British American Tobacco

Financial Statement Analysis of

British American Tobacco

Bangladesh

Executive Summary

This report is prepared with a view to obtaining a clear understanding of financial analysis

and financial ratios and learning to interpret them in the real life context. In this regard

British American Tobacco Bangladesh (BAT B) was chosen and an extensive analysis has

been performed on its annual reports from 2009 to 2013. The report mainly portrays analysis

of different significant ratios of the balance sheets, income statements and contents analysis

of BAT B and their corresponding comprehensive interpretation of the results.

The annual reports of BAT B are highly informative and their presentation of financial

statements and other statutory and regulatory statements are made in accordance to the laws

applicable in the country. Their notes section explains all the parts of the financial statements

and they have disclosed all the relevant data for an investor or a creditor to make decisions.

Overall, BAT B has prepared a very good and comprehensive annual report making BAT B a

very attractive company to invest in.

The presentation of the annual report is not only attractive but their financial statement also

supports their position. Their profits are increasing every year which can be concluded from

the profitability ratios. The company is trying to expand their business which can be gathered

from their retention ratio. But the company isn’t suffering from any difficulties in terms of

solvency and liquidity. All these conclusions are drawn from the several ratio analyses

conducted on these areas. Again, the activity ratios show their income earning ability is very

good in terms of using its assets. But it has been noticed that they hold huge amounts of

inventory but for this they are not facing any kind of difficulties. They are able to fight risks

associated with their business, mainly business risks and financial risks properly.

This also can be concluded from the horizontal and vertical analysis. It is because the

analyses show that they focus on low long term debt but they have huge current liabilities.

However their equity financing gives them an edge and security.

Overall their financial position is strong and they are trying to strengthen this more. It is

undoubtedly a very good company to invest in.

Table of Content

SL. Contents Page No

Chapter 1 (Introduction)

1.01.11.21.3

Introduction

Objective

Scope

Methodology

1

1

2

2

Chapter 2 (Company profile-British American Tobacco Bangladesh)

2.02.12.22.32.42.52.62.72.8

Company profile-British American Tobacco Bangladesh

Incorporation

Shareholders of BATB

Contributions of BATB

BATB’s Beliefs

BATB’s Human Resources

BATB’s Business Principles

Brands of BATB

Corporate Social Responsibility of BATB

3

3

3

3

3

4

4

4

5

Chapter 3 (Contents of the annual reports)

3.03.13.23.33.43.5

Content

Different Reports & Statements in the Annual Report

Summary of Financial Information of BAT BC

Accounting Issues

Regulatory Disclosures

Important notes on Financial Statement

7

7

8

8

9

9

Chapter 4 (Financial analysis)

4.04.14.24.3

Financial analysis

Horizontal Analysis

Vertical Analysis

Ratio Analysis

11

11

12

15

Chapter 5 (Conclusion)

5.0 Conclusion 20

Glossary i

List of Tables

SL. Table Name Page No.

Table 1 Summary of Financial Information 8

Table 2 Balance sheet (Horizontal Analysis) 10

Table 3 Income statement (Horizontal Analysis) 12

Table 4 Balance Sheet (Vertical Analysis) 13

Table 5 Income statement (Vertical Analysis) 13

Table 6 Profitability ratio analysis 15

Table 7 Liquidity ratio analysis 17

Table 8 Efficiency / Activity ratio analysis 18

Table 9 Solvency ratio analysis 19

Table 10 Other ratio analysis 19

List of Figures

SL. Figure Name Page No.

Figure 1 Horaizontal Analysis of Balance Sheet from 2009 11

Figure 2 Horaizontal Analysis of Income Statement from 2009 12

Figure 3 Differnt Part of Income Statement as a Part of Net Turnover

for the Year 2013

14


for the Year 2012

14


for the Year 2011

14


for the Year 2010

14

Figure 7 Changes in Different Profitability Ratio Over the Year 16

Figure 8 Changes in Earnings per Share(tk) from 2008 16

Figure 9 Changes in Current Ratio and Quick Ratio Since 2005 17

Figure 10 Changes in Total Asset Turnover Since 2005 18

1

Chapter 1

1.1 Introduction:

Financial analysis is the process of evaluating businesses, projects, budgets and other finance-

related entities to determine their suitability for investment. Typically, financial analysis is

used to analyze whether an entity is stable, solvent, liquid, or profitable enough to be invested

in. When looking at a specific company, the financial analyst will often focus on the income

statement, balance sheet, and cash flow statement. In addition, one key area of financial

analysis involves extrapolating the company's past performance into an estimate of the

company's future performance. One of the most common ways of analyzing financial data is

to calculate ratios from the data to compare against those of other companies or against the

company's own historical performance. For example, return on assets is a common ratio used

to determine how efficient a company is at using its assets and as a measure of profitability.

This ratio could be calculated for several similar companies and compared as part of a larger

analysis.

In this report an extensive analysis has been performed on one of the largest multinational

companies in Bangladesh, British American Tobacco Bangladesh Company (informally

known as BATB). The analysis was conducted over the data collected from 2009 to 2013.

The report mainly concentrated on analyzing different significant ratios regarding the balance

sheets and income statements of BATB and a comprehensive interpretation was made from

the corresponding results.

