Analysis of Financial Statements

Analysis of Financial StatementsBritish American Tobacco Bangladesh Company Limited 2014Date of Submission: 2nd December 20141/1/2014

IntroductionBritish American Tobacco Bangladesh Company Limitedis one of the largest multinational corporations, operated byBritish American TobaccoinBangladesh. They are listed on thestock indexof theDhaka Stock ExchangeandChittagong Stock Exchange. It is doing its business over 100 years in this region. It was founded in Bangladesh on 1910. It had established its first depot at Armanitola in Dhaka. After partition in 1947, it was established in 1949. After the independence of Bangladesh fromPakistan, it was renamed as Bangladesh Tobacco Company (BTC) in 1972. But in 1998, it is again renamed as British American Tobacco Bangladesh (BATB). In Bangladesh, British American Tobacco Bangladesh has more than 1,200 people as direct employees and more than 50,000 people as indirect employees (mostlyfarmers). British American Tobacco Bangladesh's motto is "success and responsibility go together". Shehzad Munim is the currentManaging Directorof BATB. He is serving as the first ever Bangladeshi Managing Director in the history of BATBCL.

Liquidity Ratios This is the most fundamentally important set of ratios, because they measure the ability of a company to remain in business. Liquidity ratiosare used to determine how quickly a company can turn its assets into cash if it experiences financial difficulties or bankruptcy. It essentially is a measure of a company's ability to remain in business. A few common liquidity ratios are the current ratio and the quick ratio. The current ratio is current assets/current liabilities and measures how much liquidity is available to pay for liabilities. The quick ratio is same as the current ratio, but does not include inventory.Now according to the financial position of British American Tobacco Bangladesh Company Limited Current Ratio and Quick Ratio of 2012 & 2013 are calculating as follows:Particulars2013 (TK)2012 (TK)

Current Assets 9,950.631 9,172.866

Current Liabilities8,314.7697,029.777

Inventories6,626.7034,956.887

* Amount in Million FiguresWe know,01.

02.

S. NoRatios2013 2012

01Current Ratio1.20 times1.30 times

02Quick Ratio0.40 times0.60 times

01. The concept behind Current Ratio is to ascertain whether a company's short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes). In theory, the higher the current ratio, the better. In a liquidity contest between the year of 2012 & 2013 of BATBCL, 2012 Current Ratio (1.30 times) was better than the year of 2013 (1.20 times). In 2012, BATBCL had an ample margin of current assets over its current liabilities, where it droped 0.10 times in the following year.02. TheQuick Ratio is a liquidity indicator that further refines the current ratio by measuring the amount of the mostliquidcurrent assets there are to cover current liabilities. The quick ratio is more conservative than the current ratio because it excludes inventory, which is more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position. In the scenario of Quick Ratio of BATBCL, the difference between the year of 2012 & 2013 was 0.20 times. As the Quick Ratio was lower than 1:1 in both year may indicate that BATBCL relies too much on inventory or other assets to pay its short-term liabilities.

Asset Management Ratios or Activity RatiosThese ratios are a strong indicator of the quality of management, since they reveal how well management is utilizing company resources. Two common activity ratios are accounts payable turnover and accounts receivable turnover. These ratios demonstrate how long it takes for a company to pay off its accounts payable and how long it takes for a company to receive payments, respectively.Now according to the financial position of British American Tobacco Bangladesh Company Limited each ratio under asset management ratios of 2012 & 2013 are calculating as follows:Particulars2013 (TK)2012 (TK)

Sales (Net Turnover)31,225.43727,471.344

Inventories6,626.7034,956.887

Accounts Receivables (Trade & Other Receivables)770.917937.873

Accounts Payables (Trade & Other Payables)3,701.8893,245.676

Total Assets18,463.79815,034.493

Fixed Assets (Non-Current Assets)8,513.1675,861.627

* Amount in Million FiguresWe know,01.

02.

03.

04.

05.

06.

