ASSIGNMENT ON WHAT IS FINANCIAL MANAGEMENT.

Running Head: FINANCIAL MANAGEMENT
FINANCIAL MANAGEMENT
Name of the Student
Name of the University
Author Note

1FINANCIAL MANAGEMENT
Table of Contents
Introduction................................................................................................................................2
Profile of Imperial Brands Plc and British American Tobacco Plc...........................................2
Ratio Analysis............................................................................................................................3
Operating Profit Margin Ratio...................................................................................................3
Return on Capital Employed......................................................................................................4
Earnings per Share.....................................................................................................................5
Conclusion..................................................................................................................................6
Reference....................................................................................................................................7

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Introduction
Financial analysis is the aspect of finance function of business, which is consists of
examining the historical data in order to gain information about the future as well as current
financial health of the organization. The financial analysis can be applied in extensive set of
the circumstances for giving managers of business the information, which they require for
making critical decisions (Minnis and Sutherland 2017). Hence, this assignment aims to
critically analyze profitability of Imperial Brands Plc and comparison will be done with Peer
Company that is British American Tobacco Plc. Further, for analyzing profitability three
ratios will be calculated for 2017-2018.
Profile of Imperial Brands Plc and British American Tobacco Plc
Profile of IB
IB is largest international tobacco company and prominent tobacco manufacturer
products such as Player, snuff, Embassy cigarettes, different cigars brands, tubes and rolling
papers. It is London based company that was founded in 1901. It produces and distributes
number of the other products such as beer and prepared foods. The net revenue of company is
£7.7 bn and has operating margin of 46%. The employees of company are around 36,000 and
its product is in more than 160 countries (Imperialbrandsplc.com. 2019).
Profile of BAT
BAT is the British multinational tobacco and cigarette manufacturing organization of
America that is headquartered in London. It is world’s second-largest biggest marker of
cigarette. It has the market leading position in around 50 countries and its operations is in
around 180 countries. It operates in Tobacco industry and is traded in New York Stock
Exchange (Bat.com. 2019).

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Ratio Analysis
Ratio analysis is the method of financial analysis that helps in providing meaningful
relationship between financial statements components. It is often proportionately expressed
for showing relationship between the figures of financial statements. It provides most
meaningful information when it is used in comparison. The analysis through ratio is
quantitative method foe gaining insights into liquidity, efficiency and profitability with the
help of comparing information contained in financial statements. The analysis of ratio helps
to make decisions from information provided in financial statements. The proper uses of
ratios assist the management for communicating the information that is purposeful and
pertinent for the decision makers in order to ensure management effectiveness in enterprises
(Kraft 2014).
Operating Profit Margin Ratio
Operating profit margin ratio is the performance or the profitability ratio that is used
to calculate total percentage of the earning, which firm produces from its business operations.
It helps in demonstrating total revenue left over after paying all operating costs. This ratio is
expressed as sales percentage for showing company’s efficiency, controlling costs as well as
expenses that are associated with the operations of business (Muritala 2018).
As shown in graph, operating profit margin ratio of Imperial brands from 2017-2018
is consistent that is 8%. However, the operating profit margin ratio of its competitor- British
American Tobacco Plc for same accounting period has increased. It is because of delivering
of strong financial results for Group by Reynolds American Inc. The annualized savings of
costs that results from acquisitions are running at more than $300million and the company are
on track for delivering $400 m per year in synergies of cost by 2020 end. This indicates the
efficiency of the BAT in controlling its costs is more and is more than industry average in
comparison to Imperial Brands (Robinson et al. 2015)