1.2 Objective:

The primary objective of this report is to have a clear concept of various financial analysis

and ratios in order to understand how they are helpful to interpret a financial report and

understand the financial position of the organization. The other objectives of this report are to

understand:

How financial reports are made

Purpose of the report.

Different issues in the accounting processes such as – inventory valuation,

depreciation, disclosure etc.

Contents of the report which includes different statements and reports.

Key features and presentation of the annual report.

2

1.3 Scope:

This report covers the horizontal and vertical analysis of the balance sheets and income

statements of BATB from 2009 to 2013 to show the trend in the company. To measure the

profitability, liquidity, efficiency, solvency and other areas, some ratios have been calculated

and the company’s financial position in these areas has been interpreted from the results.

1.4 Methodology:

All the data used in this report are from secondary sources. But all the analysis and

interpretation have been conducted elaborately by the group.

3

Chapter 2: Company Profile: British American Tobacco Bangladesh

2.1 Incorporation

The presence of British American Tobacco in this part of the world can be traced back to

1910. Beginning the journey as Imperial Tobacco 100 years ago, the Company set up its first

sales depot at Armanitola in Dhaka.

After the partition of India in 1947, Pakistan Tobacco Company was established in 1949. The

factory in Bangladesh (the then East Pakistan) was set up in 1949 at Fauzdarhat in

Chittagong. In 1965, the second factory of Pakistan Tobacco went into production in

Mohkhli, Dhaka. Then it became Bangladesh Tobacco Company Limited (BAT B) in 1972

immediately after Bangladesh’s independence. In 1998, the Company changed its name and

identity to British American Tobacco Bangladesh Company Ltd aligning the corporate

identity with other operating companies in the British American Tobacco Group.

2.2 Shareholders of BATB

BATB was one of the first companies listed on Dhaka and Chittagong stock exchanges. It is

currently ranked amongst the top 10 companies in terms of market capitalization. The British

American Tobacco Group holds 72.91% of the shares in BAT B. Other shareholders are the

Investment Corporation of Bangladesh (14%), Shadharan Bima Corporation, Bangladesh

Development Bank Limited, Government of People’s Republic of Bangladesh, Sena Kalyan

Shangstha (0.26%) and a further 12.83% is owned by other shareholders.

2.3 Contributions of BATB

British American Tobacco Bangladesh is one of the largest multinational companies in

Bangladesh. They continue to contribute approximately two-thirds of the revenue derived

from the cigarette industry. Consequently, they are also the largest private sector tax payer in

Bangladesh. In 2012-13 fiscal year, they contributed over BDT 8.436 crores as tax to the

National Exchequer. Over time, they have successfully established themselves as the

company contributing to economic, social and human resource development.

2.4 BATB’s Beliefs

BAT B strives to be a responsible c to their shareholders, employees, business partners or any

other relevant internal and external stakeholders. To them, responsibility is a way of life and

that is why we believe “success and responsibility go together”.

4

2.5 BATB’s Human Resources

At British American Tobacco Bangladesh, difference is their advantage and diversity is their

strength. They employ more than 1500 people directly and about 50,000 people indirectly as

farmers, distributors and local suppliers. Moreover, around 900,000 retailers in the country

sell their brands to earn their living. They take great pride in saying that they are one of the

most preferred employers in the country.

2.6 BATB’s Business Principles

BATB’s Statement of Business Principles forms the basis on which they run their business in

terms of responsibility. They have got three basic principles –

The principle of Mutual Benefit

The principle of Mutual Benefit is the basis on which they build their relationships with their

stakeholders. They are primarily in business to build long term shareholder value and they

believe the best way to do this is to seek to understand and take account of the needs of all of

their stakeholders.

The principle of Responsible Product Stewardship

The principle of Responsible Product Stewardship is the basis on which they meet consumer

demand for a legal product that is a cause of serious diseases. They also aspire to develop

tobacco products with critical mass appeal that will, over time, be recognized by scientific

and regulatory authorities as posing substantially reduced risks to health.

The principle of Good Corporate Conduct

The principle of Good Corporate Conduct is the basis on which all their businesses are

managed. Business success brings with it an obligation for high standards of behavior and

integrity in everything they do and wherever they operate.

2.7 Brands of BATB

Their business is not about encouraging people to start smoking or to smoke more, but about

meeting the preferences of adults, who have chosen to consume tobacco, and differentiating

their brands from the competitors. In its effort to create an international market for

Bangladeshi leaf tobacco the Company has been exporting tobacco to markets in developed

countries like UK, Germany, Poland, Russia and New Zealand.

5

They manufacture and market high quality and well established international cigarette brands.

Their current brands are positioned in four segments in the Bangladesh cigarette market –

Benson & Hedges

Launched in 1997, Benson & Hedges maintains their prime market share in the Premium

segment. Within a short time Benson & Hedges became a successful brand in their portfolio.

John Player Gold Leaf, Pall Mall and Capstan

John Player Gold Leaf, Pall Mall and Capstan are positioned in the High segment. Launched

in 1980, John Player Gold Leaf is one of the highest selling brands of their company,

enjoying large market share in the High segment. Pall Mall was the Group’s first Global

Drive Brand to be launched in Bangladesh in 2006.

