Rio Tinto Financial Analysis

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Contents
1. Executive Summary……………………………………………………..3 2. Financial Ratio Analysis
a. Short Term Solvency Ratio…………………………………….4-5 i. Current Ratio………………………………………….…4 ii. Quick Ratio……………………………………………...5 b. Long Term Solvency Ratio……………………………………..5-6 i. Debt To Equity………………………………………….5 ii. Times Interest Earned……………………………...……6 c. Asset Utilization Ratio……………………………………….….7-8 i. Average Collection Period…………………………….…7 ii. Inventory Turnover…………………………………….…8 iii. Asset Turnover……………………………………………8 d. Profitability Ratio…………………………………………..…….8-10 i. Return On Assets……………………………………..…..8 ii. Operating Profit Margin……………………………..……9 iii. Net Profit Margin………………………………….………9 3. Hr Cost Drivers Analysis…………………………………………………… 4. Recommendations………………………………………………………….. 5. Conclusion………………………………………………………………….

Executive summary
The paper shows Rio Tinto Limited financial ratio analysis. For the sake of convenience, the analysis is divided into four segments namely short term solvency, long term solvency, asset utilization and profitability. The analysis for the FY 2008 and 2007 has shown that the company has managed to have a satisfactory level of liquidity, less risky reliance on debt financing which is a wise move for the company to adopt particularly during economic recession. On the apart of asset management and utilization, Rio Tinto Limited is at a satisfactory level by managing its inventory, receivables and assets with its prudent and conservation policies and increase in sales has helped the company to enjoy a stable turnover. However, the company’s profitability is tormented to a large extent mainly due to 124$ rise in R&D, 66% increase in selling and administrative expenses in turn resulting in 108% rise in operating expenses. All this has shown its adverse effects on net income which has decline by 50%. The report also highlights the cost drivers for HR and shares recommendations for better performance of the company by keeping in focus Human Resource department’s ability and functions within the company.

Financial ratio analysis to measure the historical performance of the company

Financial ratio analysis can be carried out by categorizing the company’s performance into four different aspects, namely short term solvency, long term solvency, asset management and profitability ( Rao 2000). The following text will display Rio Tinto Ltd. Financial ratio analysis under the mentioned sections along with defining and highlighting the importance of each ratio from the business perspective.

a. Short term solvency ratios
It can also be called liquidity ratio which mainly takes into account current and quick ratio and working capital analysis of the company.

Current ratio
It is calculated by dividing the total current assets by the total current liabilities. It shows the company’s ability to meet its current obligations safely, which is generally the concern for short term creditors (Rao 2000). Rio Tinto Ltd current ratio for the FY 2008 is 0.83 which has decreased from 1.12 in the FY2007. The decline has resulted from the 16% decrease in current assets and 13% increase in current liabilities. The decrease in current assets can be attributed to the 31% decrease in cash and short investments and 22% decrease in accounts receivables. The current liabilities increase can be attributed to the 22% increase in the current portion of long term debts to be paid and 57% in accrued expenses. The simultaneous decrease in cash, short term investments and accounts receivables can be explained as the company’s realization of carrying too much blockage of funds in the shape of receivables and short term investments which it needed to retire the current obligations.

Quick ratio
It is calculated by subtracting inventory and prepaid expenses from current...
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