Financial Analysis Of British American Tobacco Plc Finance Essay

Financial Analysis Of British Ameri underside baccy Plc Finance EssayIntroductionThe purpose of this makeup is to provide randomness Interpretation of British American baccy plc ( work) in basis of historical record, com rack upative pecuniary indicators, and position in the foodstuff a capacious with key value drivers for the telephoner and functioning indicators. This is done by analysing the information provided in the historical and present financial statements.About British American baccy Revenue AnalysisBritish American Tobacco is a public company listed on the London entrepot Exchange, which has taper and collateral stakes in several companies together constituting to be the British American Tobacco root word of companies. The theme touchd gross give up over of GBP 40,713 gazillion with revenues amounting to GBP 14,208 Million in the social class 2009. There atomic number 18 more than 250 brands in their portfolio with Dunhill, Kent, Lucky Strike Paul Mal l being their flagship rear brands which are together sold in more than 120 countries with summate gross revenue constituting 196 Billion stub units ( gradebook Report, 2009). The company follows the accounting cycle starting beginning(a) January of the calendar year ending on 31st December of the analogous calendar year. The company currently has 95,710 employees on its payrolls. It sold 724 Billion cigarette units in the same(p) year and has production capabilities in 50 cigarette factories based in 41 countries.British American Tobacco is the bet on largest tobacco company in the world (Excluding China), trance it has 6.4% plow of the UK commercialise, predominate players being Imperial Tobacco Japan Tobacco inter subject fieldist (Nielsen Data, Feb 2010). 74% of whacky sales come from the developing countries emerging economies (Annual Report, 2009).Revenue by Geography cricket bats largest food market lies in Western Europe which accounted for 27.3% of its in nate revenues in FY 2009. solve apothegm an augment of 20.7% from the revenues it had registered in the FY 2008.Asia Pacific accounted for 23% of its total revenues while Americas accounted for 22.2%. Eastern Europe accounted for 11.5% o the total revenues while the highest performed for BAT turns out to be Africa and Middle east which accounted for 22.2% but it saw an extend of 31.2% in terms of revenue over last year. diachronic Performance AnalysisBritish American Tobacco was established as a joint venture among the Imperial tobacco group of the United Kingdom the American Tobacco Group of the United States in the year 1902. Subsequently, In the year 1911 the company was listed on the London Stock Exchange. In 1913, the company looked overseas for expansion and entered the Argentinean markets. In the 1920s, British American Tobaccos dandyization had quadrupled since 1902 and sales grew by nearly a factor of 40. In 1923, The Companys worldwide sales had stimulaten to 50 one billion million million cigarettes per year. By 1962, British American Tobaccos capitalization rendered it to move towards diversification. It grew consistently, however, and was achieving turnover at the rate of 15% per annum by 1970. Diversifying and expanding at a rapid pace, British American Tobacco became a well known brand world(a)ly. With uncertainty about a long term market in tobacco, steps were taken to precipitate soft dependence on the tobacco industry. In 1986, exclusively fractional of its total pre tax profit came from tobacco group which was down from 57% pre tax profit BAT masterd in the year 1985. The 1990s were non a good time of the decade for tobacco sales as companies in the industry faced several lawsuits and litigations. The U.S. courts awarded verdicts which cost the tobacco companies millions of dollars as the consumer claimed tobacco related illness and relatives of smokers who claimed heavy compensation. The company continued with its system to take over small to midsized companies as it acquired Canadas dominant tobacco company, Imasco in the year 2000. The company has been consistently achieving Year on Year evolution in the range of 8-12% in terms of revenue since 2005. While it has consistently defended the operating moulding percentage in the range of 26%-29% from 2005 to 2009, the alter Diluted gain per piece of land has been rising from 56.9p in 2000 to 153p in the year 2009 (Annual Report, 2005-2009).Annual Report AnalysisThe goal of accounting information is to provide economic decision makers with useful information, according to Williams, Haka, Bettne Carcello (2006, p. 670). Financial statements compendium is not just important for the shareholders but various stakeholders as well.The Group has prepared its one-year consolidated financial statements in accordance with outside(a) Financial Reporting Standards (IFRS), as endorsed by the European Union. Some of the highlights of the Annual Report inc lude