Star and Scissors

Star and Scissors are positioned in the Medium segment. Star, launched 40 years ago, is still a

leading brand in this segment. Currently, it is the highest volume generating brand for the

company.

Pilot and Bristol

Pilot was launched in 2009 in the Low segment, which is growing rapidly in Bangladesh.

Bristol was launched also in the Low segment in October 2010.The Company also markets

imported cigar brand called “Dunhill” and exports processed leaf to various countries around

the world. The most recent Brand is ‘switch’. It has two flavors and was launch in February

2012.

2.8 Corporate Social Responsibility of BATB

Responsibility is a way of life for BATB. This is because they believe in the success that has

come to them as a result of responsible business operations. Therefore, they have in place

very robust CSR initiatives. Through such endeavors of them, they aim to achieve the

necessary balance of sustainable environmental, social and economic development.

Afforestation- They started their afforestation program when they joined hands with

the Forest Department in 1980 to conserve the forests and combat the negative

impacts of climate change. Till now, they have contributed around 67.5 million

saplings throughout Bangladesh.

6

Safe drinking water: ‘Probaho’

Through Probaho (Bangla for flow), BAT B aims to provide rural communities with safe

drinking water. Using Government approved community based water filtration technology,

their 18 water filtration plants in Manikganj, Satkhira, Meherpur, Kushtia, Jhenidah, Tangail,

Kurigram, Lalmonirhat and Chuadanga districts provide approximately 95,000 litres of pure

drinking water for 47,000 people every day.

Sustainable agriculture

BAT B’s initiatives include Green Manuring with Dhaincha (Sesbania aculeata) - an effective

approach in enriching soil health and fertility. Dhaincha is also promoted as alternate fuel in

leaf growing areas. Moreover, they have introduced Integrated Pest Management Clubs and

Farmer Field Schools in collaboration with the Department of Agriculture Extension to

educate their farmers about the adoption of Good Agriculture Practices.

7

Chapter: 3 - Contents

3.1 Different Reports & Statements in the Annual Report

British American Tobacco Bangladesh (BATB) is one of the largest multinational companies

in the country. The Company is a part of British American Tobacco Group, the world's most

international tobacco group with its various brands sold in more than 180 markets. The

annual report of British American Tobacco Bangladesh contains the following reports –

1. Director's report: In the director's report it is mentioned that the company consistently

focused on key strategic pillars of growth, responsibility and winning organization. The

Significant Components of the business under each pillar, together with the salient features of

such performance are described and highlighted in the report.

2. Auditor's report: The auditor’s report of the years 2009 to 2013 have stated that BATB has

followed effective and satisfactory internal control systems to identify and limit business

risks and that the Company’s business has been conducted in a proper and prudent manner.

3. CSR committee report: According to CSR committee report, Corporate Social

responsibility has always been core to the ‘Responsibility’ strategy of British American

Tobacco Bangladesh Limited. The report states that, the company has a role to play in

helping society to achieve the necessary sustainable balance of economic growth,

environment protection and social progress. Therefore, its CSR activities are designed to

contribute to contribute to the economic, social and environmental sustainability of the

community in which it operates.

4. Environment, Health and Safety report: The Environment, Health and Safety report

shows how BAT as a group is working to create an inspiring, motivating and high performing

working environment for all its employees. The report also says that, British American

Tobacco (BATB) puts a lot of efforts and resources in maintaining a world class standard of

Environment, Health and Safety (EHS) practices.

5. Other Statements and reports: Each report also reveals the business principle of BATB

over the last few years. Other reports and statements of the annual reports contain -

Profiles of the Board of directors and executive committee.

The statement of Risk Management & Internal Control – it reveals that the board of

directors of British American Tobacco Bangladesh recognizes the importance of

8

sound internal control and risk management practices to safeguard shareholders’

investments and company’s’ assets.

The corporate governance statement – it states that the company and its board of

directors are committed to continuously strive for the highest standard of corporate

governance to ensure that its business and affairs are in strict adherence to the

doctrine and principles of good corporate governance such as integrity, transparency,

compliance, accountability and responsible conduct to safeguard the interest of its

shareholders and stockholders.

3.2 Summary of Financial Information of BATB

A detailed analysis of the financial statement with key operating and financial information is

also reported in each of the reports which can be summarized as follows:

Table 1: Summary of Financial Information

Performance Summary (InMillions)

2013 2012 2011 2010 2009

Gross Turnover 109582 90174 75357 65987 55075

Net Turnover 31225 27471 23269 20946 17576

Profit before Tax 9104 6501 4914 4093 2794

Profit after Tax 4924 3942 2551 2879 2069

Share Capital 600 600 600 600 600

EPS in BDT 81.14 65.69 42.51 47.98 34.48

Leaf Export Volume(millionkg)

9903 11792 12045 13146 10262

No of Employees 1251 1119 1146 1186 850

Total Contribution toNational Exchequer in millionBDT

84357 66983 55913 47628 39613

Supplementary Duty & Vat as% Turnover

72% 70% 69% 68% 68%

3.3 Accounting Issues:

The overall presentation of the annual report of BATB is good and it provides and it provides

adequate information as to make any investment decisions or understand its financial

position. All the statements and reports align and supplementary notes and annexed parts

9

further clarify all the contents of the financial statements. After analyzing all the statements,

notes, reports and supplementary parts it can be said that –

The financial statements of the company present a true and fair view of company’s

state of affairs, result of its operation, cash flow and changes in equity.

