2023b), however, Anglo American has had
the same trend (Bloomberg, 2023a).

As for the Quick Ratio, which is a more conservative approach to liquidity, confirms
that Rio Tinto has had a good position to meet its short-term obligation and that it has had
better stat than Anglo American over the last years, which suggests that Rio Tinto has more
chances to manoeuvre for financial emergencies.

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 Efficiency ratios
The numbers related to managing the Inventory are favourable to Rio Tinto as well,
as its Inventory Turnover Ratio is higher than Anglo American, which means the company is
managing its inventory more efficiently, indicating strong sales, and possibly avoiding
overstocking.

In terms of the capacity of collecting payments from its customer, Rio Tinto runs a
more efficient and smooth operation, since it has decreased the Trade Receivables
Collection over the last 5 years, from 18 to 15 days (FAME, 2023b), and in the other hand
Anglo American has increased from 16 to 23 days (FAME, 2023a), meaning its accounts
receivable process has deteriorated over the last years.

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 Profitability ratios
ROCE is a key measure of business performance and a strategic ratio for investors,
who are looking for capital growth, and in this regard, the numbers of both companies over
the last years are similar, with a slightly better performance from Rio Tinto.

As shown in Figure 12, elaborated based on data from Bloomberg, Rio Tinto has
managed over the last 5 years to have a higher net profit margin than Anglo American, with
an average net profit margin of 26.6% over the last 5 years, compared to the average net
profit margin of Anglo American, of 17.8% in the same period. In terms of net contribution,
Rio Tinto has doubled the annual net profit of Anglo American, of every year but 2019, which
proves it to be a more profitable company consistently over time.

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 Solvency ratios
Regarding Capital Gearing, both companies seem to have had a similar debt/capital
structure, however, there is a major difference in the Interest Cover ratio, where Rio Tinto
has had a considerably higher ratio over the last 5 years compared to Anglo American, as it
is shown in Figure 14 (FAME, 2023a, 2023b), which is a good sign since indicate Rio Tinto is
more capable of responding to debt obligations from its operating profits.

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 Solvency ratios are fundamental for potential investor looking for income and capital
growth, as robust figures, like the ones from Rio Tinto, demonstrate a strong solvency
position, that reduces risk.

Investment ratios
The Dividend Yield is critical to evaluate the attractiveness of investing in Rio Tinto,
and the Figure 15 show how the dividend yield has evolved from 4.7% in 2018 into 10.7% in
2022, averaging 9% for the last 5 years period (London Stock Exchange, 2023c), while the
average dividend yield of Anglo American is 4.7% for the same timelapse (London Stock
Exchange, 2023a). On the other hand, the dividend yield of Rio Tinto also stands out when
compared to the current average dividend yield of the FTSE 350 of 3.95% (London Stock
Exchange, 2023b).

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 Earnings per share shows the ability of the company to generate profits that can be
distributed to shareholders as dividends, and in this sense, the comparison between Rio
Tinto and Anglo American, illustrated in Figure 16 based on data from the companies’ last 5
years annual report, shows how Rio Tinto has had higher EPS over the last years, which can
translate as more significant dividend pay-outs.

Finally, the fact that the P/E ratio of Rio Tinto has moved within the range of 5 to 13
times over the last years (London Stock Exchange, 2023c), as shown in Figure 17, allows to
interpret that the stock may be undervalued, especially when compared to the industry’s
ratio, e.g., the average current P/E ratio of the mining industry in USA is 32 times, and in the
UK is around 52 times according to an online database (Damodaran, 2023), meaning Rio
Tinto’s share has room for capital appreciation while providing a higher dividend yield.

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Conclusion
In brief, the comprehensive financial and performance analysis of Rio Tinto
demonstrates that the company has had strong financial performances over the last 5 years,
including stable profits, financial efficiency, healthy liquidity, and solvency ratios which
ensure financial stability, that allow it to consider it an appearing low-risk investment, given
its financial strength and how well-prepared it is to meet its obligations.
Considering the disclaimer of the related limitations of this analysis, including
potential discrepancies there might be because of the use of different sources of information,
as databases, annual reports, and online information, as well as different accounting policies
that might exist within the industry, it is recommended that John Doe invest in Rio Tinto.
Even though all investments carry inherent risks, the financial stability of the company along
with its outstanding dividend yield, high EPS, and lower P/E ratio make it a perfect suit for an
investor seeking for income, received as dividends, and capital growth, thanks to the
company’s ability to generate profits, that can lead to an increase in the stock price.