revenue increase of 10% at continuous rates of exchange 17% at current rate, when compared to the financials for the year 2008. Adjusted profits from ope dimensionns too increased by 10% at constant rates and 20% at current rates. The total well-being of the result amounted to GBP 355 Million, which resulted in adjusted thin out loot per share grow by 19% to 153 pence. Over the past 5 years, BAT has achieved a compounded yearbook growth rate of 15% in earnings per share and 19 % in dividends per share. The total shareholder returns over the same 5 year has been 175% compared to the FTSE 100 tycoon which gave 35% returns to the investors.The financial abridgment views the group as a strong player in the global tobacco industry. The resilience in achieving profits wealth coevals along with geographical diversification has positioned the group as a multi national company with strong fundamentals which makes it more susceptible to face risks and unforeseen events in the future. In the first half of the financial year 2009, gross sales multitudes had increased by 4% or declined by 2% when the hit derived from acquisition was excluded. cockamamie free cash flow remained strong and springy during the year 2009 and looks set to remain the same in the year 2010 despite volume pressure levels. Price increases sales improvements continue to offset the volume pressure faced by the company in the broad range of opposite markets. In the financial year 2009, FFO was 31% of fully adjusted debt which was 3% points high than the FFO in the year 2008. The reason for the same was marginal minify in debt along with the increase in earnings delinquent to acquisitions. The ingress of operating cash flow in to discretionary spending has slowed due(p) to the company suspending the unfold to buy backside shares until further notice given. BAT is comparablely to generate free cash flows despite various expenses like restructuring dividend payments to th e shareholders as it has ample internal liquidity, cash flow characteristics access to capital markets. The liquidity of BAT was supported by a) USD 1.75 Billion revolving credit expertness for a quin year hitch which along with the cash balance of USD 1.3 million exceeded gross debt maturing on June 2010 b) Bond maturities Bond worth USD 2.5 billion were issued to extend the groups debt portfolio c) Finance accessibilities It has ready access to credit facilities on offer by the financial institutions d) Significant cash position in exorbitance of USD 1billion.Based on analysis, dotty profitability margins are on par with its global peers. BAT intends to improve its sales by 2 % year on year by price increases and product mixes. Market share reached by BAT in specific markets determined its profitability. Operating margin in developing countries can be compared with the margins achieved in matured markets as shown by the margin achieved in excess of 30% in regions like Lati n America, Africa and Middle East. EBIDTA margins for BAT in the year 2009 figured 36%, has had a significant rise of 2.5% percentage point from 33.5% margin it achieved in 2008 and 32.5% in 2007. wholeness widely accepted method of assessing financial statements is ratio analysis which uses data from balance sheet and income statement to produce explanation which submit financial meaning to it. estimate of the financial health of a pipeline is quick and relatively childlike when information is derived using the germane(predicate) financial ratios.Ratio AnalysisA ratio is a simple mathematical expression of the relationship of one item to another, according to Williams, Haka, Bettner, and Carcello (2005, p. 674). Ratios can provide diverse information to diverse financial information users.The analysis of annual report suggests the following ratio analysis of the group. The relevant ratios exhaust been grouped and presented in this paper under various heads. gainfulness Asses smentOperating Margin BAT achieved an operating margin of 31.12% in the year 2009 mainly due to savings it achieved in return chain, general overheads and indirect costs. The impact of higher leaf prices and input costs were offset due to these savings. It allowed the boilersuit operating margin to increase from 30.7% to 31.4% in the year which was frequently greater than the industry and sector just of 22.01% and 10.10% respectively. BAT also, had much get out margins when compared to Japan tobacco which could achieve operating margin of 4.76%.Return on Equity BAT has been a fundamentally sound company demonstrating consistence in handsome return on equity to its shareholders. In the FY 2009, buggy Return on Equity was standing at 37.05% which was considerably higher than the industry and sector average of 11.57% and 8.01% respectively. While Japan Tobacco could fuck to achieve little less than 10% Return on Equity, BAT has been since the past able to maintain consistent re turns. In the past quadruple years starting 2005 2008, BAT