Appropriate accounting policies have been followed in formulating the financial

statements and accounting statements are reasonable and prudent.

The internal control system is sound in design and effectively implemented and

regulated.

There is no significant doubt upon the BAT B’s ability to continue as a going concern.

The deviation from the operating result of previous year is reported in details to the

accounts. But no significant variations have occurred between quarterly and financial

results of the company during 2013.

3.4 Regulatory Disclosures:

BATB has made the following disclosures in their annual reports –

Financial Statement s as per Bangladesh Financial Reporting Standards (BFRS).

Details of related party and transactions have been disclosed under the principle

“Arm’s Length Transaction” as per BFRS.

As per IAS 1 presentation of financial statements, no extra ordinary gain or loss has

been recognized in the financial statements.

Director’s profiles, remuneration, operating and financial data are disclosed.

The shareholding patterns of the company.

3.5 Important notes on Financial Statement

a) Going concern assumption

The Directors are of the opinion that the Company is a going concern. Accordingly, Financial

Statements are prepared on a going concern basis.

b) Statement of compliance

The financial statements have been prepared in accordance with the Bangladesh Accounting

Standards (BAS), Bangladesh Financial Reporting Standards (BFRS), the Companies Act

1994, the Securities and Exchange Rules 1987 and other applicable laws in Bangladesh.

10

c) Basis of measurement

The financial statements have been prepared on the historical cost basis.

d) Property, plant and equipment

Items of property, plant and equipment are measured at cost less accumulated depreciation

and accumulated impairment losses. Cost includes expenditures that are directly attributable

to the acquisition of the property, plant and equipment.

e) Depreciation

Depreciation is calculated over the depreciable amount on the straight-line method with a

pro-rata charge based on the month of acquisition.

f) Inventories

Inventories are measured at the lower of cost and net realizable value. Cost is determined on

a weighted average cost method.

g) Revenue recognition policy

Revenue from sale of goods is recognized when the significant risk and rewards of ownership

have been transferred to the buyer; the associated costs and possible return of goods can be

estimated reliably, and where amount of revenue can be measured reliably. Interest Income is

derived from short-term investments and is recognized on an accrual basis.

h) Income tax

Income tax expense comprising of current tax and deferred tax and is recognized in the

Statement of Comprehensive Income.

i) Dividends

Final dividend distributions to the company's shareholders are recognized as a liability in the

financial statements in the period in which the dividends are approved by the company's

shareholders at the Annual General Meeting, while interim dividend distributions are

recognized in the period in which the dividends are declared and paid.

j) Materiality and aggregation

Each material class of similar items is presented separately in the financial statements. Items

of dissimilar nature or function are presented separately unless they are immaterial.

11

Chapter: 4

4.0 Financial analysis

4.1 Horizontal Analysis

Horizontal Analysis for Balance Sheet & Income Statement for the years from 2009 to 2013

is given below.

a) Balance Sheet

Table 2: Balance sheet (Horizontal Analysis)

Particulars 2009 2010 2011 2012 2013

Non-current Assets 100% 139.6% 141.2% 153.9% 223.5%

Current Assets 100% 98.1% 94.7% 111.7% 121.2%

Total Asset 100% 111.2% 109.4% 125% 153.6%

Shareholder Equity 100% 120.9% 114.5% 136.2% 172.4%

Non-current Liabilities 100% 132.4% 154.4% 159.8% 205.1%

Current Liabilities 100% 101.2% 100.8% 112.5% 133.1%

Total Equity and Liability 100% 111.2% 109.4% 125.1% 153.6%

0

50

100

150

200

250

2009 2010 2011 2012 2013

Non-current Assets Current Assets Total Asset

Shareholder Equity Non-current Liabilities Current Liabilities

Total Equity and Liability

Figure 1: Horaizontal Analysis of Balance Sheet from 2009

12

b) Income Statement

Table 3: Income statement (Horizontal Analysis)

Particulars 2009 2010 2011 2012 2013

Net Turnover 100% 119.2% 132.4% 156.3% 177.7%

Cost of Goods Sold 100% 117.5% 117.4% 139.1% 152.7%

Gross Profit 100% 122.2% 160.5% 188.5% 224.5%

Operating Expense 100% 98.1% 142.5% 143.9% 131.7%

Operating Profit 100% 148.7% 180.4% 237.7% 326.8%

TAX Paid 100% 167.5% 325.9% 353.0% 576.4%

Profit for Year 100% 139.2% 123.3% 190.5% 238.0%

The graphical representation of the horizontal analysis for balance sheet data are given

below:

0

100

200

300

400

500

600

700

2009 2010 2011 2012 2013

Figure 2:Horizontal Analysis of Income Statement Comparedto 2009

Net Turnover Cost of Goods Sold Gross Profit Operating Expense

Operating Profit TAX Paid Profit for Year

13

4.2 Vertical Analysis

A method of financial statement analysis in which each entry for each of the three major

categories of accounts (assets, liabilities and equities) in a balance sheet is represented as a

proportion of the total account.Vertical Analysis for Balance Sheet & Income Statement for

the years from 2009 to 2013 is given below.

