Financial Analysis and Management of British American Tobacco Report

This report provides a comprehensive financial analysis of British American Tobacco (BAT). It begins with an overview of the company, its vision, and mission. The analysis focuses on the critical evaluation of BAT's financial statements, including profitability, efficiency, and gearing ratios. The report calculates and interprets various financial ratios such as gross profit margin, operating profit margin, net profit margin, return on assets (ROA), return on equity (ROE), return on capital employed (ROCE), and working capital ratios. It also examines the company's financial position, including its assets, liabilities, and equity. The report concludes with recommendations based on the financial analysis, addressing the challenges faced by BAT and suggesting areas for improvement. The financial statements are prepared in accordance with global financial reporting standards, providing a detailed assessment of BAT's financial performance and stability. The report is a valuable resource for understanding BAT's financial health and making informed decisions.

Financial Analysis and
Management

Table of Contents
INTRODUCTION...........................................................................................................................1
Overview of the company:.....................................................................................................1
1. Critical evaluation of financial statements.........................................................................2
2: Challenges faced by the BAT company.............................................................................8
3. Recommendation:.............................................................................................................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Finance is a crucial field that is connected with management and allocation of various assets
and debt obligations that are over a space and time. It has been analysing that without having
sufficient amount of capital a company cannot be able to perform their task in reliable manner.
Basically, it happens to be the management of capital aspects that are commonly affect the
internal as well as external department at the same point of time. This project is generally aims to
analyse the financial statements of “BAT (British American Tobacco)”.
It is considering as one of the top five industries listed on LSX as per the market
capitalisation. It used to discuss various research information literature reviews about sources of
finance. Apart from this, various challenges and innovation needed in the areas of analysis are
done with proper utilisation of resources (Aebi, Sabato and Schmid, 2012). By the help of
appropriate methodologies collected data is being analysed effectively under this report. All the
essential rationalise aspects related with the financial performance of the company are taken into
consideration under this project module.
Overview of the company:
BAT is one of the international tobacco and coming generation products company which is
having sufficient amount of brands and sold them in almost 200 markets. They are operating
with the total of 50,000 people at global level. They are related with cigarette that is being
selected by top eight of worlds 1 billion adult’s smokers and having effective portfolios of
innovation in tobacco and nicotine related products that are offering consumers potentially
minimum risky. British American Tobacco is being established in 1902 and was firstly listed in
1912. Traditional tobacco products are varying from cigarettes, fine cut and Swedish style snus.
They are always making valuable modification in terms of high quality products and leading
innovations into their brands (Almazari, 2012).
Our products are mainly all available all around the world and have essential to
continuing success that are employ a diverse range of people and nature. The method of
sustainability is embodied in sustainability matter which is all about creating specific share
valued for both their shareholder and other stakeholder in large society. They are working for the
satisfying consumers, providing shareholder wealth and building valued employment for coming
period of time. Likewise, it has been entering into the most dynamic period for alter over the
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encountered. It is mainly attaining is most effectively with tobacco that is caused inhaling the
smoke produced through combustion of tobacco. The development and sale range of potentially
eliminate risky products that are delivered the enjoyment of smoking for young people. The
group’s overall cigarette market shares in their key market regulate to increase positive base in
the market. This was powered by another reliable performance which has been growing with 110
bps and in current time there are more than 50% of group are sold and revenue is being collected
from outside market.
Vision: The primary vision of the company is to satisfying various demand of consumer
related aspects in certain areas of tobacco and other aspects.
Mission: Making delivering of various commitments made to the society, while
commitments to society that products are provided as per the demand or choice of them.
1. Critical evaluation of financial statements
On the basis of financial reports that are made by the finance department. It has been seen
that the group internal audit functions used to provide appropriate advice and guidance to the
owner on best practice in risk management and other control system. The group has in right
place of a series of policies, practices and control in accordance with the financial reporting and
consolidation process. Annual report in respect with regulatory requirements can be done to
determine present position of the company (Campello and et. al., 2011). As per the financial
statements prepared in respect with the applicable set of accounting standards that are providing
true and real aspects of all the assets and debts obligation, financial position as well as incomes
statement of BAT company. A strategic reports conclude fair analysis of development and
performance of various business and other position of the company and better understanding of
consolidation taken into consideration as a whole.
