Introduction
This research aims to expose the financial performance of Rio Tinto by using key financial indicators and financial ratios. The company is a multinational metal and mining corporation that focuses on supplying metals and products of mining. Therefore, using the company to understand the financial layout and progress of businesses using the financial indicators and ratios. These two aspects help the researcher to understand more about what the two properties indicate about the business’s state. The firm is a member of a group of stakeholders that relies on key financial measures and indicators to comprehend and assess the state of the company’s operations (Perfetto and Vargas-Sánchez, 2018). The information on the financial indicators influences the investors’ decisions on their investment schemes.
A proper analysis of the business performance significantly influences investment choices since the investor has information regarding the market and critically evaluates it to obtain the best possible outcome. The financial analysis indicates that Rio Tinto is a progressive company in terms of profits and investment prices. Therefore, the following research provides a clear analysis of the market by analyzing the key financial indicators such as the return on capital employed return on investment, and many more. The research provides a deep analysis of Rio Tinto’s financial performance.
Key Performance Indicators
Businesses rely on key financial indicators to determine the investors’ net worth of a business. Key performance indexes are strategic accounting strategies that help measure the business’ progress and indicate how the business fairs and its possible future direction. They form part of the vital information in business that helps people to determine the business progress. The key financial indicators create a strong foundation for new investors to join the market and select the best business opportunities for their investment choices. They determine whether the business is headed in the right direction by highlighting the areas that need more concentration. Some of the key financial indicators include the return on capital employed, return on investment, net sales, and the number of new contracts signed during the period. Another benefit of the key performance index is that they help improve the morale and performance of the employees. Incorporating the indices on measuring the employee contribution into the business progress helps employees to operate in a more focused approach hence making them act to impress through their results.
However, despite the key performance indicators contributing to positive impacts on businesses, they may impact them negatively through the wastage of time and resources usable in measuring the KPIs. Conducting a thoroughly reliable performance index measurement requires extreme commitment from the researcher and utilizes resources hence reducing the profitability ratio. The business employs skilled personnel to conduct the process. Thus, the amount that it spends on research increases the expenses. Businesses conduct such research to improve their financial information and to identify the areas that need more effort to make them more prosperous without minding the extra cost arising from these operations.
Interpretation and Insights
Causes of Changes in the Financial Performance of Rio Tinto
Some of the causes of changes in the financial performance of Rio Tinto Company include the firm’s size, age, leverage, and liquidity among others. The size of the organization is crucial to consider because big corporations benefit from economies of scale. This lowers the expenses the business has, boosting its profitability. Considering Rio Tinto has been active in the market for around 149 years, it has a wealth of knowledge (Shrivastava & Vidhi, 2020). A long existence in the market provides the company with a competitive advantage and a strong brand image. On the other hand, liquidity is the ability of the business to clear debts using the current assets. Rio Tinto has a high liquidity power due to its significant involvement in sales. These factors influence the company’s financial performance and ensure that it enjoys high profitability.
Financial Ratios
The company experiences a high increase in the number of sales over the period. A huge number of sales indicate that customers receive high attraction in the company hence increasing the sales margin. It depicts that the customers are more satisfied with the materials and services they obtain from the company. The huge amounts of sales indicate that the company has positively efficient marketing strategies that arise due to proper product positioning in the market that attracts more customers. Additionally, positive branding attracts customers and creates awareness about the brand’s existence in the market hence attracting more buyers.
Good sales indicate that customers respect and value the products available hence motivating the business to operate more efficiently and skillfully (Shahid et al., 2021). An increase in the number of sales indicates that the business gains control over the market compared to rival companies. Moreover, it allows the business to reach more clients since the brand name expands and attracts more skillful employees. Thus, the increasing sales of Rio Tinto demonstrate that they enjoy a marvelous following and good positioning in the market hence important in performance evaluation. The net profit for Rio Tinto had improved over the years except for 2019 when it dropped due to the emergence of the COVID-19 pandemic that led to global economic sabotage (Lucas, 2021). However, it slowly recovered in the coming years after the discovery of the vaccines that curbed its further spread hence the reintroduction of businesses to operate. The increase in the profit ratios in the years indicates that the company is progressive in ensuring economic prosperity.