a) Balance Sheet (Vertical Analysis)

Table 4: Balance Sheet (Vertical Analysis)

Particulars 2013 2012 2011 2010 2009

Non-current Asset 46.11% 38.99% 32.74% 39.70% 31.69%

Current Asset 53.89% 61.01% 67.26% 60.24% 68.30%

Asset 100% 100% 100% 100% 100%

Total Equity 48.21% 46.78% 36% 46.68% 42.95%

Non-current Liability 6.76% 6.46% 5.72% 6.02% 5.06%

Current Liability 45.03% 46.76% 58.28% 47.30% 50.99%

Total Equity & Liabilities 100% 100% 100% 100% 100%

b) Income Statement

Table 5: Income Statement (Vertical Statement)

Particulars 2013 2012 2011 2010 2009

Net Turnover 100% 100% 100% 100% 100%

Cost of Goods sold 56.05% 58.05% 57.83% 64.34% 65.22%

Gross Profit 13.45% 41.95% 42.17% 35.66% 34.78%

Operating Expense 13.51% 16.79% 19.47% 15.01% 18.23%

Operating Profit 30.44% 25.16% 22.70% 20.65% 16.55%

Profit Before Income Tax 29.15% 23.67% 21.12% 19.54% 15.89%

Tax Paid 13.39% 9.32% 10.16% 5.80% 4.12%

Net Profit 15.77% 14.35% 10.96% 13.74% 11.77%

The graphical representations of vertical analysis for Income statement is given below:

14

16.76%13.39%

29.15%30.44%

13.51%43.95%

56.05%100%

Net ProfitTax Paid

Profit Before Income TaxOperating Profit

Operating ExpenseGross Profit

Cost of Goods soldNet Turnover

Figure 3: Differnt Part of Income Statement as a Part of Net Turnover forthe Year 2013

14.35%9.32%

23.67%25.16%

16.79%41.95%

58.05%100%

Net ProfitTax Paid





10.96%10.16%

21.12%22.70%

19.47%42.17%

57.83%100%

Net ProfitTax Paid





13.74%5.80%

19.54%20.65%

15.01%35.66%

64.34%100%

Net ProfitTax Paid




Fig 6: Differnt Part of Income Statement as a Part of Net Turnover for the Year2010

15

4.3 Ratio analysis

Quantitative analysis of information contained in a company’s financial statements. Ratio

analysis is based on line items in financial statements like the balance sheet, income

statement and cash flow statement; the ratios of one item – or a combination of items - to

another item or combination are then calculated. Ratio analysis is used to evaluate various

aspects of a company’s operating and financial performance such as its efficiency, liquidity,

profitability and solvency. The trend of these ratios over time is studied to check whether

they are improving or deteriorating. Ratios are also compared across different companies in

the same sector to see how they stack up, and to get an idea of comparative valuations. Ratio

analysis is a cornerstone of fundamental analysis. For a specific ratio, most companies have

values that fall within a certain range. A company whose ratio falls outside the range may be

regarded as grossly undervalued or overvalued, depending on the ratio.

A) Profitability RatioA class of financial metrics that are used to assess a business's ability to generate earnings as

compared to its expenses and other relevant costs incurred during a specific period of time.

For most of these ratios, having a higher value relative to a competitor's ratio or the same

ratio from a previous period is indicative that the company is doing well.

Profitability Ratio Analysis for the years from 2009 to 2013 are given in the table below.

Table 6: Profitability Ratio Analysis

Particulars 2013 2012 2011 2010

Gross Profit Ratio 43.95 41.95 42.17 35.66

Net Profit Ratio / Profit Margin 15.77 14.35 10.96 13.74

Return on Equity 61.80 60.90 74.44 50.49

Return on Total Asset 29.40 27.97 17.12 16.29

Return on Investment 48.52 49.26 37.23 29.36

Earnings per Share 81.14 65.69 42.5 47.98

16

Changes in Different Profitability ratio over the years are shown below:

Changes in Earning per Share over the years are shown below:

Data before 2010 is taken from a secondary report

2007 2008 2009 2010 2011 2012 2013Gross Profit Ratio 29.7 35.86 34.78 35.66 42.17 41.95 43.95Net Profit Ratio 10.91 11.89 11.77 13.74 10.96 14.35 15.77Return on Equity 27 43 43 50.49 74.44 60.9 61.8Return on Total Asset 8 12 14 16.29 17.12 27.97 29.4Return on Investment 29.36 37.23 49.26 48.52

01020304050607080

Figure 7: Changes in Different Profitability Ratio Over theYear

27.8134.48

47.9842.5

65.69

81.14

2008 2009 2010 2011 2012 2013

Figure 8: Changes in Earnings per Share(tk) from 2008

Earnings per Share

17

B) Liquidity Ratio

A class of financial metrics that is used to determine a company's ability to pay off its short-

terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of

safety that the company possesses to cover short-term debts.

