Is BHP Billiton plc Dependent On Debt?

Are debt levels at BHP Billiton plc (LON: BLT) becoming unaffordable and detrimental to the company’s future prospects?

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BHP BillitonA Strong Start To The Year

Shares in BHP Billiton (LSE: BLT) (NYSE: BBL.US) have made a strong start to 2014. Despite falling in line with the market during the first few weeks of the year, as investors became concerned about the long-run sustainability of the emerging market growth story, BHP Billiton has recovered strongly to post capital gains of 3.2% year-to-date, which compares favourably to the FTSE 100 on 1%.

Indeed, what was perhaps surprising was the tracking of the index by BHP Billiton during the fall in the first few weeks of 2014. As a company whose revenue is biased towards emerging markets, it may have been expected for shares to fall more than the index. However, they didn’t and now look to offer a bright future for shareholders.

One aspect that needs to be focused upon, though, is whether BHP Billiton is taking on too much risk so as to boost returns to shareholders. In other words, is BHP Billiton dependent on debt and, in doing so, is it putting its long-term future in doubt?

Excessive Debt?

With a debt to equity ratio of 49%, BHP Billiton appears to be only moderately leveraged. This means that for every £1 of net assets, it currently has £0.49 of debt, which is not excessive and could, in fact, be increased somewhat without increasing risk to an unreasonable level.

Furthermore, BHP Billiton’s interest coverage ratio was a very healthy 14.2 in 2013, which shows that the company was able to make interest payments on its debt over fourteen times. This is very comfortable and shows, as mentioned, that that company could afford to take on more debt. It also provides comfort to investors that higher interest rates and/or declining profits are unlikely to cause a major problem for the business when its interest payments are due.

Looking Ahead

The potential for a slowdown in emerging markets (particularly in China) is a real threat to BHP Billiton. However, its current price to earnings (P/E) ratio appears to price this in, with it being 11.8 — considerably below the FTSE 100 average of 13.5.

Furthermore, with earnings per share (EPS) set to grow by 22% this year, BHP Billiton seems to offer a potent mixture of strong growth prospects and financial stability. As such, it looks all set to have a strong 2014.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Peter owns shares in BHP Billiton.

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