As per the annual report and accounts that are taken as entire, a fair, balance and
understandable information that are available for the assessment of companies overall financial
position. In order to make proper analysis of financial statements of BAT company, it is
necessary to analyse various financial ratios that are consider as for financial analysis of various
statements. Some of them are mentioned underneath:
Profitability and efficiency: It is known as appropriate class of financial metrics those
are used to make assessment of BAT ability to incurred earning as compare to total expenses and
other related costs that are arises during an accounting period of time. It has been used by
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analysts and investors to measures as well as evaluate the capability of BAT to generate relative
earning, balance sheet assets and operating cost of the company. There are various types of ratios
which are needed to be taken into consideration such as:
 Profit margin ratio: It is further categories into three parts such as gross profit margin,
operating profit and net profit margin.
Gross profit margin: Such kind of ratios are said to be crucial indicators of degree to which
selling cost of product per units can be reduced without resulting any kind of losses during the
time. A low ratios indicate unfavourable buying, as the instability of management need to
develop overall sale volume and making impossible to purchase products in wide scale. Higher
will be consider better for the company (Chandra, 2011).
Operating profit margin: It is kind of ratios that is used to analyse total earning of a
business incurred within an accounting period of time. This seems to determine operating cost of
production as a total percentage of earning.
Net profit ratio: It has been analysing that in case of simple profitability ratios, it has been
analyse that net profit and loss is utmost important aspect for performance analysis. The net
profit margin indicates about total sales made in dollars indicated up as net incomes after all
expense are made.
Profitability ratios Formulas 2016 2015
Gross profit margin Gross profit /total sales *100 317.856 312.882
Operating profit margin Operating profit / net sales *100 31.5572 34.7756
Net profit margin Net profit/ Total sale *100 10.3206 11.0293
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From the above ratios calculation, it has been seen that there very tiny movement in the
profitability position of BAT company from the last year. As far as gross profit margin is
concern, they are providing only 5% of increment in overall earnings. While in case of operating
profit only 3% of growth has been observed. Apart from this, Net profit incurred during the
current year is 10 % which is below from last year with 11%.
 Rate of return ratios: These are also divided into three major categories such as Return
on Assets, return on Equity and return on capital employed.
ROA: It has been indicated that the ways BAT profitable a companies is relative to their total
assets. It is used to provide a crucial idea as to determine efficient management by using their
assets to incurred overall revenues for BAT company.
ROE: It has been seen that total amount of net income returned as overall percentage of
entire shareholder equity. It is used to consider that analyse total pounds of profit a company
used to incurred with each dollar of shareholder equity (Churet and Eccles, 2014).
ROCE: It is considering as one of the effective financial ratio that used to measure a
company’s overall profitability position in which total capital employed can be analyse by the
account manager.
Profitability ratios Formulas 2016 2015
Return on Assets Total income / Total Assets *100 12.1665 14.34872283
Return on equity Total income / Equity *100 57.566 89.86486486
ROCE
Operating profit / Total asset- Current
liabilities *100 16.6816 20.33408859
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According to the above calculation, it has been found that on the basis of total sales they
are getting minimum retun from the last year of total investments made by the investors in their
various projects.
Gearing investors: It is known as the level of BAT total debts to their equity amount,
mainly expressed in overall percentage form. It is most commonly describing as a financial
ration that is taken into consideration for making comparison among various forms of owners’
equity in order to borrowed funds (David, 2011). It is considering as common classification that
is taken for measuring the entity financial leverage that used to demonstrate the level at which a
firm’s events are capitalised through owner capital in accordance with the creditors funds.
Formula for calculating gearing ratio: Total liabilities / Total shareholders’ equity
2016: 11856/39773= 29.80%
2015: 9006/31515=28.57%
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From the above calculation, it has been found that BAT company is focused on long term
financial stability of business on the basis of their gearing ratios. Increasing gearing ratio from
more than 50%, it means that potential problems in financing overall capital and interest
repayment during the time.
