Financial Management and Analysis

This document provides an introduction to financial management and analysis, with a focus on the British American Tobacco plc. It includes a critical analysis of the company's financial condition and health over the past two years, as well as recommendations for improvement. The document also covers topics such as liquidity, profitability, efficiency, capital structure, and stock market performance.

FINANCIAL
MANAGEMENT AND
ANALYSIS

Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
1. Critically analysis of variations in financial condition and health during previous two years.
.....................................................................................................................................................3
2. Explanation of problem of analysis.......................................................................................11
3. Recommendation to above company in accordance of analysis...........................................11
TASK 2......................................................................................................................................12
Task 3.............................................................................................................................................15
Task 4.............................................................................................................................................16
(a) Difference between systematic and unsystematic risk and factors to monitor sensitivity of
market........................................................................................................................................18
(b) Difference between capital and money market, interest bearing instruments and document
instrument?................................................................................................................................19
(c) Difference between risk and uncertainty..............................................................................20
(d) Explain with reasons whether a bank overdraft is suitable to finance the purchase of this
property......................................................................................................................................21
CONCLUSION..............................................................................................................................21
REFERENCES..............................................................................................................................22

INTRODUCTION
Financial management can be interpreted as a planning, management, strategic planning,
and project management. The management's goal is to make good use of the financial capital
available in order to accomplish the goals (AREAS, 2018). Fundamentally, finance departments
are responsible for applying various approaches to improve financial accounting. One company
publicly traded exchange is chosen for the project study which is British American Tobacco plc.
This firm supplies tobacco and cigars and is based in London, England. It is the second biggest
tobacco maker in the world. The project report includes liquidity, viability etc. details about
financial stability of the above-elected organisation. In addition to the further section of the
study, readers will have suggestions for companies in poorer aspects.
MAIN BODY
1. Critically analysis of variations in financial condition and health during
previous two years.
Financial performance analysis- This is crucial for businesses to analyse financial factors
properly in order for internally and externally partners to be mindful of the financial wellbeing of
companies (Grennan and Michaely, 2019). There are a variety of considerations to be weighed in
order to analyse the fiscal conditions of companies. As for British American Tobacco plc, those
things below are protected for two years, for example:
1. Liquidity- Current ratio- Current asset / current liability
All data in
GBP million
except current
ratio
2017 2018
Current asset 13966 12655
Current
liability
15544 16329
Calculation 13966/15544 12655/16329

Current ratio 0.9 times 0.77 times
 Quick ratio (Acid test ratio) = Quick asset / current liability
All data in
GBP million
except quick
ratio
2017 2018
Quick assets 8102 6626
Current
liabilities
15544 16329
Calculation 8102/15544 6626/16329
Quick ratio 0.52 times 0.41 times
Analysis- In terms of liquidity ratio of above company this can be stated that company’s
performance is not so good. This is so because they are not able to maintain ideal ratio in both
years.
2. Profitability- Operating profit ratio- Operating profit / net sale x 100
All data in
GBP million
except
operating
profit ratio
2017 2018
Operating
profit
6470 9437
Net sales 20292 24492
Calculation 6470/20292*1 9437/24492*1

00 00
Operating
profit ratio
31.88% 38.53%
 Gross profit margin= Gross profit / net sale x 100
All data in
GBP million
except gross
profit ratio
2017 2018
Gross profit 15259 19942
Net sales 20292 24492
Calculation 15259/20292*
100
19942/24492*
100
Gross profit
ratio
75.20% 81.42%
 Net profit ratio= Net profit / net sale x 100
All data in
GBP million
except net
profit ratio
2017 2018
Net profit 37533 6030
Net sale 20292 24492
Calculation 37533/20292*
100
6030/24492*1
00
Net profit ratio 184.96% 24.62%