Liquidity Ratio Analysis for the years from 2009 to 2013 is given in the table below.

Table 7: Liquidity Ratio Analysis

2013 2012 2011 2010 2009 2008 2007 2006 2005Current Ratio 1.20 1.30 1.15 1.27 1.31 1.35 1.08 0.88 0.74Quick Ratio 0.40 0. 60 0.59 0.56 0.74 0.79 0.52 0.34 0.22Working CapitalRatio

0.20 0.30 0.15 0.27 - - - - -

Data before 2010 are collected from another secondary source

Changes in Current Ratio and Quick Ratio since 2005 are shown below:

0.740.88

1.08

1.35 1.31 1.271.15

1.31.2

0.220.34

0.52

0.79 0.74

0.56 0.59 0.6

0.4

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2005 2006 2007 2008 2009 2010 2011 2012 2013

Figure 9: Changes in Current Ratio and Quick Ratio Since 2005

Current Ratio

Quick Ratio

18

C) Efficiency / Activity Ratio

Ratios that are typically used to analyze how well a company uses its assets and liabilities

internally. These ratios are meaningful when compared to peers in the same industry and can

identify business that are better managed relative to the others. Also, efficiency ratios are

important because an improvement in the ratios usually translate to improved profitability.

Efficiency Ratio Analysis for the years from 2009 to 2013 is given in the table below.

Table 8: Efficiency Ratio Analysis

Particulars 2010 2011 2012 2013

Total Asset Turnover 1.65 1.56 1.95 1.95

Account Receivable Turnover 42.79 32.89 28.74 36.55

Average Receivable Collection Period

Days in A/R outstanding

8.61 10.95 12.53 9.85

Inventory Turnover 3.39 2.76 3.09 3.02

Days in Inventory /Inventory holding

period

106.11 130.29 111.6 119.14

Account Payable Turnover 5.55 4.76 4.63 5.52

Days in A/P 64.9 75.6 77.8 65.2

Changes in total asset Turnover ratio are shown below:

Data before 2005 is taken from a secondary source

2.67

1.521.2

0.971.23

1.65 1.56

1.95 1.95

2005 2006 2007 2008 2009 2010 2011 2012 2013

Figure 10: Changes in Total Asset Turnover Since 2005

Total Asset Turnover

19

D) Solvency Ratio

A key metric used to measure an enterprise’s ability to meet its debt and other obligations.

The solvency ratio indicates whether a company’s cash flow is sufficient to meet its short-

term and long-term liabilities. The lower a company's solvency ratio, the greater the

probability that it will default on its debt obligations.

Solvency ratio analysis for the year from 2010 to 2013 are given below.

Table 9: Solvency ratio analysis

Particulars 2013 2012 2011 2010

Debt-equity Ratio 1.07 1.14 1.78 1.14

Debt-total Asset 0.52 0.53 0.64 0.53

Long Term Debt-equity Ratio 0.14 0.14 0.16 0.13

E) Other Ratio

Table 10: Other ratio analysis

Particulars 2013 2012 2011 2010

Times Interest Earned 102.5 35.2 - -

Pay-Out Ratio 49.96% 46.89% 47.89% 29.94%

20

Chapter 5:

5.0 Conclusion:

After conducting the horizontal, vertical and ratio analysis of the BAT B from the year 2009

to 2013, it can be concluded that –

a) Horizontal / Trend analysis –

Balance Sheet - The assets and liabilities of BAT B are increasing in a growing rate.

Especially its currents assets grew almost 70% in 2013 from 2012. Its increase in equity is

more than its liabilities. It means BAT B puts emphasis on equity financing and it gives the

company a cushion and security from any business or financial risk.

Income Statement – The horizontal analysis of income statements shows a tremendous

increase in gross profit, operating profit and net profit. But the table 3 shows that 2011 was a

good year for BAT B since the company was able to increase its revenues but decrease its

Cost of goods sold. Whereas in 2010 BAT B was able to decrease its operating expenses to

the least in the last 5 years. Moreover, in 2013 BAT B paid the highest amount of tax but it

has also the highest net profit among the last 5 years. It shows the company’s market is

expanding and its position is strengthening in a growing rate.

b) Vertical Analysis –

Balance Sheet – The vertical analysis of balance sheet shows that the proportion of current

asset in total asset is more than non-current asset. But, the trend shows that the company is

continuously trying to increase its non-current asset implying BAT B is trying to expand its

business. Whereas their non -current liability is a small portion of the total liabilities however

the company focuses on equity more than debt financing. The small portion of long term debt

of the years 2009 to 2013 shows their superior ability to fight financial risks.

Income Statement – The common size statement of income statement shows that the net

profit of the company is only 15% (for 2013) though this percentage is increasing. The major

portion of the net turnover consists of cost of goods sold and tax payment.

c) Profitability Ratios –

The profitability ratios portray the strong financial position of the company. Every single

ratio shows an increasing trend which is a good sign for both shareholders and creditors.

Undoubtedly, BAT B is an attractive company to invest in.