gave returns of 26.12%, 27.70%, 28.95% 30.44% respectively. These numbers give confidence to investors and allow BAT to be looked upon as a good company to lay ones bet on.Return on Capital Employed (ROCE) Corporate Profitability can be determined by assessing the trading profit that the company has achieved over the capital employed by it to achieve the same. BAT achieved an ROCE of 20.82% in the FY 2009 which is slightly better than the Industry average and sector average. BAT fared roughly twice as better when compared to Japan Tobacco.addition Utilisation plus Turnover BAT was able to main asset utilisation which was on par with the industry average. The industry average for the FY 2009 was 0.58, while BAT registered an asset utlisation ratio of 0.73. The company is expect to register even better numbers in the near future as FY 2009 saw some acquisitions which resulted in BATs performance on par with the market i n terms of making its asset sweat. Closure of the Soeborg factory in Denmark, Downsizing of manufacturing make in Australia and impairment charges for certain software assets resulted in these assets having minimum and restrain future economic benefit. But with consolidation resulting in greater savings and better utlisation of the assets of the companies acquired in the emerging markets, the asset turnover ratio is expected to fare better in the next financial year.Interest extendBATs interest cover remains steady at 8.6x in the FY 2009 compared to 8.5x which was reported in the FY 2008. It was offset as a result of the financial arrangements carried out for the acquisitions. Pre-Tax impact on adjusting item distorts the interest cover.Risk allowance accountBy analysing the financial statements, BATs policy seems to be moderate as it focuses on maintaining EBIDTA coverage of gross interest payments between 5x and 9x at the same time maintaining cash balance exceeding USD 1 bill ion and five year maturity on its debt profile. BAT needs to strike a fine balance between acquisitions and share buy backs to avoid over stretching its debt capacity over a short time barf due its commitments to a 65% annual dividend payout ratio. In the year 2008, BAT humiliated its annual buy back commitment from USD 750 Million to USD four hundred Million to accommodate acquisitions. BAT also suspended its buy back program in 2009 until further notice.Cash Flow Adequacy suppuration profitability would benefit the companies debt protection metrics to a greater extent. well conversion of profits into cash supports BATs financial metrics. The groups future on the job(p) capital requirements will remain stable in proportion to its annual sales unless there are any significant large carapace acquisitions. BATs capital expenditure of its win operating cash flows is precise low when compared with the averages in food, beverage tobacco industries. In the year 2009, BATs capital expenditure accounted for 15%-20% of net operating cash flows. BATs future capital expenditure is most likely to grow giving the compounded annual growth rate of the company along with the industry. draw Performance IndicatorsThe key performance indicators for BAT has been its consistent ability to maintain growth in its core competency. Revenue for the FY 2009 grew by 17% which is 3 4 per annum greater than the target growing revenue for the medium and long term. This was possible due to acquisitions it made and favourable exchange rate movements.One of the key strengths of the company in terms of its performance is its diversified global drive brands which constitute majority of the sales for the company. Though growth of 16% was achieved in the FY 2008 in this segment, FY 2009 volumes grew by 4% which is coherent with the companys strategy to achieved oneness digit growth over the long run.The adjust profit from trading operations achieved by the firm was well above the compan y target to achieve 6% profit from operations. BAT registered a growth of 20%.The net cash from operating activities in the FY 2009 was up by 26 million to 2630 million. Free cash flow per share increased by 2%, the ratio of free cash flow to adjusted diluted earnings was 86%.Adjusted Earnings Per Share (EPS) had grown at an average of 11% over the last ten years. This exceeds the companys target of growing at a single digit figure per annum on an average. Adjusted diluted EPS grew by 19% in the year 2009.S.W.O.T. AnalysisStrengthsDiversified globose Brand Drive (GBD) portfolioOne of the keys strengths of the group is its diversified portfolio of cigarette brands. In the FY 2009, overall volume of the GBD grew by 4%.Emerging EconomiesCurrently, 74% of BATs revenues come from the emerging economies.Enhanced Internal OperationsBAT deliver GBP 239 Million in the FY 2009 by improving its supply chain, overheads and indirect costs.Weaknesses healthy IssuesRecoupment actions and Class actions are filed against the company and its subsidiaries which in turn impacts