Working capital: It is known as one of the crucial funds that is being used for every day
production of businesses. That would be act as important aspects in order to determine the
overall financial position of the company. It is used to represents vital funds present with the
company for everyday transactions that are made within an accounting period of time. Working
capital ratios used to indicate total number of time a unit gets involves in producing overall sales
of products for the company. In other words, the ratios that would indicate efficient use of short
term capital for attaining sales for the BAT company (Dzhandzhugazova and et. al., 2015).
Calculation:
Working capital ratio: Net sales / Working capital
Formula 2016 2015
Working capital
ratios
Net sales/ Working
capital 93.2147117 50.74257
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From the above charts that is indicating total net current asset and debts of the BAT
company. From this it has been found that as comparison to last year the company is collected
wide number of current assets in accordance with the debts. This means that the position of
company must stronger as compare to short term capital planning. This seems to indicate that
total number of time the working capital is rotating over a period of time. It is mainly used to
analyse the efficiency of the working capital usage.
Overall analysis:
The group overall financial statement has been formulating in preparation in accordance
with global internal financial reporting standards that are adopted through EU. The Group
financial statements used to formulate statements which have been prepared under the historical
cost of conventions as per the description of accounting policies. The review of BAT company
assets evaluation of asset value, basically related with the goodwill and impartment analysis of
the outcomes. There are certain key aspects those are needed to be taken into consideration. Such
as cash generating units, the budgeted cash flow statements and long term growth rate (Gonzalez
and et. al., 2011). The consolidation of financial statements consists of vital information about
British American Tobacco that can be related with resulting share of outcomes of their related
associates and joint arrangements. The subsidiary company of BAT to analyse the ability of
paying future debts obligations those are affecting the profitability position of the company.
Financial instruments are related with the assets and liabilities those are recognised during the
group which become a party to contractual provision of relevant facts. At the time of preparing
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financial report for the company all the measurement related aspects are taken into account
which will be easy to get better outcomes in coming period of time. The finance department are
held responsible for keeping all the adequate data of accounting records that are sufficiently
indicate that position of company is much more effective as compare to other one. The financial
account used to prepare in accordance with the applicable set of standards that used to give a true
and fair of assets, debts and other financial position and income statement of BAT company.
2: Challenges faced by the BAT company
There are lots of challenges and problems faced by BAT which may affects their
financial position in market due to which it becomes difficult for them to sustain in competitive
market for longer period of time. Such challenges are briefly described as below:
Illicit trade:
BAT assumes that the total volume of illicit trade is around 12% of consumptions on
which high rates of taxes are imposed on cigarettes products. This will encourage tobacco
companies to produce to do illegal productions and selling to different regimes in order to avoid
taxation. As limited production of cigarettes reduces their profitability due to which it becomes
difficult for them to survive their products in market. BAT fears that decreases in economy will
bring more threat to company due to having low disposable income which will forces
government to imposed burden on legitimate manufacturers through increasing regulatory and
legal laws (Higgins, 2012).
Health based regulation:
The government enforces the tobacco companies to print message on their packets so as
to aware people about the harmful causes by consuming cigarettes. As in some countries,
cigarettes are banned which makes negative impact on the revenue of BAT. Framework
convention on Tobacco Control (FCTC) protocol imposed strict regulations
which brings competitive advantages to company due to which their growth will also increasing
in decreasing rate.
Excise and tax:
The excise and sales tax are imposed on cigarettes in many countries which increases
their prices due to which it has been negatively affected the revenue of BAT. The rates of taxes
vary between different countries on the basis of their import and consumption thus it becomes
more difficult for BAT to increase sales of their products in different countries (Scarborough,
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2016). The government actively engaged in the selling and distribution of tobacco due to causing
bad effects on the health of local people. Due to this, it becomes too difficult for tobacco
companies such as BAT to raise their revenues.
There are various ways through all the financial related issues can be managed by the
company. Key performance indicators are considering as one of the effective financial tools that
can assist the company resolve various issues that are related with the company. It consists of
various aspects such as:
 Employee retention: It has been seen that in 2017, the total number of management
grades employees was consider with 1610 that used to represent 14% of the total
population during the period of time.
 Staff engagement: In the same year, it has been analysing that there was a research
conduct by the company with the name called as “Your Voice” to know the reaction of
people towards use of tobacco. The 83% of the people are satisfy with the FMCG
comparator regulation of 71%.