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Reference list
Anglo American PLC (2019) Annual Report 2018. Available at:
https://www.angloamerican.com/investors/annual-reporting (Accessed: 20 October 2023).
Anglo American PLC (2020) Annual Report 2019. Available at:
https://www.angloamerican.com/investors/annual-reporting (Accessed: 20 October 2023).
Anglo American PLC (2021) Annual Report 2020. Available at:
https://www.angloamerican.com/investors/annual-reporting (Accessed: 20 October 2023).
Anglo American PLC (2022) Annual Report 2021. Available at:
https://www.angloamerican.com/investors/annual-reporting (Accessed: 20 October 2023).
Anglo American PLC (2023a) ‘Anglo American re-organises senior management team to lead next
phase of value delivery’, 31 May [Press release]. Available at:
https://www.angloamerican.com/media/press-releases/2023/31-05-2023 (Accessed: 03
November 2023).
Anglo American PLC (2023b) Annual Report 2022. Available at:
https://www.angloamerican.com/investors/annual-reporting (Accessed: 20 October 2023).
Anglo American PLC (2023c) Dividends. Available at:
https://www.angloamerican.com/investors/dividend-information/ (Accessed: 20 October
2023).
Anglo American PLC (2023d) Website. Available at: https://www.angloamerican.com/ (Accessed: 20
October 2023).
Bloomberg (2023a) Anglo American PLC company report. Available at: Bloomberg (Accessed: 20
October 2023).
Bloomberg (2023b) Rio Tinto PLC company report. Available at: Bloomberg (Accessed: 20 October
2023).
Businesswire (2023) ‘Rio Tinto to acquire Chilean exploration assets and enter joint venture with
Codelco’, 31 July [Press release]. Available at:
https://www.businesswire.com/news/home/20230731319461/en/ (Accessed: 03 November
2023).
CODELCO (2023) Annual Report 2022. Available at: https://www.codelco.com/memorias (Accessed:
03 November 2023).
Damodaran Online (2023) Data Breakdown. Available at:
https://pages.stern.nyu.edu/~adamodar/New_Home_Page/databreakdown.html#industry
(Accessed: 01 November 2023).
Ericsson, M. and Löf, O. (2019) 'Mining’s contribution to national economies between 1996 and 2016',
Mineral economics: raw materials report, 32(2), pp. 223-250.
FAME (2023a) Anglo American PLC company report. Available at: https://fame-r1.bvdinfo.com/
(Accessed: 20 October 2023).
FAME (2023b) Rio Tinto PLC company report. Available at: https://fame-r1.bvdinfo.com/ (Accessed:
20 October 2023).
Hodge, R. A., Ericsson, M., Löf, O., Löf, A. and Semkowich, P. (2022) 'The global mining industry:
corporate profile, complexity, and change', Mineral economics: raw materials report, 35(3-4),
pp. 587-606.
International Labour Organisation (2023) ILOSTAT. Available at: https://ilostat.ilo.org/data/ (Accessed:
30 October 2023).
London Stock Exchange (2023a) Anglo American PLC. Available at:
https://www.londonstockexchange.com/stock/AAL/anglo-american-plc/fundamentals
(Accessed: 01 November 2023).

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London Stock Exchange (2023b) FTSE 350. Available at:
https://www.londonstockexchange.com/indices/ftse-350 (Accessed: 01 November 2023).
London Stock Exchange (2023c) Rio Tinto PLC. Available at:
https://www.londonstockexchange.com/stock/RIO/rio-tinto-plc/fundamentals (Accessed: 01
November 2023).
Rio Tinto PLC (2019) Annual Report 2018. Available at:
https://www.riotinto.com/en/invest/reports/annual-report (Accessed: 20 October 2023).
Rio Tinto PLC (2020) Annual Report 2019. Available at:
https://www.riotinto.com/en/invest/reports/annual-report (Accessed: 20 October 2023).
Rio Tinto PLC (2021) Annual Report 2020. Available at:
https://www.riotinto.com/en/invest/reports/annual-report (Accessed: 20 October 2023).
Rio Tinto PLC (2022) Annual Report 2021. Available at:
https://www.riotinto.com/en/invest/reports/annual-report (Accessed: 20 October 2023).
Rio Tinto PLC (2023a) Annual Report 2022. Available at:
https://www.riotinto.com/en/invest/reports/annual-report (Accessed: 20 October 2023).
Rio Tinto PLC (2023b) Dividends. Available at: https://www.riotinto.com/en/invest/shareholder-
information/dividends (Accessed: 20 October 2023).
Rio Tinto PLC (2023c) Website. Available at: https://www.riotinto.com (Accessed: 20 October 2023).

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