Financial Statement Analysis - British American Tobacco - Case Study Example

Financial statement analysis Name: University: Financial statement analysis Background: British American tobacco (BAT) has been operating for more than 100 years since its start, British American Tobacco. 2008. It has traded through various moments of instability, change, nationalization, and controversy that surround smoking across the world. IN 1902 BAT was formed as a partnership business between the American tobacco company(AM) and the imperial tobacco company(ITC). Though it was formed from the amalgamation of the two companies, BAT was formed to operate outside both USA and UK. It thus grew in several other countries in Asia, Africa, America and Europe. The diversification of BAT Company took place between the year 1962 and 1988, British American Tobacco. 2008. In 1962, the BATcompany acquired Mardon packaging international and Wiggins Teape limited. The success in the acquisition of the two companies paved a way for more acquisitions in the British American tobacco. Further acquisition helped the BATto advance from a large tobacco company to an even larger corporation. BATis an international company and it has its headquarters in London. It is the second largest tobacco company in the world taking a leading position in many countries. Its products brands include Dunhill, Pall Mall and Kent among others. According to Imperial Tobacco, group PLC. 2010, Imperial Tobacco Company was started in 1901 through the amalgamation of various tobacco companies. Imperial Tobacco Company is an international tobacco company and it has its headquarters at Bristol in the United Kingdom. It is the fourth largest tobacco industry in the world. Since 1996, the company has invested a lot in the use of new technology in its factories. The efficient production base of the Imperial Tobacco Company has greatly enhanced its success in the international market. Acquiring of businesses such as Rizla and the Netherlands tobacco business strengthened Imperial British Company and enhanced its capability of distributing products in a wide market, Imperial Tobacco, group PLC. 2010. To increase its market share, Imperial Tobacco Company continued with its expansion through acquisition. Belgian tobacco and German based manufacturer of tobacco products were also made part of Imperial tobacco. The purchase of Tobaccor, a cigarette manufacturer in sub-Saharan Africa led to the growth of Imperial Tobacco Company and its expansion into Asia continent. The acquisition of Reemtsma cigarette from the German based tobacco company led to premeditated development of Imperial Tobacco and this strengthened its commitment to become an international tobacco company. Imperial tobacco is currently a firmly established international tobacco company with its products selling in over 160 countries across the world. The products brands of the Imperial Tobacco company include embassy, escort, prima and regal. Numerical analysis of the two companies over the last 3 years Over the last three years, BAThas shown good performance through increased profits and market share, British American Tobacco. 2008. The company’s income is higher than its expenditure by 3%. This was achieved through increase in the sell of products and company’s shares. Earnings per share have also increased by 10% and this shows that the company is able to meet its goal meeting increase in its profits. Another evidence for increased performance is the increase in the sell of the company’s global drive brands which increased by 10%. The target of the BATis to increase out put in profits through increase in brand and market share. The BATuses various mechanisms to measure its performance. Revenue growth is one of the measures of performance in the BAT company. In the year 2009, the revenue growth grew by 17% as compared to the 24% growth in 2008. Revenue growth is calculated after the deduction of taxes from the total revenue obtained during a particular financial period. Market share is also another mechanism used in measuring the performance of the company. In addition, profit from operations is also used to measure performance of the British American tobacco. According to British American Tobacco. 2008, Growth in revenue has been realized in the BATcompany in the years 2008, 2009 and 2010. The company has increased its market share in various countries and this has led to the growth in revenue and profits in the three consecutive years. The favorable impact of exchange rate movements, good pricing and increased expansion have also led to the increase in company revenue and profits. The current ratio of the BAT shows that the company has good performance. The current ratio is 1.0 owing that the company is operating at a profit. The debit ratio of the BAT is 1.36 and this shows good performance of the company. CR= assets/liabilities DR= debt/ assets In the Imperial tobacco company, financial statements are prepared in accordance with the company’s accepted accounting principles, Imperial Tobacco group PLC. 2010. The main measure of performance in the Imperial Tobacco Company is the evaluation of profits made in a specific financial year. According to Imperial Tobacco, group PLC. 2010, Increase in revenue in the Imperial Tobacco Company is due to the strategic cigarette brand gains, excellent fine cut on tobacco volumes and strong pricing. Profit grew by 5% in 2010 showing their focus on the sales growth and reduction in operation cost. The cost of running the company reduced by 14% in 2010 and this shows the continued focus on working capital reduction and good management of their financial accounts, Imperial Tobacco group PLC. 2010. There are also increased reported earnings per share reflecting fair value gains on derivative financial statements. Financial ratios of the Imperial Tobacco show that the company is also operating under profits but its performance is not as high as that of the British American tobacco. The current ratio of the Imperial tobacco company is 0.8 while the debt ratio is 2.0, Thomas R, 2008, pp 78.The statements of BAT and those of Imperial tobacco show that the BAT makes more profit than the Imperial tobacco company does. Net income of the two companies is calculated by deducting cost of expenses from the gross income. In the years 2008 to 2010, both companies have shown an increase in net income with the BAT registering a higher income than the Imperial Tobacco Company. The limitations of the research In this research, various limitations were encountered. The research relied much on financial statements of the two companies. The financial statements of these companies are based on historical costs and impact of changes in price is at most times ignored, Global markets direct. 