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d) Liquidity Ratios –

The trend of current ration shows that since 2005 BAT B has been trying to reduce its current

liabilities and increase current assets to meet the current liabilities. It means the company

possesses superior position in fighting its business risks. But the quick ratio or acid test ratio

signifies the company has a huge amount of inventory piled up. This puts the company in

inflexibility and incurs huge costs of holding inventory. But after observing the profitability

trend it can be said that, so far the company do not any problems regarding the inventory.

e) Activity/ Efficiency Ratios –

The total asset turnover of BAT B shows an increasing trend which means the company is

developing ability to generate more and more income from their assets. The A/R receivable

turnover ratios show an increasing trend implying the A/R remains uncollectible for longer

period. The inventory holding period trend implies that the company is trying to reduce their

inventory holding period but still they hold inventory for a great number of days. On the

other hand, they are trying to increase their A/P turnover but in 2013 their payments of A/P

were earlier than the previous two years.

f) Solvency Ratios –

The company has more current liabilities than long-term liabilities. But their total debt is

higher than their total equity. Whereas their long term debt is only a small portion of the total

asset and equity. It means that the company has lower financial risks though their huge

current liabilities put them in business ricks. But the company’s huge current assets negate

the risks.

g) Other ratios –

The payout ratio shows that the company retains most of its earnings in the expansion of the

business. It implies the company plans to grow in a huge scale. On the other hand, times

interest earned ratio signifies the earning s of the company is much more for them to cover

their expenses of low debt.

At the end, it can be said that, in terms of profitability, solvency, liquidity, efficiency and

other areas, BAT B holds strong ground in the market and is an attractive company for both

investors and creditors.

i

Glossary

Account Payable Turnover This ratio will indicate how much credit the company uses fromits suppliers. Note that this ratio is very useful in credit checks of firms applying for credit.Payable turnover that is too small may negatively affect a company's credit rating.AccountsPayableTurnover = Accounts Receivable Turnover This ratio provides an indicator of the effectiveness of acompany's credit policy. The high receivable turnover will indicate that the company collectsits dues from its customers quickly. If this ratio is too high compared to the industry, this mayindicate that the company does not offer its clients a long enough credit facility, and as aresult may be losing sales. A decreasing receivable-turnover ratio may indicate that thecompany is having difficulties collecting cash from customers, and may be a sign that salesare perhaps overstated.AccountsReceivableTurnover = Asset Turnover Ratio The amount of sales or revenues generated per dollar of assets. TheAsset Turnover ratio is an indicator of the efficiency with which a company is deploying itsassets.

Asset Turnover = Sales or Revenues/Total AssetsAverage Receivable Collection Period This ratio provides the same information asreceivable turnover except that it indicates it as number of days.AverageReceivableCollectionPeriod = 365 Current Ratio This ratio is a measure of the ability of a firm to meet its short-termobligations. In general, a ratio of 2 to 3 is usually considered good. Too small a ratio indicatesthat there is some potential difficulty in covering obligations. A high ratio may indicate thatthe firm has too many assets tied up in current assets and is not making efficient use to them.CurrentRatio = Days In Accounts Payable A company's average payable period. Also known as Dayspayable outstanding (DPO), it tells how long it takes a company to pay its invoices from tradecreditors, such as suppliers. DPO is typically looked at either quarterly or yearly.DaysInAccountsPayable = Companies must strike a delicate balance with DPO. The longer they take to pay theircreditors, the more money the company has on hand, which is good for working capital andfree cash flow.

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Days in Inventory: This ratio provides the same information as inventory turnover exceptthat it indicates it as number of days.DaysinInventory = 365Debt-equity Ratio A measure of a company's financial leverage calculated by dividing itstotal liabilities by stockholders' equity. It indicates what proportion of equity and debt thecompany is using to finance its assets.Debt − EquityRatio = Debt-total Asset Total debt to total assets is a leverage ratio that defines the total amount ofdebt relative to assets. This enables comparisons of leverage to be made across differentcompanies. The higher the ratio, the higher the degree of leverage, and consequently,financial risk. This is a broad ratio that includes long-term and short-term debt (borrowingsmaturing within one year), as well as all assets – tangible and intangible.Debt − TotalAssetRatio = Earnings Per Share (EPS) The portion of a company's profit allocated to each outstandingshare of common stock. Earnings per share serves as an indicator of a company'sprofitability.EarningsPerShare = − ℎGross Profit Ratio A financial metric used to assess a firm's financial health by revealing theproportion of money left over from revenues after accounting for the cost of goods sold.Gross profit margin serves as the source for paying additional expenses and future savings.GrossProfitRatio = ∗ 100Horizontal Analysis A procedure in fundamental analysis in which an analyst comparesratios or line items in a company's financial statements over a certain period of time. Theanalyst will use his or her discretion when choosing a particular timeline; however, thedecision is often based on the investing time horizon under consideration. Horizontal analysiscan be used on any item in a company's financials (from revenues to earnings per share), andis useful when comparing the performance of various companies.Inventory Turnover This ratio provides an indication of how efficiently the company'sinventory is utilized by management. A high inventory ratio is an indicator that the companysells its inventory rapidly and that the inventory does not languish, which may mean there isless risk that the inventory reported has decreased in value. Too high a ratio could indicate alevel of inventory that is too low, perhaps resulting in frequent shortages of stock and thepotential of losing customers. It could also indicate inadequate production levels for meetingcustomer demand. InventoryTurnover =

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Interest Coverage Ratio/ Times Interest Earned: A ratio used to determine how easily acompany can pay interest on outstanding debt. The interest coverage ratio is calculated bydividing a company's earnings before interest and taxes (EBIT) of one period by thecompany's interest expenses of the same period.InterestCoverageRatio = Liquidity Ratio A class of financial metrics that is used to determine a company's ability topay off its short-terms debts obligations. Generally, the higher the value of the ratio, thelarger the margin of safety that the company possesses to cover short-term debts.

