British American Tobacco

Annual Report Assessment

Louis Toussaint

BUS 220_Financial Accounting_Assignment 2

Word Count: 1524

#100096382

Table of Contents
Introduction:.......................................................................................................... 3
Financial:............................................................................................................... 3
Ratio Analysis:....................................................................................................... 5
Sustainability and Governance:............................................................................. 6
Reflective Statement:............................................................................................ 7
Conclusion:............................................................................................................ 7
Bibliography:.......................................................................................................... 8

Introduction:
British American Tobacco is one of the worlds leading groups in the tobacco industry
sector along with Phillip Morris, Imperial Tobacco and few others. Ever since 1902 British
American Tobacco has progressively cut itself a very sure part of the tobacco industry
with its portfolio of 200 brands sold in over 180 markets. Moreover, BAT has also

achieved to trade throughout the turbulences of the 20 th century, including wars,

revolutions and nationalisations1 thanks to their approach to marketing and their
business model built around customers. Their business strategy is based on four key
points: Growth, Productivity, Winning Organisation and Responsibility. Growth as in
consumer-led, Productivity as in effectively deploying resources and Responsibility as in
acting ethically at all times.

Financial:
British

American

Tobacco currently holds

13%

of

the

tobacco

global market shares in

direct competition with
Imperial Tobacco, Phillip
Morris and others.

Figure 1

Moreover, as shown in the

graph on the right, British
American Tobaccos actual
shares have gone up since
2009 from an average of
1.6 to an average of 2.9 in
2012, and even 3.34 in
2013. The main reason for
the growth in the tobacco
market,

despite

tougher

regulations on packaging
and sudden increases in
excise rates, is driven by
population

growth

and

increasing disposable income, quite simply.2

Figure 2

British American Tobacco

Gearing
Net
Gearing (%)
63.92
Gross Gearing (%)
Debt Ratio
Debt-to-Equity Ratio

71.53
51.14
0.42

If one were to compare British American Tobaccos degree of leverage to another

company, Imperial Tobacco for example, one would notice that British American
Tobaccos Net Gearing (64) to this day is lower than Imperial Tobaccos Net Gearing (74).
This means that Imperial Tobacco is a riskier
Net Gearing (%)
73.76
Gross Gearing (%)
80.13
Imperial Tobacco Gearing
Debt Ratio
67.42
Debt-to-Equity Ratio

0.51

company,

in

the

sense

that

it

is

more

vulnerable to downturns in the business cycle 3

and that Imperial Tobacco is more likely to
struggle

servicing

its

debts

than

British

American Tobacco.
Figure 4Figure 3

On the right is a graph showing

past finances and, as one can
see, sales have increased ever
since 2007, growing from 10000
to almost 20000 million pounds.
It could strike as strange given
the restrictions concerning plain
packaging

(no

appealing

cigarette

introduced

in

development

aesthetically

2000,
of

the

packs)
but

the

tobacco

market in Indonesia and South

Figure

Korea4, as well as its investments

in the e-cigarette concepts allowed British American Tobacco to develop its sales growth.
2012

Reporting date

31
Dec 31
Dec 31
Dec 31
Dec 31
Dec
2012
2011
2010
2009
2008

Tangible assets

3,201

3,047

3,117

3,010

3,076

11,710

11,992

12,458

12,323

12,318

18,141

18,624

19,203

18,508

18,809

3,498

3,608

3,261

3,177

2,423

2,482

2,344

2,532

the table, Tangible Assets

27,119

27,860

26,614

27,551

went up from 3,076 (M)

Intangible
goodwill

assets

and

Total non-current assets

Inventory / Work in
4,026
progress
Trade
and
other
2,741
receivables
Total of all ASSETS

27,327

2011

in 2008 to 3,201 (M) in 2012,

2010

2009

A simple proof, or visual

Assets (M)

Equity (M)

so did Inventory and Trade.

