Must-know: An overview of BHP’s financial condition

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Must-know: An investor’s guide to BHP (Part 5 of 10)

(Continued from Part 4)

BHP’s financial condition

Net debt is the total debt less cash and cash equivalents. BHP’s net debt at the end of December was $27.7 billion. The company is targeting a net debt of $25 billion by end of financial year (or FY) 2014. After this, it can start thinking about buying back shares according to its CEO, Andrew Mackenzie.

The previous chart shows that BHP Billiton (BHP) is in a comfortable position as far as the debt to earnings before interest, taxes, depreciation, and amortization (or EBITDA) position is concerned.

The Debt/EBITDA ratio is a common metric used by credit rating agencies to assess the probability of default on issued debt. A higher number suggests that a firm may not be able to service its debt.

It’s peers, including Rio Tinto (RIO) and Vale SA (VALE), are also in a comfortable position regarding debt/EBITDA. However, smaller and less diversified players like Atlas Iron (or AGO), Cliffs Natural Resources (CLF), and Fortescue Metals Group (or FMG) might be in trouble if iron ore prices remain below $90 per ton for long. Investors can also consider investing in exchange-traded funds (or ETFs) that invest in the metals and mining sector—like the SPDR S&P Metals & Mining ETF (XME).

Credit rating

Credit rating agencies have reaffirmed BHP’s stable rating because of its strong balance sheet. BHP’s management is also committed to the “A” credit rating. Moody’s rating for BHP is A1—meaning that it’s stable. Standard & Poor’s gave BHP an “A-1″ as short-term corporate credit rating because BHP has a stable outlook.

Free cash flow

Free cash flow represents the cash that a company can use to pay dividends, pay off debt, etc. It’s calculated by deducting capital expenditure from operating cash flow. BHP’s free cash flow for the half year ending in December was $3 billion. This is an increase of $7.8 billion. BHP is focusing on core operations and increasing productivity. It intends to achieve growth in free cash flow. The company has targeted 25% less capital and exploration costs in FY14 compared to FY13.

Continue to Part 6

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