Rio Tinto Capital Case

FINA2222- Rio Tinto Analysis

Summary

Rio Tinto in 2014 made a direct statement to “materially increase cash returns to our shareholders” and have kept this promise. This is clearly attempting to signal their dominance to both their shareholders and the resource market as a whole. Rio have released a 12% dividend increase in partnership with $2 billion in proposed share buy-back’s, totaling to almost $6 billion in cash returns. Chief Executive Sam Walsh has credited the “financial and operating discipline”, of the mining giants inner makings for their $9.3billion of steady earnings. Despite the 2014 commodity price slump and the currently unstable economic markets.

The direct reduction of capital expenses including working capital, have all aided in the effort to keep their cash flow levels and earnings steady. Whilst simultaneously reducing their debt by an - all things considered - impressive $5.6billion.

Critique

Capital structure is the foundation program that indicated how a company finances its operations and growth through various funding options. The annual result for Rio Tinto 2014 indicates that Rio Tinto earns 6,527 million (US dollar) in 2014. In comparison with the data of net earnings in 2013, Rio Tinto increased 78% of its total net earnings in 2014 (Rio Tinto 2015).The net debt decreased 31% from the original debt 18,055 in 2013 to the current mount 12,495 in 2014. From a financial point of view, Rio Tinto use debt as an essential part of their capital structure. The use of debt is likely to prevent problems such as agency a tax costs in previous times, however the recent reduction of debt is often a sign of attempts to lower the financial cost burden. Consequently this reduces the potential bankruptcy risk and future financial liabilities.

Rio Tinto’s reduction in its total liability from $57,523m to $53,233m and increased its total equity from $53,502m to $54,594m both contributing to lower the 2014 D/E ratio, from 1.075 to...