S. NoRatios2013 2012

01Inventory Turnover Ratio4.71 times5.54 times

02Accounts Receivable Ratio40.50 times29.29 times

03Accounts Payable Ratio8.44 times8.46 times

04Asset Turnover Ratio1.69 times1.83 times

05Fixed Asset Turnover Ratio3.67 times4.69 times

06Days Sales Outstanding (DSO) Ratio9 days12 days

01. Inventory Turnover Ratiois one of the efficiency ratios and measures the number of times, on average; the inventory is sold and replaced during the fiscal year. Inventory Turnover Ratio measures company's efficiency in turning its inventory into sales. Its purpose is to measure the liquidity of the inventory. Compared between the years of BATBCL, Year 2013 Inventory Turnover Ratio became lower than the year of 2012. Low Inventory Turnover Ratiois a signal of inefficiency, since inventory usually has a rate of return of zero. It also implies either poor sales or excess inventory. A low turnover rate can indicate poor liquidity, possible overstocking, and obsolescence, but it may also reflect a planned inventory buildup in the case of material shortages or in anticipation of rapidly rising prices.02. Accounts Receivables Turnover ratio measures Companys efficiency in collecting its sales on creditand collection policies. This ratio takes in consideration only the credit sales. If the cash sales are included, the ratio will be affected and may lose its significance. It is best to use average accounts receivable to avoid seasonality effects. If the company uses discounts, those discounts must be taken into consideration when calculate net accounts receivable. Compared between two year, 2013 had boost up its Account Receivable Ratio to 40.50 times, which is 11.21 times more than the previous year. Higher Receivables Turnover Ratioimplies either that the BATBCL operates on a cash basis or that its extension of credit and collection of accounts receivable are efficient. Also, a high ratio reflects a short lapse of time between sales and the collection of cash, while a low number means collection takes longer.03. The Accounts Payable Turnover Ratio is a liquidity ratio that shows a company's ability to pay off its accounts payable by comparing sales to the average accounts payable during a period. In other words, the accounts payable turnover ratio is how many times a company can pay off its average accounts payable balance during the course of a year. As it has seen that, BATBCL had approximate same Accounts Payable Ratio over the past two years (2013 8.44 times; 2012 8.46 times). This means that BATBCL paid its vendors back on average twice every three months of a year. This is on average a high turnover ratio, but it should be compared to others in BATBCL industry.04. The Asset Turnover Ratio is an efficiency ratio that measures a company's ability to generate sales from its assets by comparing net sales with average total assets. In other words, this ratio shows how efficiently a company can use its assets to generate sales. As we do not know the industry average, so we can say that, Asset Turnover in 2012 was 1.83 times where as 1.69 times in 2013. That means the net sales of BATBCL was more the average total assets for both of the year. In other words, the company is generating 1.69 & 1.83 dollar of sales for every dollar invested in assets. So a higher ratio is always more favorable. Higher turnover ratios mean the company is using its assets more efficiently. Lower ratios mean that the company isn't using its assets efficiently and most likely have management or production problems.05. Fixed Asset Turnover Ratio is a rough measure of the productivity of a company'sfixed assets (property, plant and equipment) with respect to generating sales. For most companies, their investment in fixed assets represents the single largest component of their total assets. Here the difference between Fixed Asset Turnover Ratio is 1. That indicates in 2012 BATBCL sales were 4.69 times then its fixed assets. But in 2013 sales became only 3.67 times of fixed assets and that happen because of increasing fixed asset volume.06. The Days Sales Outstanding (DSO) calculation, also called the average collection period or days' sales in receivables, measures the number of days it takes a company to collect cash from its credit sales. This calculation shows the liquidity and efficiency of a company's collections department. As it can see, BATBCL took 12 days to collect cash from his customers on average in 2012 but in 2013 it took only 9 days. This lower ratio is more favorable because it means companies collect cash earlier from customers and can use this cash for other operations. It also shows that the accounts receivables are good and won't be written off asbad debts.

Debt Management Ratio or Leverage Ratios These ratios reveal the extent to which a company is relying upon debt to fund its operations, and its ability to pay back the debt. A very common leverage ratio used for financial statement analysis is the debt-to-equity ratio. This ratio shows the extent to which management is willing to use debt in order to fund operations.Now according to the financial position of British American Tobacco Bangladesh Company Limited each ratio under debt management ratios of 2012 & 2013 are calculating as follows:Particulars2013 (TK)2012 (TK)

Total Debt (Total Current & Non-Current Liabilities)9,562.2088,001.553

Total Assets18,463.79815,034.493

Common Equity (Total Equity)8,901.5907,032.940

EBITt (Operating Profit + Other Income)9,594.0296,963.522

Interest Expence (Net Financial Expence)11.215119.878

* Amount in Million Figurest Earning Before Interest & TaxWe know,01.

02.

03.