not only the brand image but also its cost structure.Poor Asset UtlizationThe companys Return on Assets (ROA) and Return on Equity (hard roe) has been poor when compared to its competitors. Philip Morris International and Altria Group recorded an ROA of 29.7% and 20% respectively with BAT recorded an ROA of 15.1% only. Similarly, ROE for BAT was lower than Philip Morris International which recorded 99.2% while BAT could achieve 40.6% only.OpportunitiesAcquisitionsBAT completed an acquisition of a Turkish state owned tobacco company in the year 2008 which elevated its market share from 7% to 36%. In the same year, BAT Bought Skandinavisk Tobakskompagni (ST) which allowed it to increase annual sales of approximately 30,000 million cigarettes.Recently BAT acquired PT Bentoel Internasional Investama, Indonesias quaternary largest cigarette maker which had sales of around 250 million cigarettes a year.Thes e acquisitions would increase the global presence of BAT across the globe and in turn enhance its topline and profitability.Growth of Tobacco IndustryThe tobacco industry is forecasted to interpret growth. It is estimated that there would be 1.3 billion smokers in the world by 2020 up from 1.3 billion currently. According to the Datamonitor estimates, the global tobacco market generated total revenues of $429.3 billion in 2009, representing a compound annual growth rate (CAGR) of 3.1% for the period spanning 2005-2009. Cigarette sales generated total revenues of $394.2 billion in the FY 2009, equivalent to 91.8% of the markets overall value. The global tobacco market is forecasted to have a value of $490.2 billion, an increase of 14.2% since 2009. BAT is the second-largest global cigarette player. It tends to benefit from this positive outlook.ThreatsIllicit businessIllicit trade is estimated up to 660 million cigarettes a year which represents 12% of world cigarette consumption. This results in losses upto GBP 4 Billion to GBP 7 billion a year. Increase in illicit trade would reduce revenues of the company.Advertising restrictionsBrand Building, advertising and promotion are facing hindrances globally. The absence of market would effect introduction and promotion of new products in the markets. It could have a negative impact on BATs sales.Consumer focus and knowingness on health issuesIncreasing health consciousness and introduction of substitutes to cigarettes into the market has led to decline of sales for the company. Pharma products and nicotine replacement patches along with manducate gums are the new source of harmless alternatives.What makes British American Tobacco work?The year 2009 was a challenging year for the Fast despicable Consumer Goods (FMCG) segment. Total market volumes declined by 2% for the BAT products. The overall performance for BAT was firm . It continued to invest in its marketing initiatives which resulted in it maintaining its market share in key markets. The orbiculate Drive brands (GDB) grew by combined 4% in terms of volume. These accounted for 27% of the global volume sales for BAT. The overall brand mix for BAT is balanced between premium, mid-price low-price.Managing business to business relationships makes up for a large part of BATs trade marketing activities. BAT co-ordinate its business with its trading partners to figure that it is able to meet the demands of the client at the right place and at the right time. This has worked out well for the company as it helps it maintain the market share in a highly competitive tobacco industry. grounds customer and their needs is of the core non financial activities of BAT. BAT regularly surveys their customer base internationally against its peers in the FMCG industry and particularly against its competitiors in the tobacco industry. Their efforts made them be recognised as the leading business in the tobacco category for customer relationship mana gement by Dow Jones sustainability index for the third successive year in 2009. apart(predicate) from its own marketing initiatives, BAT makes efforts to develop marketing programmes jointly with its retail partners, who engage with consumers in market channels like Global Travel Retail and Global Convenience Retail.For BAT, the Direct Store Sales in the most preferred way of selling cigarettes to customers. It fecilitates greater access to consumer information and market. It has also helped them with a direct commericla link to their most strategic retail accounts. In the FY 2009, total sales volumes distributed through DSS reached 50%.Integrated Global EnterpriseApart from the key revenue generators for the company, BAT has been able to achieve growth by savings. BAT was successful in turning a multinational business operations in over 180 markets into an integrated global first step which take better advantage of its scale. It led to savings in supply chain, overheads and indir ect costs amounting to 239 million. The company has a target achieve 800 million savings by 2012.