BAT major approaches are considering for reducing the environmental influence of
companies internal reporting systems. The key areas used to target on various number and
outcomes that are determine by the auditor which used to conduct as important part of due
diligence procedure for their suppliers and other reliable business operations. The group policies
used to indicate proper observing of credit ratings, interest covers, soundness and liquidity with
continuous reporting done by the board members. It has been found that the incentive
arrangement is nearly related with the company’s overall strategies and performance metrics
those are align with the financial reports of an organisation (Vogel, 2014). The Group has been
delivered a positive set of outcomes in 2017, building on long term growth across the market.
Such kind of results are reflecting strong or positive results in respective measure for various
department in order to get more reliable and positive outcomes in near future time.
The net debts and equity of BAT company are analysing by the finance department. The
only outside impacts on capital requirements for the cited parties with certain kind of interest that
used to describe interest risk underneath (Liquidity Ratio. 2018). The group assess their financial
capacity can be analysing by considering cash flow and interest coverage ratios of the company.
These will provide an appropriate framework within which group capital base in overall
management of various policies on dividends and share buyback are taken into account.
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Liquidity risk are taken into account for raising finance for the BAT group in managing cash
resources as well as financial risk that are related with underlying operations. As per the help of
global system and manners of working across the nations are assist them to deal with cost base
and increase expertise in an organisation. It is done through using back office events those are
carried most effectively in the internal department of the group. The target made by BAT
company on an average of centrally managed debts in an accounting period of time. The liquidity
pooling structure those are placed in order to ensure that there is maximum mobilisation of cash
liquidity with the position of cash kept by the company (Weng and Fujiwara, 2011).
3. Recommendation:
On the basis of financial statements, it has been suggested that company need to make
investment in the external production process. It will be more profitable for them in long period
of time. The profit and loss statement of the company is much more positive in terms of net
profit and efficiency. They need to make use of cash in reliable manner so that they can make
future investment and earn maximum revenue for the company.
CONCLUSION
From the above report, it has been concluded that finance is utmost crucial aspects for any
business organisation. It will assist them to attain better outcomes in near future time. For this
purpose, proper evaluation about financial performance of BAT company is being done by
calculating financial ratios. On the basis of various outcomes certain recommendation has made
to attain more reliable solution to their issues. These analyse is done to attain better growth and
sustainability in near future time.
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REFERENCES
Books and Journals:
Aebi, V., Sabato, G. and Schmid, M., 2012. Risk management, corporate governance, and bank
performance in the financial crisis. Journal of Banking & Finance. 36(12). pp.3213-3226.
Almazari, A. A., 2012. Financial performance analysis of the Jordanian Arab bank by using the
DuPont system of financial analysis. International Journal of Economics and Finance.
4(4). p.86.
Campello, M., and et. al., 2011. Liquidity management and corporate investment during a
financial crisis. The Review of Financial Studies. 24(6). pp.1944-1979.
Chandra, P., 2011. Financial management. Tata McGraw-Hill Education.
Churet, C. and Eccles, R.G., 2014. Integrated reporting, quality of management, and financial
performance. Journal of Applied Corporate Finance. 26(1). pp.56-64.
David, F. R., 2011. Strategic management: Concepts and cases. Peaeson/Prentice Hall.
Dzhandzhugazova, E.A., and et. al., 2015. Methodological aspects of strategic management of
financial risks during construction of hotel business objects. Asian Social Science. 11(20).
p.229.
Gonzalez, R., and et. al., 2011. Exploring the potential of Eucalyptus for energy production in
the Southern United States: Financial analysis of delivered biomass. Part I. Biomass and
Bioenergy. 35(2). pp.755-766.
Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Scarborough, N.M., 2016. Essentials of entrepreneurship and small business management.
Pearson.
Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge
University Press.
Weng, Y.C. and Fujiwara, T., 2011. Examining the effectiveness of municipal solid waste
management systems: an integrated cost–benefit analysis perspective with a financial cost
modeling in Taiwan. Waste management. 31(6). pp.1393-1406.
Online
Liquidity Ratio. 2018.[Online]. Available through: < https://cleartax.in/s/liquidity-ratio>.
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