BHP’s share price is in focus.
The BHP Group (formerly known as BHP Bulletin) is a diversified natural resources company founded in 1885 that produces products for energy use and manufacturing.
BHP’s core business lines are mineral exploration and production. BHP’s assets, operations and interests are divided into three focus areas: copper and related minerals (such as gold, uranium, silver, zinc, etc.); iron; and coal (ie metallurgical and energy). While these categories account for the bulk of revenue and profits, the company is also diversifying into other areas such as fertilizers.
BHP shares have long been seen as a reliable dividend-paying investment and are a common member of Australian share portfolios. It’s one of Australia’s biggest companies so if you own an ASX 200 ETF or LIC, or even have money in retirement, chances are you already have exposure to BHP shares.
Key metrics
If you’ve ever tried to read a company’s income statement on an annual report, you know it can be quite complicated. Although there are many figures you can draw from this statement, three are important. Revenue, Gross Marginand profit.
Income is important for obvious reasons – it all starts here. If you can’t generate revenue, you can’t generate profit. What we are concerned with is not the absolute number, but the trend. BHP last reported annual revenue of $56,027m with a Compound Annual Growth Rate (CAGR) -0.7% per year over the last 3 years.
Moving down to the income statement, we then arrive at gross margin. Gross margin tells us how profitable the underlying products/services are – before you take into account all overhead costs, how much does the company make from selling $100 worth of goods or services? BHP’s most recently reported gross margin was 82.3%.
In the end, we benefit, which is the most important figure. Last financial year BHP Group Limited reported a profit of $7,897m. This compares to 3 years ago when they made a profit of $11,304m, representing a CAGR of -11.3%.
Financial health of BHP shares
The next thing we need to consider is the capital ‘health’ of the company. What we are trying to assess here is whether they are generating a reasonable return on their equity (total shareholder value) and have a reasonable buffer of safety. A scale that we can see. Net debt. It is simply the total debt minus the company’s cash holdings. In BHP’s case, current net debt is $9,467 million.
A higher number here means that the company has a lot of debt which potentially means higher interest payments, higher volatility, and higher sensitivity to interest rates. A negative value, on the other hand, indicates that the company has more cash than debt (a useful safety buffer).
However, the argument is more important Debt/Equity Percentage. It tells us how much debt the company has compared to shareholder ownership. In other words, how leveraged is the company? BHP’s debt/equity ratio is 45.3%, which means they have more equity than debt.
Finally, we can see Return on Equity (ROE). ROE tells us how much profit a company is making as a percentage of its total equity – a higher number indicates that the company is allocating capital well and creating value, while a lower number indicates that profits could offer more value if they were paid out to shareholders as dividends. BHP generated an ROE of 19.7% in FY24.
What to make of BHP shares?
A high return on equity might suggest the BHP share price is worth a look, but I would be wary of a negative trend in profits and earnings.
Please keep in mind that these figures are important but should only be the beginning of your research. It is important to get a good grasp of the company’s financials and compare it to its peers. It is also very important to make sure that the company is priced appropriately. To learn more about share price evaluation, you can sign up for one of our many free online investing courses.