A business’s success relies on its ability to maintain substantial profit margins during operation periods. Profitability ratios determine the business’ expansion by affecting the investors’ decisions. Many business people are profit-oriented, meaning that companies with higher profits attract many investors. The profits affect the lending ability of a company. A highly profitable company encourages banks and other financial institutions to trust them and provide more resources to run their operations. Therefore, Rio Tinto enjoys a high borrowing opportunity since its profits keep increasing.
The most common financial stability ratio is the gearing ratio, which focuses on the relationship between a company’s debt and equity. It determines the company’s ability or power to recover from the debt it owes other financial institutions and businesses. Thus, companies must evaluate their performance based on the financial stability ratio since it indicates debt-clearing power. In recent years, Rio Tinto Company’s gearing ratio has decreased, suggesting that it may be able to pay down long-term obligations with the equity that is currently accessible (Jindřichovská and Eckert, 2021). This indicates that the business is becoming more stable with time and possesses higher profitability. Such positive progress attracts new investors to the company and allows the business to have a higher advantage of accessing loans quickly. The business must strive to provide a simple strategy that helps it recover from the debts it has, thus increasing its borrowing power. The company is more likely to clear its debt in the coming years and increase its ability to obtain emergency loans when the need comes.
The efficiency ratio in the tested years fluctuates through the years. It was below 50% in the first three years, indicating optimal business performance. However, it rose beyond 50%, indicating that the business poorly performed during the period by increasing the bank loans. Therefore, the industry negatively performed in the last financial period due to excessive borrowing making it inefficient. Rio Tinto borrowed excessively in the previous period.
Non-Financial Indicators
Customer satisfaction helps them determine business success since a more positive high contentment indicates that more customers return to purchase from the company, making it more prosperous. Consumer satisfaction is a performance indicator since businesses make more net sales, improving their financial stability. The company possesses higher consumer satisfaction, which implies it drives more sales, enhancing the net sales and profit margin. A better business performance indicates their interest in making the customers more satisfied. It encourages them to engage in business operations by consuming more products and recommending the business to other customers demanding similar products. Companies need to review their customers’ satisfaction levels and incorporate customer care units to respond to complaints that customers raise since their reaction affects the general performance and profitability.
Additionally, the company utilizes its employees’ satisfaction levels to determine its prosperity in the future. Corporate social responsibilities require the company to maintain a positive relationship with its employees to ensure they do not suffer but obtain the best protection from damages and hazardous activities. A business that pays attention to the employees and how they relate to their working environment enjoys more productivity since it focuses on delivering proper rights and accuracy without spending time seeking better opportunities. Employee satisfaction influences how the company relates with other stakeholders internally and externally. The business gains support from its investors when it focuses on the employees by gaining confidence. The company attracts external parties to join its workforce by increasing the number of applicants in the business. A strong force increases productivity and encourages employees to work with more creative strategies to meet the high employer expectations.
Company’s SWOT Analysis
The SWOT analysis aids in the management of businesses by equipping the business executive to understand the key areas to focus on to bring the business success. Rio Tinto is a company that identifies with its SWOT analysis and utilizes it to improve its condition. Some advantages the company gains include a strong global brand presence, cutting-edge technology, and leadership in the delivery of some commodities such as aluminum, iron, ore, and copper (Nagar, 2021). The strengths provide Rio Tinto with a competitive advantage over rival companies like Barrick Gold Corporation, Kronos Worldwide, Allegheny Technologies, and Alcoa.
One of the greatest weaknesses that the company experiences are government intervention that influences operational efficiencies negatively. The business must identify new strategies that aid in minimizing the government’s impact on its progress. Rio Tinto needs to utilize its prospects, which include promoting the growing need for aluminum as a substitute for iron, the need to expand operations abroad, and product diversification (Shrivastava & Vidhi, 2020). However, the company faces threats that include competition from rivals and volatility of the commodity market. The management must utilize this information to identify alternatives through the underlying opportunities.