Analysis- as per above done profitability ratio analysis this can be stated that company is able to
manage effective profitability ratio in past year 2018 compared to year 2017.
3. Efficiency- A/R turnover ratio= Revenue/ average A/R
All data in
GBP million
except A/R
turnover ratio
2017 2018
Revenue 20292 24492
A/R 4053 3588
Calculation 20292/4053 24492/3588
A/R turnover
ratio
5.01 times 6.83 times
A/R turnover
days
73 days 53 days
 A/P turnover ratio= cost of sales/ A/P
All data in
GBP million
except A/P
turnover ratio
2017 2018
Cost of sale 5033 4550
Accounts
payables
8847 10631
Calculation 5033/8847 4550/10631
Accounts 0.57x 0.43x

payable
turnover ratio
Accounts
payable
turnover days
642 days 853 days
 Inventory turnover ratio= Cost of sales / inventory
All data in
GBP million
except
inventory
turnover ratio
2017 2018
Cost of sale 5033 4550
Inventory 5864 6029
Calculation 5033/5864 4550/6029
Inventory
turnover ratio
0.86 times 0.75 times
Inventory
turnover days
425 days 484 days
 Total assets turnover ratio= Revenue/ total asset
All data in
GBP million
except total
assets
turnover ratio
2017 2018
Revenues 20292 24492
Total assets 141038 146342

Calculation 20292/141038 24492/146342
Total assets
turnover ratio
0.14x 0.17x
 Fixed assets turnover ratio= Revenue/ fixed assets
All data in
GBP million
except fixed
assets
turnover ratio
2017 2018
Revenues 20292 24492
Fixed assets 127072 133687
Calculation 20292/127072 24492/133687
Fixed assets
turnover ratio
0.16 times 0.18 times
Analysis- The above measured efficiency ratio this can be stated that company’s performance is
better in year 2018 as compared to year 2017. This has been justified under various kinds of
ratio.
4. Capital structure- Debt to equity ratio = Total liability / shareholders’ equity
All data in
GBP million
except debt
to equity ratio
2017 2018
Total
liabilities
80234 80898
Shareholders’ 60804 65444

equity
Calculation 80234/60804 80898/65444
Debt to equity
ratio
1.32 1.24
 Debt to total assets ratio= Total debt/total asset
All data in
GBP million
except D/A
ratio
2017 2018
Total Debts 80234 80898
Total assets 141038 146342
Calculation 80234/141038 80898/146342
Debt total
assets ratio
0.57 0.55
 Interest coverage ratio= EBIT/Interest expense
All data in
GBP million
except
interest
coverage
ratio
2017 2018
EBIT 6470 9437
Interest
expenses
1124 1634
Calculation 6470/1124 9437/1634
Interest
coverage ratio
5.76 5.77

Analysis- The above measured Capital structure ratios this can be stated that company’s
performance is better in year 2018 as compared to year 2017. This has been justified under
various kinds of ratio.
5. Stock market performance Price earnings ratio = M.V per share/EPS
All data in
GBP million
except price
earnings
ratio
2017 2018
Market value
per share
65.27 51.22
Earnings per
share
18.36 2.64
Calculation 65.27/18.36 51.22/2.64
Price earnings
ratio
3.55 times 19.40 times
 Return on equity ratio= Net income/ shareholders’ equity
All data in
GBP million
except ROE
ratio
2017 2018
Net income 37533 6030
Shareholders’
equity
60804 65444
Calculation 37533/60804 6030/65444
ROE 0.62 0.09

