British American Tobacco - Essay Example

BRITISH AMERICAN TOBACCO British American Tobacco is one of the top fifty stock market picks at present. Its stock market price has increase for the last five years. This is due to the excellent service it has been known for thru almost all countries in the world. Critical appraisal of the accounting policies used by the company - are there any features which are unusual, judged against generally accepted practice or "industry specific" usage. This should at least consider "international" usage, but may also address national standards if necessary.(15%) Accounting policies: a) "As described on page 82, the accounting policy no 9 under the International Financial Reporting Standards that is recognized and followed by almost all countries in the world effective January 1, 2005, states that it is necessary to provide deferred tax on unremitted profit of associates and part of the remitted profit of subsidiaries. This is not required under generally accepted accounting standards in United Kingdom. As of December 2004, this resulted to additional deferred tax liability of 49 million pounds ( January 1, 2004 and 40 million pounds ) And for the year ended Dec 31, 2005 an additional charge of 7 million pounds. b) Under IFRS, it is necessary to provide deferred tax on the difference between the carrying values and tax base of assets in operations which use inflation accounting, and also all differences between the carrying values and tax base for land and buildings. As of December 2004, these resulted to an additional deferred tax liability of 16 million pounds. c) Under United Kingdom GAAP, the final dividend for the year is provided but on page 84 in accounting policy 15, under International financial accounting standards, it is should be provided in the year it is declared. d) Under United Kingdom Generally Accepted Accounting principles, certain of the group's share based compensation plans did not result in a charge as they had no value or were finance thru issue of new shares of stocks. However the schemes financed by the purchase of shares did have value and were charged to operating profit over the vesting period based on the share price at the date of grant. Under International financial accounting standards, all share schemes will result in a charge based on fair market value of the grant as described on page 82 in accounting policy no. 7. e) Under the United Kingdom generally accepted accounting principles and international financial reporting standards, basic earnings per share are based on the profit attributable to ordinary earnings per share as based on the profit attributable to ordinary shareholders during this period. (This excludes shares held by the group's two employee share ownership trusts.) The difference between United kingdom Generally accepted accounting principles and international financial reporting standards figures is the due to the result of different treatment of the profit and amortisation of goodwill. For the United Kingdom generally accepted accounting principles, the adjusted diluted earnings per share uses same shares, investment costs written off, profit on disposal of subsidiaries and fixed asset investments, goodwill amortisation/impairment of brands and the exceptional credits arising from tax recoveries in Reynolds America in 2004. e) Under the International Financial Reporting Standards, the group will report regional business segments regional business as for United Kingdom Generally Accepted Accounting Principles. But Group costs, which are corporate costs that are not directly attributable to a particular segment of reporting will now be shown as a separate line in the segmental analysis. f) On page 83 in accounting policy 15, International Accounting Standards no 32 and International Accounting standards no 39 on the financial instruments will be used prospectively effectively starting January 1, 2005." REFERENCE: Director's report and account 2004.British American Tobacco. COMMENT: We have to follow the international financial accounting reporting standards which has been put in place on January 1, 2005. Each country has its own Genarally Accepted Accounting Standards. But eventually this GAAP will be pushed aside to give room for the IFRS. Analysis of the financial strengths and weaknesses revealed by the financial statements.(70%) A Return on capital employed Net profit before interest and taxation x 100% Share capital + reserves + long-term loans 2,254,000,000.00 net profit before interest and taxation 18.01 percent 5,416,000,000.00 share capital plus reserve 7,097,000,000.00 long term debt (Borrowings) COMMENT: The return on capital employed tells us that the capital was used well in the business. B Return on ordinary shareholders' funds Net profit after long-term interest and tax x 100% Share capital + reserves This ratio shows how the profit of the business will be able to pay for the capital investment it has employed. 1,098,000,000.00 Net profit after long term interest tax 8.7748741 5,416,000,000.00 share capital + reserves c Gross profit x 100% Sales 1,938,000,000.00 Gross profit 5.66 percent 34,255,000,000.00 Revenue This shows that there is profit in the business of British American Tobacco. d Net profit margin Net profit before interest and tax x 100% Sales 2,254,000,000.00 net profit before interest and tax 6.58 Percent 34,255,000,000.00 Revenue The computation here shows that we should be able to continue the business activity because there is a gain. If there is a loss, There must be drastic measures implemented to bring back the company from a loss result in the financial statements. e Current ratio Current assets divide by Current liabilities This ratio tells us that the assets must be more than the liabilities portion of the balance sheet to have a favourable picture for the stakeholders to be proud of. 6,108,000,000.00 current assets 118.30 percent 5,163,000,000.00 current liabilities f Acid test ratio Liquid assets (current assets excluding stock) divide by Current liabilities This test tells us that a more tighter ratio to use is the acid test ratio. This ratio takes away the stocks for sales in computing for the acid test ratio. This is a truer way to determine if the company the assets are more than the debts the company has generated in the regular line of business. 