Long Term Debt-equity Ratio One of the capitalization ratios. It is calculated by theformula given below.LongTermDebt − EquityRatio = Net Profit Ratio/Profit Margin: A ratio of profitability calculated as net income divided byrevenues, or net profits divided by sales. It measures how much out of every dollar of sales acompany actually keeps in earnings. Profit margin is very useful when comparing companiesin similar industries. A higher profit margin indicates a more profitable company that hasbetter control over its costs compared to its competitors.NetProfitRatio = ∗ 100Pay-out Ratio: The proportion of earnings paid out as dividends to shareholders, typicallyexpressed as a percentage. The payout ratio can also be expressed as dividends paid out as aproportion of cash flow. The payout ratio is a key financial metric used to determine thesustainability of a company’s dividend payments. A lower payout ratio is generally preferableto a higher payout ratio, with a ratio greater than 100% indicating the company is paying outmore in dividends than it makes in net income.PayoutRatio = ℎ ( ) ℎ ( )The adequacy of the payout ratio depends very much on the sector. Companies in defensiveindustries – such as utilities, pipelines, and telecommunications – have stable and predictableearnings and cash flows, and thus can support much higher payouts than cyclical companies.Companies in cyclical sectors like resources and energy typically have lower payouts sincetheir earnings fluctuate considerably in line with the economic cycle.

Profitability Ratio A class of financial metrics that are used to assess a business's ability togenerate earnings as compared to its expenses and other relevant costs incurred during aspecific period of time. For most of these ratios, having a higher value relative to acompetitor's ratio or the same ratio from a previous period is indicative that the company isdoing well.

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Price-Earnings Ratio (P/E Ratio): A valuation ratio of a company's current share pricecompared to its per-share earnings.Price − EarningsRatio = ℎ ℎAlso sometimes known as "price multiple" or "earnings multiple", In general, a high P/Esuggests that investors are expecting higher earnings growth in the future compared tocompanies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself.It's usually more useful to compare the P/E ratios of one company to other companies in thesame industry, to the market in general or against the company's own historical P/E.

Quick Ratio: The quick (or acid-test) ratio is a more stringent measure of liquidity. Onlyliquid assets are taken into account. Inventory and other assets are excluded, as they may bedifficult to dispose of. QuickRatio = −Return on Equity (ROE): The amount of net income returned as a percentage ofshareholders equity. Return on equity measures a corporation's profitability by revealing howmuch profit a company generates with the money shareholders have invested.ReturnonEquity = ∗ 100Return on Investment (ROI): A performance measure used to evaluate the efficiency of aninvestment or to compare the efficiency of a number of different investments. To calculateROI, the benefit (return) of an investment is divided by the cost of the investment; the resultis expressed as a percentage or a ratio.ReturnonInvestment = ∗ 100Return on Total Asset (ROTA): An indicator of how profitable a company is relative to itstotal assets. ROTA gives an idea as to how efficient management is at using its assets togenerate earnings. Calculated by dividing a company's annual earnings by its total assets,ROTA is displayed as a percentage. Sometimes this is referred to as "return on investment".ReturnonTotalAsset = ∗ 100

Retention Ratio: The proportion of earnings kept back in the business as retained earnings.The retention ratio refers to the percentage of net income that is retained to grow thebusiness, rather than being paid out as dividends. It is the opposite of the payout ratio, whichmeasures the percentage of earnings paid out to shareholders as dividends.

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On a per-share basis, the retention ratio can be expressed as (1 – Dividends per share / EPS).RetentionRatio = − = 1 − = 1 − PayoutRatioThe retention ratio is 100% for companies that do not pay dividends, and is zero for

companies that pay out their entire net income as dividends.The retention ratio is typically higher for growth companies that are experiencing rapidincreases in revenues and profits. A growth company would prefer to plow earnings back intoits business if it believes that it can reward its shareholders by increasing revenues and profitsat a faster pace than shareholders could achieve by investing their dividend receipts.

Solvency RatioA key metric used to measure an enterprise’s ability to meet its debt and other obligations.The solvency ratio indicates whether a company’s cash flow is sufficient to meet its short-term and long-term liabilities

Vertical Analysis A method of financial statement analysis in which each entry for each ofthe three major categories of accounts (assets, liabilities and equities) in a balance sheet isrepresented as a proportion of the total account. The main advantages of vertical analysis arethat the balance sheets of businesses of all sizes can easily be compared. It also makes it easyto see relative annual changes within one business.

Working Capital Ratio: An accounting and finance term used to describe how many days itwill take for a company to convert its working capital into revenue. The faster a companydoes this, the better.

WorkingCapitalRatio = ∗ 365

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