British American Tobacco is one of the world’s 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 20th century, including wars, revolutions and nationalisations”1 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.
Figure British American Tobacco currently holds 13% of the tobacco global market shares in direct competition with Imperial Tobacco, Phillip Morris and others.
Moreover, as shown in the graph on the right, British American Tobacco’s 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
Net Gearing (%)
Gross Gearing (%)
British American Tobacco Gearing
Net Gearing (%)
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Imperial Tobacco Gearing If one were to compare British American Tobacco’s degree of leverage to another company, Imperial Tobacco for example, one would notice that British American Tobacco’s Net Gearing (64) to this day is lower than Imperial Tobacco’s Net Gearing (74). This means that Imperial Tobacco is a riskier 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.
On the right is a graph showing past finances and, as one can see, sales have increased ever since 2007, growing from 10’000 to almost 20’000 million pounds. It could strike as strange given the restrictions concerning plain packaging (no aesthetically appealing cigarette packs) introduced in 2000, but the development of the tobacco market in Indonesia and South Korea4, as well as its investments in the e-cigarette concepts allowed British American Tobacco to develop its sales growth.
Figure A simple proof, or visual display for the growth in sales revenue can be seen in the five year asset section of British American Tobacco’s financial statement. As shown in the table, Tangible Assets went up from 3,076£ (M) in 2008 to 3,201£ (M) in 2012, so did Inventory and Trade.
Figure 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.
Analysing and comparing different ratios for different companies is the surest way to assess the company’s performance. In this section ratios such as EPS (earnings per share), ROCE or Price to Earnings Ratios.
Figure Looking at the difference in earnings per share for British American Tobacco and Imperial Tobacco one can clearly see that British American Tobacco’s 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.
The P/E ratio or price per earnings ratio displays a company’s 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 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.
Figure 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 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 Anti-Illicit 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 doesn’t 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.
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.
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.
1British American Tobacco.com. BAT, Web Page 2, 20 Dec. 2012. .
2 "Global Tobacco Market."British American Tobacco.com. BAT, n.d. Web. 3 Dec. 2013. DO6Z2EUD>.