Analysis- In terms of stock market performance this can be stated that company is managing in
an effective manner their stock in year 2018 compared to year 2017.
2. Explanation of problem of analysis.
The ratio analysis methodology was used in the previous section of the quantitative report of
British American Tobacco Plc. This is a tool for calculating and interpreting various kinds of
ratios to realise the exact financial situation. Some important ratio analysis problems are listed
below, which are as follows:
• Book value averages – this is one of the main challenges when it comes to depending on ratios.
Based on the book valuation (mainly past costs), financial knowledge is not reflected in the
present state of the business (Yüksel, Dinçer and Meral, 2019).
• No quality control assessment- Detail is contained in the ratios on the financial side.
Knowledge on administrative aspects is not considered. As a result, careful review of an
organisation becomes impossible (Schroeder, Clark and Cathey, 2019).
3. Recommendation to above company in accordance of analysis.
According to the ratio review of British American Tobacco Plc, the financial situation of the firm
presents various problems. Below are among this company's poor sectors:
• In the present year the earnings per share is in a bad position, slipping from a massive margin
in 2018 compared with 2017. • In the present period, the net profit is in an unfailing situation.
• With respect to the productivity level, the company cannot pay its creditors on schedule and
this adversely affects their goodwill. •
• In addition, you will see that in all two years, the firm cannot produce a better yield on its
shares. This would not lead to any further spending from its owners.
Recommendation:
• Company should aim to reduce the current costs and try to boost the current net assets to
maximise liquidity.
• The company should concentrate upon managing its costs in order to maximise its degree of net
profitability.

• As mentioned above, their payment quality is lower. In this respect, the latter business has to
manage its debts. Often manage to pay the creditors before the due date. They can also
concentrate on receiving better returns on their stocks by raising the market value of stocks.
TASK 2
(a) Calculate the payback period for each choice.
Year Choice A
Choice
B Choice C
1 48000 48000 48000
2 48000 48000 48000
3 48000 48000 48000
4 48000 48000
5 48000 48000
6 48000 48000
7 48000
8 48000
9 48000
Payback period: Initial investment/cash flow
Choice A
105000/4800
0
2.1875
Choice B
187000/4800
0
3.895833333
Choice C
245000/4800
0
5.104166667

(b) Calculate the NPV for each choice.
Net present value: Discounted cash
flow-investment
Year Choice A
PV
factor
Discounted cash
flow
1 48000 0.91 43680
2 48000 0.83 39840
3 48000 0.75 36000
119520
NPV 14520
Year Choice B
PV
factor
Discounted cash
flow
1 48000 0.91 43680
2 48000 0.83 39840
3 48000 0.75 36000
4 48000 0.68 32640
5 48000 0.62 29760
6 48000 0.56 26880
208800
NPV 21800
Year Choice C
PV
factor
Discounted cash
flow
1 48000 0.91 43680
2 48000 0.83 39840
3 48000 0.75 36000
4 48000 0.68 32640
5 48000 0.62 29760
6 48000 0.56 26880
7 48000 0.51 24480

8 48000 0.47 22560
9 48000 0.42 20160
276000
NPV 31000
(c) Calculate the IRR for each choice
IRR
Choice A
0= -105000+144000/(1+r)^3
105000*(1+r)^3= 144000
(1+r)^3= 144000/105000
(1+r)^3= 1.37
1+r= (1.37)^1/3
1+r= (1.37)^0.33
1+r= 1.11
r= 0.11
Choice B
0= -187000+288000/(1+r)^6
187000*(1+r)^6= 288000
(1+r)^6= 288000/187000
(1+r)^6= 1.54
1+r= (1.54)^1/6
1+r= (1.54)^0.17
1+r= 1.07
r= 0.07
Choice C
0= -245000+432000/(1+r)^9
245000*(1+r)^9= 432000
(1+r)^9= 432000/245000

(1+r)^9= 1.76
1+r= (1.76)^1/9
1+r= (1.76)^0.11
1+r= 1.06
r= 0.06
(d) Recommendation
 Payback period: As per the above calculation values of payback period can be defined
that choice. As per the choice A covered in 2 years and 2 months in company of other
choices.
 Net present value: After that application of this method it is saying that choice C seems
good and efficient. It is occurring because value is greater that is 31000 and rest of
choices present value is lesser.
 Internal rate of return: As per the method, Choice A seems effective because of under it
value of IRR is greater in comparative way.
Thus, it is concluded that company must go with choice A.
Task 3
(a) Calculate the theoretical ex-rights price (TERP) of Düsseldorf plc-
TERP: New share *issue price + old share*market price/(new share + old share)
[(1*1)+(2*2)]/(1+2)
(1+4)/3
1.666666667
(b) Calculate the value of the rights attached to each existing
share
Value of rights= TERP-Issue price
1.66-1
0.66
(c) What would be the effect on the wealth of Lukas:

(i) Takes up his rights
Lukas takes up their rights so wealth of him increase in positive manner because of 1.00
or 1000 (1.66-0.66).
(ii) Sells his rights.
When investors planning to sell their rights so wealth will be 660 (0.66*1000).
(iii) Takes no action.
As per the situation there will be no loss and condition in this situation and wealth will be
recognised 1000.
Task 4
(a) What is the value of Amsterdam plc using market capitalisation?
Equity market value: Market value of per share*number of share
= 4.00*20
= 80
(b) What is the value of Amsterdam plc using the net asset value
Net asset value: Total assets-current liability
= 99.3-7.1
= 92.2
(c) What is the value of Amsterdam plc using the price/earnings ratio method
P/E ratio: Share price/earnings per share
EPS: Profit/share
= 10.1/20
= 0.505
Share price: 4
PE ratio: 4/0.505
= 7.92

(d) What is the average historic dividend growth rate for Amsterdam plc?
Year 2019 2018 2017 2016
Total dividends
(€m)
6.0 5.6 5.2 5
Change during 2016-17:
(5.2-5)/5*100
= 4%
Change during 2017-18:
(5.6-5.2)/5.2*100
= 7.69%
Change during 2018-19:
(6-5.6)/5.6*100
= 0.4/5.6*100
= 7.14%
average historic dividend growth rate: (4+7.69+7.14)/4
= 4.71%
(e) Advise to a potential investor:
As per the above determination it is defined that investors require to focus on the
acquisition of an entity. It is because under this methodology valuation of an entity efficiency
seems good. With the help of price earnings ratio is not comparable but when investor will take
entity after that will not face any problems.

TASK 5
(a) Difference between systematic and unsystematic risk and factors to monitor sensitivity of
market
The capital assets pricing model was introduced by the financial economist William
Sharpe in the year of 1970 book portfolio theory and capital markets. In this model identified
two types of risk such as:
 Systematic risk: In this type of risk consider market risk that is general perils of investing
that cannot be expanded manner. For example, interest rates, recessions as well as wars.
 Unsystematic risk: It is known as specific risk which is related to particular stocks. As per
the technical terms it presents main elements of a stock return which is not connected
with common market moves.
Basis Systematic risk Unsystematic risk
Meaning These types of risks are
uncontrollable in nature that occur in
the business by external elements
such as socio logical, economical and
many others.
It is controllable risk in nature and
occur in entity when inner aspects
impact on business in negative way.
Nature As per the nature these risks are non-
diversified and cannot be minimised,
controlled by administration of an
entity.
It is totally controllable in nature and
such kinds of risks are diversifiable
in nature. Along with it can be
minimised, controlled as well as
removed.
Factors responsible These risks arise when external
aspects impact on business in direct
manner.
It arises in the entity when internal
factors affect business operations.
Impacts It can impact on the sector, market
and overall economy too
This risk impact on particular entity
and a sector
“Beta” is a statistical measure of instability of stock versus the entire market and it is
mainly utilised both a measure of systematic risk as well as performance measurement. The
market is defined as having a beta 1 and for stock how much stock prices moves as compared to
the market. When a stock has a beta above 1 so it become more volatile in whole market. Such

