BMG704 - Ulster University: British American Tobacco Finance

This report provides an analysis of British American Tobacco's international financial environment, focusing on recent developments impacting the organization's performance. It examines the influence of recessionary conditions and money market fluctuations, along with the banking sector's challenges. The report highlights key elements of the company's financial and risk management strategies, specifically focusing on sources of funds and dividend policy. A comparative financial performance analysis is conducted for the years 2019 and 2020, utilizing accounting ratios such as profitability, liquidity, efficiency, and investment ratios to assess the company's operational efficiency and financial health. The analysis interprets trends in operating profit, net profit, current ratio, quick ratio, inventory turnover, accounts receivable, earnings per share, and debt-equity ratio to provide a comprehensive overview of British American Tobacco's financial standing.

INTERNATIONAL FINANCE

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
British American Tobacco...........................................................................................................1
a) Two recent developments in the International Financial Environment impacting the
organization's performance..........................................................................................................1
b) Two key elements and the international financial and the risk management strategy of the
organization in its respect............................................................................................................3
c) Analysing the financial performance of the two consecutive financial periods using the
accounting ratios for the organization.........................................................................................4
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................9
APPENDIX....................................................................................................................................10

INTRODUCTION
International finance is one of the significant functions for all the multinational
enterprises in the business considering all the monetary transactions that take place across
borders. It counts for foreign direct investment, imports and exports and the currency exchange
rates that are taking place between two or more countries. The current project shall be discussing
over the two recent developments that have been undertaken in the International Financial
Environment impacting the performance of British American Tobacco. Apart from that it shall
be highlighting over the sources of fund and the dividend as the major elements in respect of
which the international financial and the risk management strategy have been formulated. Lastly
the financial performance of the British American Tobacco shall be compared over the two
recent consecutive periods by the technique of ratio analysis of the annual reports as published
by the company.
MAIN BODY
British American Tobacco
British American Tobacco is the multinational company that has been registered on the
recognized London Stock Exchange. It is the international tobacco group that manufactures and
sells the cigarettes, tobacco and the nicotine products across many countries in the world. It was
established in 1902 and is headquartered in London being one of the largest company in the
tobacco industry of the world. It can evidently be observed that the success that is capitalized by
the company over the period is with the help of customer centric approach and the multi-
category consumer goods that the company offers to meet the expectations of the customers.
a) Two recent developments in the International Financial Environment impacting the
organization's performance
There are various developments that have taken place over the time for the business who
are internationally operating and conducting their operations (Aziz and et.al., 2021). These
businesses are highly impacted by the developments and the newer policies that take place in the
international financial markets of the company. Similarly, there are recent developments that
have impacted the business of British American Tobacco in terms of its business performance
and the operational efficiency. These major developments are:-
 Due to the high level of recessionary conditions the money market fluctuations have been
initiated by the central banks as well as the government of the country. There were high
1

level of the funding pressures in the company and on the international markets as well,
which lead to the narrowing down of the spreads between the LIBOR and the overnight
index swaps (What are the recent developments in global financial markets? 2021). The
banking industry pressure also increased due to the high level of the lending but in turn
no security for the repayment, this gave rise to the government guarantees over the loans
that are provided by such companies.
 The banking sector had problems internationally depicting that the recessionary
conditions shall be leading to the increased rates of the defaults pertaining to the
business. Since the risk tolerance capacity of the market is low and it can lead to the
volatility of the market. Then to improve the situation the Federal Reserve approved the
application of the ICE Trust. Post becoming the member of such trust the central
counterparty services shall be provided for the CDS contracts that are inducted by the
businesses (Hellmanzik and Schmitz, 2017). The credit risk associated with the CDS
transactions are being assumed by these trusts that are being formed.
 The easing of the short term interest rates led to the significant cut in the policy rates and
the inflation is disappearing and the recession is further deepening for the companies.
This was to make the financing of company operations easy.
It can be assessed that the British American Tobacco shall be highly affected by the various
international policies and the developments that are taking place in the global markets. This is
because there are huge networks of the company that are globally built. Now since the BAT is
operating internationally it requires huge funds for financing the operations. In this case the
recession is highly affecting the liquidity of the company and this increases the risk of default on
the existing loans. Apart from that the poor credibility shall be leading to low accessibility to the
loans for the company. In this case if the Central banks, Federal Reserve and the Government of
the country take the effective measures and initiatives for solving the problem, then that shall be
positively impacting the productivity at the company. If the interest rates are lowered,
government guarantees are provided or the trust to support the counterparty transactions are
established then that shall ease the problems and smoothen the business functions.
2