2009. The financial statements used give more of the company’s history than performance facts. Another limitation of this research is that most of the financial statements used might have been neither complete nor exact and hence the findings of this research may have similar flaws. The financial statements used in the research show financial transactions of the two companies and also indicate that no other business occurs. This research has limitations because it does not show the factors that affect the performance of either the BATor the Imperial tobacco company. The performance of a business can be affected by factors such as finance, economic and social factors but in this case, only the financial factors have been applied to show the performance of the two companies. This means that the financial position of the business shown in this research is not true because it does not put into consideration the social and economic factors that might have influenced the performance of the companies. Another limitation of this research is that the profit of the two businesses shown in the financial statements may not be exact. The research also has limitations because it takes into account quantitative factors but does not show the qualitative factors of the financial statements. This indicates that results do not show the reputation and prestige of the two companies. Moreover, data found in financial statements is subject to human judgment and interpretation and therefore it may be subjective. This research also has limitations because it relies on comparability between the BATand the Imperial tobacco companies that use different accounting techniques to prepare their financial statements hence there is no accuracy in the comparison, Global markets direct. 2009. In addition, the research does not capture the changes in the market and therefore the information lacks some details. Lastly, the information given in the financial statements is based on estimates and this is another limitation of the research. Brief description of the findings In the research of financial statement analysis research, it was found out that companies rely on various financial statements to show their performance. Financial statements used to show company performance include income statements, profit and loss account, revenue statements, and market share. Financial ratios such as current ratio and debt ratio are also used to show the performance of the two companies. According to Thomas R, 2008, pp 67, High current ratio shows that the company is doing well while high debt ratio shows poor performance of the company. Both the financial statements and financial ratios used show that the BAT has a better performance than the Imperial tobacco company does. Further research should be done on the financial ratios and financial statements of the British American and Imperial Tobacco companies to come up with exact report of the performance of the two companies. Though the financial statements show good performance of the two companies, research should be conducted to know the accounting techniques used by the two companies in the preparation of the financial statements in order to allow proper comparability of the performance of the two companies. References: British American Tobacco. 2008. Annual report: group financial statements. Web Retrieved on 8thMarch 2011 from http://www.bat.com/groupfs/sites/BAT_7NJGCY.nsf/vwPagesWebLive/DO7P5EQV?opendocument&SKN=1 Imperial Tobacco group PLC. 2010. Annual report and accounts. Web retrieved on 8thMarch 2011 from http://www.imperial-tobacco.com/files/financial/reports/ar2010/index.asp?pageid=63 Global markets direct. 2009. Imperial tobacco group PLC- Financial and strategic Analysis review. Canada. Market research Thomas R, 2008. Financial statements: a step-to-step guide to understanding and Creating financial reports. New York. Careers press Financial statements used in the research Income statement for imperial tobacco in 2008-2010 Actuals in M GBP Fiscal Period September 2008 2009 2010 Revenue 5 845 7 782 7 055 Operational expenses 2 687 3 568 3 282 Resultant expectations 2 230 2 933 3 067 Pre-Tax Profit 621,0 945,0 2 118 Net income 428,0 663,0 1 505 Dividend per Share (cts GBP) 63,10 73,00 84,30 From http://www.imperial-tobacco.com/files/financial/reports/ar2010/index.asp?pageid=63 BATincome statements for 2007-2010 currency in Millions of British Pounds As of: Dec 31 2008 Dec 31 2009 Dec 31 2010 Revenues 12,122.0 14,208.0 14,883.0 TOTAL REVENUES 12,122.0 14,208.0 14,883.0 Cost of Goods Sold 3,316.0 3,948.0 3,707.0 GROSS PROFIT 8,806.0 10,260.0 11,176.0 Selling General & Admin Expenses, Total 1,931.0 2,174.0 2,387.0 Other Operating Expenses 2,820.0 3,179.0 3,368.0 OTHER OPERATING EXPENSES, TOTAL 5,176.0 5,857.0 6,259.0 OPERATING INCOME 3,630.0 4,403.0 4,917.0 Interest Expense -535.0 -602.0 -583.0 Interest and Investment Income 131.0 85.0 60.0 NET INTEREST EXPENSE -404.0 -517.0 -523.0 Income (Loss) on Equity Investments 503.0 483.0 550.0 Currency Exchange Gains (Loss) 597.0 17.0 252.0 Other Non-Operating Income (Expenses) -521.0 -4.0 -209.0 EBT, EXCLUDING UNUSUAL ITEMS 3,805.0 4,382.0 4,987.0 Earnings from Continuing Operations 2,659.0 2,956.0 3,140.0 NET INCOME 2,457.0 2,713.0 2,879.0 From http://www.bat.com/groupfs/sites/BAT_7NJGCY.nsf/vwPagesWebLive/DO7P5EQV?opendocument&SKN=1 Read More