S. NoRatios2013 2012

01Debt Ratio51.79 %53.22 %

02Debt - Equity Ratio1.07 times1.14 times

03Time Interest Earned Ratio855.46 times58.09 times

01. Debt Ratio is asolvency ratiothat measures a firm's total liabilities as a percentage of its total assets. In a sense, the Debt Ratio shows a company's ability to pay off its liabilities with its assets. In other words, this shows how many assets the company must sell in order to pay off all of its liabilities. This ratio measures thefinancial leverageof a company. Companies with higher levels of liabilities compared with assets are considered highly leveraged and more risky for lenders. As we can see, in both years BATBCL had 2 times as many assets as it had liabilities. This is a less riskey ratio and implies that BATBCL will be able to pay back its loan. BATBCL shouldn't have a problem getting approved for its loan.02. The Debt - Equity Ratio is a financial liquidity ratio that compares a company's total debt to total equity. The debt to equity ratio shows the percentage of company financing that comes from creditors and investors. A higher debt to equity ratio indicates that more creditor financing (bank loans) is used than investor financing (shareholders). As we can see, the Debt Equity Ratio of BATBCL was on an average 1 that means investors and creditors have an equal stake in the business assets.03. The Times Interest Earned Ratio, sometimes called the interest coverage ratio, is a coverage ratio that measures the proportionate amount of income that can be used to cover interest expenses in the future. In some respects the Times Interest Ratio is considered a solvency ratio because it measures a firm's ability to make interest and debt service payments. Since these interest payments are usually made on a long-term basis, they are often treated as an ongoing, fixed expense. As with most fixed expenses, if the company can't make the payments, it could go bankrupt and cease to exist. Thus, this ratio could be considered a solvency ratio. In 2013, the Times Interest Earned Ratio was 855.46 times, that means BATBCL income is 855.46 times greater than its annual interest expense. In other words, BATBCL can afford to pay additional interest expenses.

Profitability Ratios These ratios measure how well a company performs in generating a profit. Aprofitability ratiois a measure of profitability, which is a way to measure a company's performance. Profitability is simply the capacity to make a profit, and a profit is what is left over from income earned after you have deducted all costs and expenses related to earning the income. The formulas you are about to learn can be used to judge a company's performance and to compare its performance against other similarly-situated companies. Now according to the financial position of British American Tobacco Bangladesh Company Limited each ratio under profitability ratios of 2012 & 2013 are calculating as follows:Particulars2013 (TK)2012 (TK)

Net Profit (Total Comprehensive Income)4,868.6493,941.640

Sales (Net Turnover)31,225.43727,471.344

Total Assets18,463.79815,034.493

Common Equity (Total Equity)8,901.5907,032.940

EBITt (Operating Profit + Other Income)9,594.0296,963.522

* Amount in Million Figurest Earning Before Interest & TaxWe know,01.

02.

03.

04.

S. NoRatios2013 2012

01Profit Mergin Ratio15.59 %14.34 %

02Return on Assets (ROA) Ratio26.37 %26.22 %

03Return on Equity (ROE) Ratio54.69%56.05 %

04Basic Earning Power (BEP) Ratio51.96 %46.32 %

01. The Profit Margin Ratio, also called the return on sales ratio or gross profit ratio, is a profitability ratio that measures the amount of net income earned with each dollar of sales generated by comparing the net income and net sales of a company. In other words, the Profit Margin Ratio shows what percentage of sales are left over after all expenses are paid by the business. In 2012, BATBCL could be able to converted 14.34% of its sales into profit. But in 2013, profit merzin boost up to 15.59% of BATBCL sales. That indicate BATBCL efficiently manages its expenses relative to its net sales.02. The Return on Assets Ratio (ROA), often called the Return on Total Assets, is a profitability ratio that measures the net income produced by total assets during a period by comparing net income to the average total assets. In other words, the return on assets ratio or ROA measures how efficiently a company can manage its assets to produce profits during a period. As we can see, BATBCLs ratio is 26.37% in 2013 and 26.22% in 2012. In other words, every taka that BATBCL invested in assets during the year produced Tk. 0.2637 (2013) and 0.2622 (2012) of net income. Depending on the economy, this can be a healthy return rate no matter what the investment is.03. The Return on Equity Ratio (ROE) is a profitability ratio that measures the ability of a firm to generate profits from its shareholders investments in the company. In other words, the Return on Equity ratio shows how much profit each dollar of common stockholders' equity generates. So a return on 1 means that every dollar of common stockholders' equity generates 1 dollar of net income. This is an important measurement for potential investors because they want to see how efficiently a company will use their money to generate net income. As we can see, from net income BATBCL's ROE is 54.69 % in 2013 and 56.05 % in 2012. This means that every taka of common shareholder'sequityearned about Tk. 0.5469 in 2013 and 0.5605 in 2012. BATBCL's ratio is most likely considered high for its industry. This could indicate that BATBCL's is a growing company.04. Basic Earning Power (BEP) ratio is a measure that calculates the earning power of a business before the effect of the business' income taxes and its financial leverage. Basic Earning Power (BEP) ratio is similar to return on assets ratio as both have the same denominator i.e. total assets. However, unlike return on assets which measures the net earning power, the Basic Earning Power (BEP) ratio calculated the operating earning power.

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