2008

display for the growth in

sales revenue can be seen
in

the

five

year

asset

section of British American

Tobaccos

financial

statement. As shown in

2012

Figure 5

2011

2010

2009

2008

Share Capital

507

506

506

506

506

Minority Interests

307

307

342

299

271

Retained earnings

2,253

2,636

3,190

2,168

1,578

Share premium account

3,916

3,913

3,910

3,907

3,905

Other Equity

796

1,112

1,600

1,032

955

Total EQUITY

7,779

8,474

9,548

7,912

7,215

Taking a look at this graph one can also say that equity was clearly raised between 2008
and 2010, but only to drop back by 2012. An explanation for the drop in overall equity
could be because of the Daric Smith case in 2010, in which allegations were made
against B&W Investments from where the defendants participated in a conspiracy to fix
or maintain the price of cigarettes sold in the US 5. The charges were dismissed in March
2012 under prejudice.

Ratio Analysis:
Analysing and comparing different ratios for different companies is the surest way to
assess the companys performance. In this section ratios such as EPS (earnings per
Figure 6

share), ROCE or Price to Earnings Ratios.

Figure 7

Earnings per Share

250
200
150
100
50
0

Looking at the difference in earnings per

share for British American Tobacco and Imperial Tobacco one can clearly see that British
American Tobaccos earnings ratio is higher than Imperial Tobacco, which means that a
higher ratio of their net income has been earned by shares of common stock.

Price/Earnings Ratio
30
25
20
15
10
5
0
British American Tobacco

Lorillard Tobacco

The P/E ratio or price per earnings ratio Figure 8

displays a companys current share price in comparison to its per-share earnings. In other
words, it informs investors of potential return growth of earnings. In the graph on the
right, one can observe that Imperial Tobacco has the highest P/E ratio while British
American Tobacco only rates in between Imperial Tobacco and Lorillard Tobacco, with an
E/P Ratio of 16.28

Figure 9

ROCE Ratio
0.25
0.2
0.15
0.1
0.05
0

The ROCE Ratio is used to compare

companies in terms of profitability based on the amount of capital used. In the case of
British American Tobacco and Imperial Tobacco, the first company has a way greater
ROCE ratio, which means that British American Tobacco does a better job at deploying its
capital.

Dividends per Share Ratio

140
135
130
125
120
115
110
105

In the graph on the right one can see that British American Tobacco has a leading
dividends per share ratio compared to Imperial Tobacco, which means that the
management of British American Tobacco believes that its growth can be sustained and
the profit distribution to its shareholders is also viable. The way the dividends per share
ratio works is to present a sum of declared dividends for every ordinary share issued. 6

Sustainability and Governance:

To

begin

with,

British

American

Tobacco

Figure 10

portrays a very solid and ethically correct marketing strategy. There is no marketing to
under age consumers, there are no product placements, whether in films, TV shows or
plays and there are no clear links made to celebrities or sport athletes nor to
professional, social or sexual success. 7 Moreover, British American Tobacco has taken an
active part in fighting against illicit tobacco trade and fake cigarettes. Measures such as
entering in a cooperation agreement with the European Union, or the creation of an AntiIllicit Trade Intelligence Unit help to tackle such problems.
Furthermore, British American Tobacco strives to reduce Carbon Emissions by developing
its five-year targets for CO2, energy and water use. It has already decreased its total CO2
production by 41% since 2000 and its water use by 22% since 2007. British American
Tobacco also invests in the exploration of renewable and low carbon energy options as
well as developing new products with reduced nicotine and tobacco risks. British
American Tobacco works hand in hand with scientists, researchers and public health
professions in the aim to secure widespread support for tobacco harm reduction. 8 As
seen, British American Tobacco doesnt focus only on profitability and revenue growth,
but on responsibility and ethical behaviour.
As far as governance goes, since British American Tobacco is a company that deals on an
international scale, diversity is promoted in order to meet the needs of consumers,
customers, suppliers and stakeholders alike. As an example, British American Tobacco
has 64 different nationalities working at the global headquarters in the UK, as well as
support for career development for female managers and diversity in the senior
management teams. Since 2012 the number of women in senior roles remained steady
at 32% and an effort to provide equal opportunities to every employee and strong
policies against discrimination has been made.
British American Tobacco has put in place an on-going survey for employees to share
concern and/or satisfaction and since 2011 (every two years) over 42,000 employees
took part in the program, which was translated in 48 different languages. Needless to say

British American Tobacco promotes employee engagement and every employee remains
well informed of internal strategy.