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2018 2017 2018 2017
Imperial Brands Plc British American Tobacco Plc
0%
5%
10%
15%
20%
25%
30%
35%
40%
Operating Profit Margin
Graph 1: Operating Profit Margin of IB and BAT for 2017-2018
Return on Capital Employed
Return on capital employed is the profitability ratio, which calculates the efficiency of
company for generating income from the capital employed by company with the help of
comparing operating profit to the capital employed. This ratio helps in measuring the
efficiency with which investment made by creditors and shareholders is used in business. The
managers use this particular ratio for making various financial decisions.
The graph shows that ability of Imperial Brands in generating income from its capital
employed from 2017-2018 is consistent that is 9%. It is because of the continued focus of
company towards capital discipline. However, the ability of its competitor- British American
Tobacco in generating profit from its capital employed has decreased from 24% to 6%.
Hence, this indicates that income generation ability of Imperial Brands is more and consistent
in comparison to its competitor. In case of IM, the company looks at opportunity for realizing
value via further selling of Logista holding and proceeds that have been used for repurchasing
shares and reducing debt by redeploying capital in the efficient manner (Williams and
Dobelman 2017).

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2018 2017 2018 2017
Imperial Brands Plc British American Tobacco Plc
0%
5%
10%
15%
20%
25%
30%
Return on Capital Employed
Graph 2: Return on Capital Employed of IB and BAT for 2017-2018
Earnings per Share
EPS ratio is financial ratio that measures the net income against the total outstanding
shares over fixed time-period. It is important financial measures that helps in indicating the
company’s profitability. The EPS of Imperial Brands between 2017-2018 has been decreased
from 147.2-143.2 and EPS of its competitor British American Tobacco has also decreased
from 1833.9 to 264. This indicates that rate of decrease in net income against the total
outstanding shares from the year 2017-2018 is more of BAT compared to Imperial brands. In
case of IM, the weakening of sterling in comparison to US dollar and euro has impacted
positively in adjusted and reported measures. The constant basis of currency and adjusted
EPS has been reduced by 2.2%. In case of BAT, there was effect of the foreign exchange on
result of Group, adjusted diluted EPS at the constant rate has increased by 11.8%. The total
tobacco as well as nicotine market is comprised of growing pool of users of over billion adult
consumers. However, there is expectation of continued decline in the combustible
consumption of cigarette (Yu et al. 2014).

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2018 2017 2018 2017
Imperial Brands Plc British American Tobacco Plc
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Earning Per Share
Graph 3: Earning Per Share of IB and BAT for 2017-2018
Conclusion
Therefore, this report concludes that ability of IB in controlling its costs is less in
comparison to its competitor. Hence, it should try to reduce its costs in order to generate
profit from operations. Further, the ROCE of Imperial brands is consistent but ROCE of BAT
has fall down majorly, which requires BAT to decrease its long-term liabilities. Lastly, EPS
of both companies has reduced but the rate of fall of EPS of BAT is high. Hence, BAT is
required to increase revenue and decrease its costs associated with business operations.

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Reference
Bat.com. 2019. [online] Available at: https://www.bat.com/ar/2018/assets/pdf/BAT-full-
annual-report-and-Form-20-F-2018.pdf [Accessed 13 Dec. 2019].
Imperialbrandsplc.com. 2019. [online] Available at:
https://www.imperialbrandsplc.com/content/dam/imperial-brands/corporate/investors/annual-
report-and-accounts/2018/annual-report-and-accounts-2018.pdf [Accessed 13 Dec. 2019].
Kraft, P., 2014. Rating agency adjustments to GAAP financial statements and their effect on
ratings and credit spreads. The Accounting Review, 90(2), pp.641-674.
Minnis, M. and Sutherland, A., 2017. Financial statements as monitoring mechanisms:
Evidence from small commercial loans. Journal of Accounting Research, 55(1), pp.197-233.
Muritala, T.A., 2018. An empirical analysis of capital structure on firms’ performance in
Nigeria. IJAME Muritala, T.A., 2018.
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial
statement analysis. John Wiley & Sons.
Williams, E.E. and Dobelman, J.A., 2017. Financial statement analysis. World Scientific
Book Chapters, pp.109-169.
Yu, Q., Miche, Y., Séverin, E. and Lendasse, A., 2014. Bankruptcy prediction using extreme
learning machine and financial expertise. Neurocomputing, 128, pp.296-302.