The working capital of the company can be simply calculated by deducting current liabilities from current assets. Working capital management is very important in a company as it guarantees the ability of the firm to carry on its operations and to pay its short term debt and operation expenses. In the following part we will discuss the working capital management of Rio Tinto.CURRENT RATIO Current ratio=(Current assets)/(Current Liabilities) The current ratio is commonly used to indicate the company's ability to pay back its short term obligations (debt and accounts payable) with its current assets. When the ratio gets higher, the company becomes more capable of paying its obligations. A current ratio higher than one indicates that the enterprise’s …show more content…
It reflects the capability of a firm in generating income from the shareholders investments. In 2015 and 2012, the company had a negative ROE. The negative ROE in 2012 was due to the decrease in the company’s asset value and its annual loss. In 2015 the drop in ROE can be explained by the drop in the company’s commodity prices (Iron and Copper). In 2016 Rio Tinto’s ROE is 12.04% which the highest amongst its top 3 competitors and its industry. This shows that the company is utilizing its investors’ funding more efficiently than its industry and competitors which is a good sign for the shareholders of the …show more content…
The longer the company pays its suppliers, the more it can finance its investments and operations. This ratio also reflects the relationship of the company with its suppliers; the longer the period the better the relationship. The company’s ratio was decreasing from 2012 till 2014. However since 2015, this ratio has been increasing. In 2016 the DPO ratio for riot into is 114.7 which is approximately the double of the industry’s DPO. This shows that Rio Tinto has better credit terms than the others company in its industry and that the company has been maintaining a good relationship with its suppliers. Only one of the company’s top 3 competitors (BHP Billiton PLC) has a longer accounts payable days
Suppliers are mostly concerned with a company 's ability to pay on their liabilities. Therefore, the current ratio and the quick ratio are both looked at by suppliers. The current ratio takes a company’s current assets and divides that by the company’s current liabilities. This number is
Net working capital represents organization’s operating liquidity. In order to compute the net working capital, total current assets are divided from total current liabilities. When there is sufficient excess of current assets over current liabilities, an organization might be considered sufficiently liquid. Another ratio that helps in assessing the operating liquidity of as company is a current ratio. The ratio is calculated by dividing the total current assets over total current liabilities. When the current ratio is high, the organization has enough of current assets to pay for the liabilities. Yet, another mean of calculating the organization’s debt-paying ability is the debt ratio. To calculate the ratio, total liabilities are divided by total assets. The computation gives information on what proportion of organization’s assets is financed by a debt, and what is the entity’s ability to pay for current and long term liabilities. Lower debt ratio is better, because the low liabilities require low debt payments. To be able to lend money, an organization’s current ratio has to fall above a certain level, also the debt ratio cannot rise above a certain threshold. Otherwise, the entity will not be able to lend money or will have to pay high penalties. The following steps can be undertaken by a company to keep the debt ratio within normal
The financial challenges facing the company in the working capital management simulation showed how companies are able to play a balancing act with incoming and outgoing cash flow floats. Companies can juggle cash flows by withholding payments to retain capital or negotiate with companies that withhold payments to receive an incoming cash flow. Either way, keeping as much cash to fund operations with out heavy financial leveraging was the greatest challenge. Another juggling act was to keep management and business partners happy. The decisions made were not always positive for everyone.
The return on equity for the company stood at 18.71% in 2009 as compared to 20.90% for the year 2008 which shows a declining trend. The investors are always keen to see high returns on their investments, but here the return on their equity is declining. It is a negative number for the company and if the trend continues the investors will lose the confidence in the company and will cease to invest in the company.
Current Ratio – For the last three years was growing from 3.56 in 2001 to 3.81 in 2002 to 4.22 in 2003. The reason of grow is increased in Assets. Even though Liability was growing, Asset grow was more significant.
Measuring the liquidity through the current ratio, with 2.74 in the year 2009,0.74 above the standard, with the decline in the following year meeting exactly the standard at 2% in the year 2010, and a steep decline in the year 2011-2012 as compared to its standard.Resulting in the decline in firm’s ability to meet its day-to-day operating expenses. The current liabilities from 2009 to 2012 have increased by 27.03 billion whereas the investments in current assets have increased just by 26.09 billion, which causes the decline in the current ratio. To cope up with this problem the company should invest more in current assets and should reduce its current liabilities.
Rio Tinto applies a disciplined and consistent approach to capital allocation. Their primary allocation is towards necessary sustaining capital (Rio Tinto, 2015). Secondly, they finance their primary contract with their shareholders, by the ordinary dividend (Rio Tinto, 2015). And finally, they estimate the optimal use of the remaining capital across alternatives of reduction of debt, compelling growth and additional cash returns to their shareholders (Rio Tinto, 2015). By implementing this, in 2015 they had sustaining capital of 2.1 billion USD, compelling growth of 2.6 billion USD, dividends of 4.1 billion USD and buy-back of shares of 2 billion USD (Rio Tinto,
In regards to the corporation’s balance sheet, it is necessary to place an importance on liquidity ratios to demonstrate the company’s ability to pay its short term obligations such as accounts payable and notes that have a duration of less than one year. These commonly used liquidity ratios include the current ratio, quick ratio, and cash ratio. All three ratios are used to measure the liquidity of a company or business. The current ratio is used to indicate a business’s ability to meet maturing obligations. The quick ratio is used to indicate the company’s ability to pay off debt. Finally the cash ratio is used to measure the amount of capital as well short term counterparts a business has over its current liabilities.
The Quick Ratio shows that the company’s cash and cash equivalents are the highest t...
Ratios traditionally measure the most important factors such as liquidity, solvency and profitability, as well as other measures of solvency. Different studies have found various ratios to be the most efficient indicators of solvency. Studies of ratio analysis began in the 1930’s, with several studies of the concluding that firms with the potential to file bankruptcy all exhibited different ratios than those companies that were financially sound.
Author , Craig S.Fleisher ,Babette E. Benhoussen (2007).Business and Competitive Analysis: Effective Application of new and classic methods Available from http://www.iseg.utl.pt/aula/cad1505/chapter6.pdf (Figure4:The Nine Forces)
The analysis of these ratios shows how Ford stands as a company for the past five years. Return on equity (ROE) reveals how much profit a company earned in comparison to the total amount of shareholder equity on the balance sheet. For long-term investing with great rewards, companies that have high return on equity ratios can provide the biggest payoffs. This ratio also tells investors how effectively their capital is being reinvested, so it is a good gauge of management's money handling skills. Ford is showing a considerable turn around in this area this past year, which could easily be due to changes in management. They are also reasonably following the industry in this area.
There are many techniques used to manage cash including, the nature of asset growth, controlling assets, patterns of financing, the financing decision, a decision process and shifts in asset structure. For any company the growth of asset results in a growth in wealth if managed effectively. The typical firm usually forecast the rate of sales to ensure that the production of goods match sales so there is not an overflow if inventory. As a company expands and produces more items they will acquire permanent current assets. Permanent current assets can be described as a constant inventory of items because it is almost impossible to predict the market and the demands of the consumer.
Rio Tinto has not only been a mining company but an investor to small and coming business that would help it to gain a competitive advantage to the mining industry. It has mostly invested in companies that specialized in innovation and technology.
If there is sufficient working capital than we can assume that it has sound financial position and if the business is under trading than there will be increment in liquid assets which shows that the funds are not been utilized and kept ideal.