Reflective Statement:
Through the Financial Accounting course basic accounting methods, principles and rules
were presented, as well as certain accounting analysis skills. This report compiled all the
techniques and knowledge learned in order to present a viable, concise presentation of a
company to a potential investor. Annual reports including all financial statements were
looked at, analysed and explained, and on-web in-depth research was carried out. It must
be said that in order to complete this report I had to combine analysing and processing
skills to accounting skills, which was a new experience. The intensive research helped to
complete the report but the occasional misunderstanding of the directions proved to be a
setback.
Working as a group has shown to be a valuable experience, and utilizing modern
resources such as Facebook, Google Groups and other websites has opened our eyes on
other learning and working possibilities.

Conclusion:
Although tobacco and cigarettes are known to be health impairing commodities, British
American Tobacco shows extraordinary willingness to promote responsibility within the
industry. The financial report clears states that British American Tobacco is a leading
company in the tobacco market, and its history, experience and renowned brand names
make it a safe investment. Even with economic crises, deteriorating environments and
growing, limiting policies and legislations, British American Tobacco continues to grow,
benefit and produce.

Bibliography:

1 British American Tobacco.com. BAT, Web Page 2, 20 Dec. 2012.

<http://www.bat.com/ar/2012/downloads/batannualreport2012.pdf>.

2
"Global Tobacco Market." British American Tobacco.com. BAT, n.d. Web. 3 Dec.
2013. <http://www.bat.com/group/sites/uk__3mnfen.nsf/vwPagesWebLive/
DO6Z2EUD>.

3
"Dividend Per Share - DPS." Investopedia. ValueClick Inc, n.d. Web. 13 Oct.
2011. <http://www.investopedia.com/terms/g/gearingratio.asp>.

"Repeat Update: British American Tobacco." London South East Alliance News. LSE
Limited, n.d. Web. 23 Oct. 2013. <http://www.lse.co.uk/AllNews.asp?
code=s8tjf71r&headline=REPEAT_UPDATE_British_Americ
an_Tobacco_Sees_Slight_Sales_Increase_Over_9_Months>

British American Tobacco.com. BAT, Web Page 179, 20 Dec. 2012.

<http://www.bat.com/ar/2012/downloads/batannualreport2012.pdf>.

"Dividend per Share - DPS." Investopedia. ValueClick Inc, n.d. Web. 10 Aug.
2011. <http://www.investopedia.com/terms/d/dividend-per-share.asp>.

"Marketing." British American Tobacco.com. BAT, n.d. Web. 3 Dec. 2013.

<http://www.bat.com/group/sites/uk__3mnfen.nsf/vwPagesWebLive/
DO52EKDZ?opendocument&SKN=1>.

British American Tobacco.com. BAT, Web Page 23, 20 Dec. 2012.

<http://www.bat.com/ar/2012/downloads/batannualreport2012.pdf>.

Source:

Figures Web

Figure 1: http://www.bat.com/group/sites/uk__3mnfen.nsf/vwPagesWebLive/DO6Z2EUD
Figure 2: http://www.wikinvest.com/stock/British_American_Tobacco_(LON:BATS)
Figure 3: http://shares.telegraph.co.uk/fundamentals/?epic=BATS
Figure 4: http://shares.telegraph.co.uk/fundamentals/?epic=IMT
Figure 5: http://www.4-traders.com/BRITISH-AMERICAN-TOBACCO-4001163/financials/
Figure 6: http://www.bat.com/ar/2012/downloads/batannualreport2012.pdf Financial Statement
Figure 7: http://www.bat.com/ar/2012/downloads/batannualreport2012.pdf Financial Statement
Figure 8, 9, 19, 11: Excel
http://shares.telegraph.co.uk/fundamentals/?epic=BATS
http://shares.telegraph.co.uk/fundamentals/?epic=IMT
http://quotes.wsj.com/LO
http://markets.ft.com/research/Markets/Tearsheets/Forecasts?s=BATS:LSE