6,108,000,000.00 current assets 115.20 percent 160,000,000.00 stocks 5,163,000,000.00 current liabilities The gearing ratio tells us how much we have borrowed from the creditors. The favourable situation is when the stock holder's equity is bigger in terms of pound values. The positive result value tells us that the company can pay the creditors the money the creditors contributed to British American Tobacco. g Gearing ratio Borrowings Share Capital 7,097,000,000.00 Borrowings 131.04 percent 5,416,000,000.00 Share Capital Profitability The financial statements for the year ended December 31, 2005 shows that British American Tobacco generated a profit of 1,098,000,000. The earnings per share based on the financial statements of British American Academy shows 52.2 pounds earnings per share of stock for the basic unadjusted portion. For shares that are diluted and unadjusted the earnings per share is 50.93 pounds per share. Liquidity The quick ratio and the currency ratio tells us that we can easily sell our stocks displayed in the stores. We can easily collect the receivables from our clients which we generated by selling the stocks to creditable customers. Even if there is a possibility that some clients may run away and not pay their debts because of bankruptcy or boredom. The liquidity issue stops when the customer pays the company the amount due the company because of rigid follow up of the receivables department of all outstanding accounts receivable. Debtors As of December 31, 2004, our claims for cash payments from our debtors totalled 1,985,000,000 pounds. These debtors are distributed around the world from almost all countries and continents in the world. This is a good sign because most business operate thru loan situations where the customer will just pay for the goods or service at a later date. The receivables department will have to monitor the actual collection from customers. Stock The average market price of British American Tobacco stock has increased, but, again, compares very favourably with the industry. Depending on the nature of British American Tobacco's business within the sector, it may have proved possible for them to operate just-in-time (JIT) systems for their tobacco raw material purchases. In addition, if they are "making to order" rather than for stock, this would in turn lead to lower or negligible levels of finished goods with most of the stock value resident in work in progress. Aggressive control of stock levels, through, for example, JIT techniques may reap significant rewards by way of improved asset utilisation, but also carries significant extra risk of disruption to the supply chain, which in turn may result in extra cost. This should be recognised and planned for. Since tobacco products are sent to the farthest place on earth, the quality of service monitoring should be excellent so the customers will not go away and buy from the competitors. Gearing Although the company's gearing level has remained constant at 131.04 is to 1. , this represents tge number of times debt is bigger than stockholders' equity. This ratio shows how much equity is in relation to long-term borrowings as the industry average. The level of gearing appears very low in relation to the industry average. This caution may be the product of a general risk-aversion on the part of the board. We can also note that comment is made concerning the wide-ranging fluctuations in sales and profits to which the industry is prone. It is exactly this variability/volatility in demand (sales) and earnings (profits) that defines the level of business risk observable in a company. STOCK MARKET CHART (Yahoo financial chart) The company can also raise money by borrowing because based on the chart from Yahoo. Com, We can afford to borrow money. The chart above clearly indicates that due to its expansion and maintenance of the same quality products in the smoking industry, the stock market price of British American Tobacco has increased thru hears Conclusion The Yahoo chart above of the 5 year closing prices of British American Tobacco has has shown that the stock market price has increased. The following data below from Yahoo also shows why British American Tobacco is one of the top fifty stock picks for investments in our present time. The average volume trade of 53,762.50 tells us that many love to study and study and study the British American Tobacco stocks. All the financial ratios above like the current ratio, gives us the needed information to buy more BTI stocks (British American Tobacco). The Yahoo charts and Table below show us that British American Tobacco is doing well. 52-Week Change3: 30.87% S&P500 52-Week Change3: 6.04% 52-Week High (14-Nov-05)3: 46.47 52-Week Low (09-Dec-04)3: 33.27 50-Day Moving Average3: 44.05 200-Day Moving Average3: 41.06 Share Statistics Average Volume (3 month)3: 53,762.50 Yahoo chart for British American Tobacco above. REREFENCES: Director's Report and Account 2004, British American Tobacco. http://wps.prenhall.com/ema_uk_he_atrill_accfinns_4/0,8068,893379-,00.html ( accounting book) Yahoo financial charts. www.tobacco.org/ www.iasplus.com/standard/ifrs03.htm www.investorwords.com/4806/subsidiary.html cpaclass.com/gaap/gaap-us-01a.htm www.bearshare.com www.ups.com/using/services/rave/rate.html www.getbestinfo.com www.acsbcanada.org/index.cfm/ci_id/1580/la_id/1.htm Read More