Company’s Business Strategy and Competitors
The business strategy determines how it conducts its operations. It influences business behavior and decisions by determining organizational goals and objectives. The goal of Rio Tinto’s business strategy is to boost profitability by emphasizing product quality rather than quantity (Alvarez-Meaza et al., 2020). The approach argues that customers are more willing to pay higher prices for quality products. The strategy provides a competitive advantage since the company utilizes its resources optimally and ascertains that there is prosperity in operation.
Conclusion and Recommendations
Investment choices in businesses are vital since they determine how businesses will perform in the progressive periods. Business people extensively use the information available in companies to select their areas of interest for investment. Thus, the need for more efficient and progressive strategies to aid in decision-making emerge. The investors demand high information to help them in making wise and thoughtful decisions that will affect their profitability in the future positively. Key financial performance indices are vital in business reporting since they influence investment and lending choices. The most common key performance indices include return on capital employed, return on investment, customer satisfaction levers, and employee contentment in the workplace. The return on capital employed and return on investment affect the financial position of the business directly by altering the number of investors available. On the other hand, the customers’ satisfaction determines their flow in the business while employee satisfaction affects the brand name and image, respectively. The business must ensure that all the take holders are satisfied by analyzing their contentment to avoid financial blows.
Businesses rely on business performance to determine their relationship with customers. Conversely, banks and other financial institutions use financial information to determine the institution’s creditworthiness. Financial ratios are vital in the choice of the loanee since they avail information about their credibility in receiving loans. Rio Tinto has been in a mess in the last financial year since it has experienced a high-efficiency ratio that indicates that it has conducted a high borrowing. It is easy to determine that the company is not reliable in lending money since it has a bad reputation for previous excessive borrowing, which indicates a question of the credibility in paying back the debt. It indicates that the business may face hardships in clearing the debts from banks. The company engaged in borrowing since the gearing ratio is at a controllable point whereas the efficiency ratio is over 50% indicating that it was borrowing.
Recommendation
The findings recommend the management conduct careful and extensive research on how it can manage borrowing in the coming periods to ensure that it keeps its lenders within a manageable position. Controlling excessive borrowing ensures that the business maintains its high profits itself hence guaranteeing a high return on investment for its shareholders. A strong reputation in debt management affirms that its shareholders’ investments are under protection and ensures that they receive their rightful share.
Reference List
Alvarez-Meaza, I., Pikatza-Gorrotxategi, N. and Rio-Belver, R.M. (2020) ‘Sustainable business model based on open innovation: Case study of Iberdrola’, Sustainability, 12(24), p.10645.
Jindřichovská, I. and Eckert, E. (2021) ‘Social responsibility of mining companies at a time of COVID-19: Dear shareholders!’ Sustainability, 14(1), p.350.
Lucas, A. (2021) ‘Investigating networks of corporate influence on government decision-making: The case of Australia’s climate change and energy policies’. Energy Research & Social Science, 81, p.102271.
Nagar, A. (2021) ‘The Juukan Gorge incident: Key lessons on free, prior and informed consent’, Business and Human Rights Journal, 6(2), pp.377-383.
Perfetto, M.C. and Vargas-Sánchez, A. (2018) ‘Towards a smart tourism business ecosystem based on industrial heritage: Research perspectives from the mining region of Rio Tinto, Spain’, Journal of Heritage Tourism, 13(6), pp.528-549.
Shahid, S., Islam, J.U., Farooqi, R. and Thomas, G. (2021) ‘Affordable luxury consumption: An emerging market’s perspective’, International Journal of Emerging Markets, (ahead-of-print).
Shrivastava, P. and Vidhi, R. (2020) ‘Pathway to sustainability in the mining Industry: A case study of Alcoa and Rio Tinto’. Resources, 9(6), p.70.
Appendix 1
Table 1: Summary
Appendix 2
Table 2: Trend Analysis
Appendix 3
Table 3: Financial Ratios
Appendix 4
Table 4: Non-Financial and Sustainability Indicators