as, when an asset has a beta of 1.3 so it is theoretically 30% more volatile than the market.
Stocks mainly have a positive beta since it was correlated to the market. It is utilised in the
capital asset pricing model that presents relationship between systematic risk as well as expected
return for assets.
This factor used in broad manner for pricing risky securities as well as creating assessed
of the expected returns of assets in which focus on both the risk of those assets as well as cost of
capital.
(b) Difference between capital and money market, interest bearing instruments and document
instrument?
Difference between capital and money market
Basis of difference Capital Market Money Market
Liquidity In this market all the securities are
liquid in nature as they are tradable
on stock exchanges but lower liquid
in compare of money market
securities.
These are traded in highly liquid
manner. There are considering DFHI
discounts money market securities
present a ready market for them.
Instruments In the capital market mostly
instruments traded are equity
shares, bonds, preference shares as
well as lengthy term securities.
There are mainly instrument traded
are commercial bills, treasury bills,
deposits and short term securities.
Risk In this market face greater risk in
regard of repayments of the
principal amount.
Such securities are less risky because
of short time period and sound
financial position of the issuers.
Time span of securities In this market mainly deals with
trading of medium as well as
lengthy term securities in which
maturity period is more than 1 year.
There are dealing with securities in
short term manner where in the
maturity period can vary from one
day to maximum of one year.
Examples of securities Stocks
Bonds
Real estate investment trusts
Commercial paper
Certificate of deposit
Treasury bills
Differences between interest bearing instrument and discount instruments

Basis Interest Bearing instruments Discount Instruments
Meaning Securities that pay interest at
particular rate either at periodic
intervals and at maturity.
These instruments are securities
that issued and traded at a discount
to their face value. It is based on
the market their prices may be
quoted conservatively in the market
either on a discount basis or on a
yield basis.
Instrument Instruments are issued in interest
bearing form or as discount
instruments consist of Sterling
commercial paper.
Discount instrument cited on
discount basis in which consist of
bills of exchange and US domestic
commercial paper
Issued It may be issued either in interest
bearing form that consist of
certificates of deposits.
This instrument cited on yield basis
in which includes sterling
commercial paper when issued on
discount.
(c) Difference between risk and uncertainty
Risk defines as decision making condition in which under all potential results and their
likelihood of occurrences are known as decision makers. On the other side uncertainty is a
situation in which results and their probabilities are unknown for the decision makers.
Basis Risk Uncertainty
Meaning It is a probability of wining as
well as losing something well-
intentioned is known as risk.
It implies a condition in which
potential events are not known.
Outcomes Possibilities of outcomes are
known
There are possibilities of results
are unknown.
Control It is predicting by the entity in
planning so control according to
situation.
It is not predicting easily so
cannot able to control all the
situation easily.

As per the above chart it is analyzed that differences between risk and uncertainty present
possibilities of failure and success. It best imprisonments the relationship between risk and
uncertainty such as, if the probability of occurrence of an event is certain so the possibility of
failure is low and managerial control is very high. If event is uncertain so, chances increase of
failure while the managerial control over the event is low.
(d) Explain with reasons whether a bank overdraft is suitable to finance the purchase of this
property
The overdraft facility can be availed by any savings as well as current accounts. The
eligibility of overdraft limit is based on the bank on client repayment history. This overdraft
facility provided by different bank as well as financial institutions in order to utilized to deduct
the amount of EMI on loans. To use overdraft facility, borrowers can facilitate surplus funds in
their saving as well as current account of the loan taken. On the basis of these surplus amount
EMI deposited into that account and outstanding amount of loan deduct and interest will be
computed on a lower amount so deducting the interest outgo of the loan as well. As a result,
surplus amount will be added in the overdraft account can be withdrawn at any time and the
outstanding amount will be rebalanced accordingly.
CONCLUSION
At the end of the report, financial reporting is necessary for companies to make use of capital.
The article covers a two year set in ratios of British American Tobacco plc. Based on the
analyses carried out, the system productivity can be inferred. It is because, in some situations, the
gross profit ratio is high over the years and the performance ratios are even higher. Although its
efficiency is lower in certain respects, such as its liquidity.

REFERENCES
AREAS, B., 2018. Financial analysis. growth, 30, p.10.
Grennan, J. and Michaely, R., 2019. Fintechs and the market for financial analysis. Journal of
Financial and Quantitative Analysis, pp.1-31.
Yüksel, S., Dinçer, H. and Meral, Y., 2019. Financial analysis of international energy trade: a
strategic outlook for EU-15. Energies, 12(3), p.431.
Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2019. Financial accounting theory and
analysis: text and cases. John Wiley & Sons.