b) Two key elements and the international financial and the risk management strategy of the
organization in its respect
The two key elements of the British American Tobacco company are the sources of funds
it uses to manage the finances for the operations in the company and the other is the dividend
policy that is applied by the company. In respect of these key elements the company then
formulates the financial and the risk management strategies to conduct the smooth business
internationally by the business. The two fundamental elements and their analysis in respect of
British American Tobacco are:- Sources of funds- In terms of sources of funds the British American Tobacco uses both
the owned and the borrowed sources of funds in the company in order to acquire the
funds for the financing of the various daily routine and the capital expenses of the
company. But it can be ascertained that the company relies more on the equity sources of
funds due to the poor liquidity position and lack of the excess profitability to meet the
financial obligations (García‐Sánchez and et.al., 2019). Till the last year the capital
structure was 2:1 which means the equity was twice the debt. The debt component was to
balance the risks of uncertainty that is pertaining to the capital markets. But in the current
as it can be evidently seen in the annual reports the company increasing the debt
component to certain extent with the rising profitability and the betterment of the
liquidity position. Since the proportion of the debt is increasing it shall be providing the
benefit of leverage as the interest is the tax-deductible expense in the company. The
various sources of funds that are to be used needs to be strategically identified from the
diverse options that are available with the company so that the risks and the returns of the
business can be balanced.
 Dividend policy- The dividend policy of the company British American Tobacco is that it
shall be paying 4 dividends per year maintaining the dividend cover of 1.5. This shall be
boosting the satisfaction level of the shareholders and shall rise the market price of the
shares on the recognized stock exchange. Recently on 17th February 2021 the interim
dividend of 215.6p is declared for the year ended 31st December 2020. Now such
dividend is to be paid in the four instalments in the year (Khattak, 2020). This discloses
the international financial strategy of the company whereby through extending the
dividends the company is trying to boost the satisfaction of the shareholders and through
3

paying it in four instalments the risk is being managed by the company of the liquidity
crisis.
The shareholder who are eligible to receive the dividends in the company are ones who are either
registered in the UK register, the ones in South Africa register and the holders of the American
depositary shares. The other major policy is that the direct cash are being paid in the nominated
bank account by the shareholders of the company (BAT sticks to dividend policy and earnings
target. 2021). Within the system of the dividend policy the company shall be managing with the
effective international finances and also the risk management concerns in terms of the liquidity
crisis.
c) Analysing the financial performance of the two consecutive financial periods using the
accounting ratios for the organization
Ratio analysis of the two consecutive years 2019 and 2020
I) Profitability ratios
1) Operating profit ratio
2020: 38.65%
2019: 34.84%
2) Net profit ratio
2020: 25.47%
2019: 22.60%
II) Liquidity ratios
3) Current ratio
2020: 0.879
2019: 0.705
4) Quick ratio
2020: 0.492
2019: 0.381
III) Efficiency ratios
5) Inventory turnover ratio
2020: 0.764
2019: 0.755
4

6) Accounts receivable ratio
2020: 6.927
2019: 6.322
IV) Investment ratio
7) Earnings per share
2020: 2.8
2019: 2.497
8) Debt-equity ratio
2020: 0.634
2019: 0.589
Interpretation of the ratios and analysation of the financial performance of the company
 Operating profit ratio- The operating profit ratio in the essential profitability ratio which
shall be measuring the efficiency with which the operations of the business are
performed. It shall be depicting the margin that is available in the revenues post the
deduction of the operational costs of the business. The higher such ratio is the better is
the chance of the profitability for the company and the achievement of the organizational
objectives. So the management of the company efficiently makes the decision in respect
of this so that the operating profit of the company can be boosted by the lower amount of
such costs and expenses of the business.
The operating profit margin of the enterprise has increased significantly as compared to the
previous year which is in 2019 it was 34.84% and in the year 2020 it changed to 38.65%. This
proves that the operational efficiency has increased resulting in the higher profitability of the
business.
 Net profit ratio- The net profit of the company is calculated after adjusting all the
incomes and expenses of the company from the revenues that are generated from the
sales of then company. The company must always try to boost the net profits through the
optimizing on the cost and expenses of the business (Dreher, Lang and Richert, 2019).
This is the measure of performance for the business and accordingly the efficiency shall
be defined.
5

The above table of ratio analysis in the company shows that the net profits of the company has
also increased with time that is in the year 2019 it was 22.60% and in the year 2020 it rises to
25.47% which again proves the efficiency with which the company operates in the business.
 Current ratio- The current ratio depicts the availability of the current assets with the
company to meet the short term liabilities and obligations of the business and this shall
also be depicting the liquidity position of the company. It is very important for the
business to maintain the current ratio in the company as this shall be maintaining the
solvency and credibility of the business.
The current ratio of the British American Tobacco has rose from 0.705 in 2019 to 0.879 in 2020
but this rise makes no sense as yet it is not sufficient to manage current liabilities of the business.
The ratio below one states that there is lack of sufficient liquidity in then business so that the
short term commitments can be met out of them.
 Quick ratio- The quick ratio of the business depicts the highly liquid assets in the
company can be either cash or cash equivalents that are available for meeting of the short
term liabilities and obligations pertaining to the company. It can be assessed that these
are also necessary for the business so that without much of the lagging time the
commitments are being fulfilled (Müllner, 2017).
The statistics or the financial information shows that the quick ratio for the company has also
risen as compared to the previous year in 2019 it was 0.381 to 0.492 in 2020. This shows the
betterment in the liquidity position but still long way to the improvised situation.
 Inventory turnover ratio- The inventory turnover ratio of the company shall be depicting
the number of times the inventory is being used in the company or sold by the business in
the particular financial year. This needs to be managed as per the use of the company and
the business must ensure that the idle inventory is not being managed by the company.
The inventory turnover ratio of the British American Tobacco is increasing with a very low
margin but is representing the pace of the operations has risen to some extent. In the year 2019
such ratio was 0.755 and now it has been increased to 0.764 in the year 2020.
 Accounts receivable ratio- This ratio of the company shall be the measurement of the
efficiency with which the company has the policy to extend the credit and also receive
back the amount by the timely collections. It can be assessed that this ratio must be in
6

sync with the payable's ratio so that the smooth working capital cycle can be ensured by
the company.
The above table shows that the accounts receivable ratio of BAT is also on the stage of
improvisation that is from 6.3 in 2019 to 6.9 in 2020. This also depicts the efficiency with which
the credit policy is being framed and the debtors are being convinced regarding the same and
also the effectiveness in the operations of the recovery agents.
 Earnings per share- It is the earnings that are available for the shareholders of the
company after deducting all the costs and expenses of the company. This refers to the
amount that is eligible for the company to extend the dividends in the form of benefits of
the earnings in the company (Queralt, 2019). The higher is such ratio the greater are the
chances of high dividends and the more is the level of customer satisfaction in the
business.
It can be observed that the earnings per share of the company are also increasing with the rise in
the profitability that is retained by the business. Since in the last year the company has 2.8 per
share earnings but now this has rose to 2.8 per share in the company. This significantly is a sign
of the strong and healthy financial position.
 Debt-equity ratio- This ratio shall be demonstrating the capital structure of the company
evidencing upon the sources of finance that are used by the company to acquire the funds.
Apart from that it shall be showing the debt and the equity proportion of the capital that
has been gathered by the company. And accordingly are the risk management policies
that are defined for the company.
The debt-equity ratio of British American Tobacco is representing that the company earlier in the
previous year has half the amount acquired through debt as compared to the equity. But now in
the current year this proportion has increased to 0.63 which means that the debt has been
increased in the business to take the benefit of financial leverage.
CONCLUSION
From the above project it can be conclusion that the companies that have the global
presence are highly affected by the changes and the developments that take place in the
international financial markets. Accordingly the business has to amend the policies and take the
various international financial decisions like the sources of funds that are to be used and the
dividend policy that is to be undertaken such that the risks and the returns both are being
7

managed in the company. The ratio analysis of the British American Tobacco shows that
certainly the financial position has been uplifted as all the profitability, liquidity, efficiency and
the investment position of the company has moved in the positive direction. This is boosting the
overall efficiency of performing the business.
8

REFERENCES
Books and Journals
Queralt, D., 2019. War, international finance, and fiscal capacity in the long run. International
Organization. 73(4). pp.713-753.
Müllner, J., 2017. International project finance: Review and implications for international
finance and international business. Management Review Quarterly. 67(2). pp.97-133.
Dreher, A., Lang, V. F. and Richert, K., 2019. The political economy of International Finance
Corporation lending. Journal of Development Economics. 140. pp.242-254.
Khattak, M. S., 2020. Does access to domestic finance and international finance contribute to
sustainable development goals? Implications for policymakers. Journal of Public Affairs. 20(2).
p.e2024.
García‐Sánchez, I. M. and et.al., 2019. Analyst coverage and forecast accuracy when CSR
reports improve stakeholder engagement: The Global Reporting Initiative‐International Finance
Corporation disclosure strategy. Corporate Social Responsibility and Environmental
Management. 26(6). pp.1392-1406.
Hellmanzik, C. and Schmitz, M., 2017. Taking gravity online: The role of virtual proximity in
international finance. Journal of International Money and Finance. 77. pp.164-179.
Aziz, H. M. and et.al., 2021. Factors affecting International Finance Corporation. Journal of
Humanities and Education Development (JHED). 3(3). pp.148-157.
Online
What are the recent developments in global financial markets? 2021. [Online] Available
through: < https://www.yourarticlelibrary.com/investment/what-are-the-recent-
developments-in-global-financial-markets/1800>
BAT sticks to dividend policy and earnings target. 2021. [Online] Available through:
<https://www.sharecast.com/news/news-and-announcements/bat-sticks-to-dividend-policy-
and-earnings-target--7455546.html>
9

APPENDIX
BRITISH AMERICAN TOBACCO
S.NO RATIOS FORMULA CALCULATION
2020 2019
PROFITABILITY
RATIOS
1
Operating Profit
Ratio
Operating Profit / Revenue from
Operations*100 38.65% 34.84%
Operating Profit 9962 9016
Revenue from
operations 25776 25877
2 Net Profit Ratio
Net Profit / Revenue from
Operations*100 25.47% 22.60%
Net Profit 6564 5849
Revenue from
operations 25776 25877
LIQUIDITY
RATIOS
3 Current Ratio Current Assets/ Current Liabilities 0.879 0.705
Current Assets 13612 13274
Current Liabilities 15478 18823
4 Quick Ratio
(Current Assets- Inventory) / Current
Liabilities 0.492 0.381
Current Assets 13612 13274
Inventory 5998 6094
Current Liabilities 15478 18823
EFFICIENCY
RATIOS
5
Inventory Turnover
Ratio Cost of goods sold / Average Inventory 0.764 0.755
Cost of goods sold 4583 4599
Average Inventory 5998 6094
6
Accounts Receivable
Ratio
Net credit sales / Average Accounts
Receivable 6.927 6.322
Net credit sales 25776 25877
Average accounts
receivable 3721 4093
INVESTMENT
10