1. Financial Statement Analysis
and Security valuation
Of
1

2. Submitted to:
Lt. Col. Showkat Ali
Corse Instructor
Corporate Finance ( F-401)
Faculty of business studies
Submitted By:
Syeda Nawrin Huq (B1001009)
Sharaf Zarrin Anika (B1001034)
Anika Tasmia Shawki (B1001048)
Tamanna Hossain Pushpa (B1001050)
BBA-1
Date of submission: May 5, 2013
Bangladesh University of Professionals
2

3. Letter of Transmittal
To,
Lt. Col. Showkat Ali
Corse Instructor
Corporate Finance ( F-401)
Faculty of business studies
Bangladesh University of Professionals
Subject: Submission of the term paper on financial statement analysis and security valuation of
British American Tobacco Bangladesh.
Dear Sir,
We are very delighted to inform you that, we have completed the term paper on’ Financial
statement analysis and security valuation of British American Tobacco Bangladesh.”
successfully as a partial requirement of the course F401. We enjoyed preparing this assignment
and it helped us to gain knowledge about the Bangladesh food industry and profound information
about British American Tobacco .We are also very grateful for your kind help and advice.
Besides, we have finished this task in a friendly environment and the entire team worked very
hard while preparing this term paper.
We aspire that this study will fulfill your suggestion and expectation. If you need any further
assistance to interpret this study, please inform us. It will be our pleasure to clarify your
questions.
Sincerely,
Syeda Nawrin Huq (B1001009)
Sharaff Zarin Anika (B1001034)
Anika Tasmia Shawki (B1001048)
3

4. Tamanna Hossain Pushpa (B1001050)
4

5. Acknowledgement
First of all we would like to thank Almighty whose gracefulness let us complete this term paper.
Besides, a comprehensive work like this must owe credit to a multiple of people. Certainly, we
should thank those kind ones whose help & kind support enable us to complete this report.
Especially we are indebted to our Course teacher Lt. Col. Showkat Ali who helped us both
forming & editing this work.
During this task each of our team members worked really hard. Our classmates also shared their
knowledge and experience with us, which helped greatly to recover different obstacles during
this study.
5

6. Executive Summery
British American Tobacco Bangladesh Company Limited started its business as a corporate
identity of British American Tobacco Group, which was previously known as Bangladesh
Tobacco Company and after liberation it renamed itself as British American Tobacco.
The Food and allied industry is very competitive with intense intra industry rivalry among the
companies. The threats of new entrants, threats of substitute are very low. Power of buyer is
quite low but suppliers groups are enjoying the benefit of strong and favorable bargaining power.
British American Tobacco Bangladesh Company has a bit abnormality in the recent years. They
have declared a large number of dividends and have created a leap in the flow. We have seen the
growth rate to fall and the retention rate as well. However the performance of the company in the
overall industry was a big success. In the time of recession the firm has shown promise in their
performance, which indicates a lower level risk involved in the security with high return.
6

7. Table of Contents
Letter of Transmittal.........................................................................................................iii
Acknowledgement.............................................................................................................iv
Executive Summary...........................................................................................................v
Table of Contents.................................................................................................................
Lt. Col. Showkat Ali......................................................................................................................................2
Especially we are indebted to our Course teacher Lt. Col. Showkat Ali who helped us both forming &
editing this work. ........................................................................................................................................5
Table of Contents........................................................................................................................................7
INTRODUCTION.........................................................................................................................................10
1.1 Origin of the report............................................................................................................................10
1.2 Objective of the study.........................................................................................................................10
1.3 Methodology of the Report.................................................................................................................10
1.4 Limitations of the study.......................................................................................................................11
1.5Industry analysis...................................................................................................................................11
Industry at a glance ..................................................................................................................................11
Cross sectional industry performance...............................................................................................12
Industry performance over time.......................................................................................................13
Performance of the company with in industry .................................................................................13
1.6 The business cycle and the industry sectors........................................................................................14
Inflation.............................................................................................................................................14
Interest rate.......................................................................................................................................15
International economics ...................................................................................................................15
Consumer sentiment.........................................................................................................................15
1.7 Structural economic changes and alternative industries.....................................................................16
Demographic.....................................................................................................................................16
Lifestyle..............................................................................................................................................16
Technology........................................................................................................................................16
1.8 Policies and regulation.................................................................................................................16
7

8. Evaluating the industry life cycle...............................................................................................................17
1.9 Analysis of Industry Competition.........................................................................................................18
1.10Estimating Industry rates of return.....................................................................................................20
Valuation using the Reduced Form DDM...........................................................................................20
Industry valuations using the Free Cash Flow to Equity.....................................................................20
Industry Analysis using the relative valuation approach...........................................................................20
The Price /Book Value Ratio ..............................................................................................................20
The Price/Equity Ratio.......................................................................................................................21
Financial Analysis.......................................................................................................................................21
2.1Financial Statement Analysis................................................................................................................21
Commonsize Income Statement........................................................................................................21
Commonsize Income Statement........................................................................................................22
Statement of Cashflow......................................................................................................................23
2.2Analysis of Financial Ratio....................................................................................................................24
Internal liquidity Ratios......................................................................................................................26
Operating Profitability Ratios.............................................................................................................26
Operating Efficiency Ratios................................................................................................................26
Solvency Ratios..................................................................................................................................26
2.3Risk Analysis.........................................................................................................................................27
Business risk.......................................................................................................................................27
2.4Analysis of Growth Potential................................................................................................................27
2.5Comparative Analysis...........................................................................................................................28
3.Company analysis...................................................................................................................................29
3.1 Nature of the company and stock.......................................................................................................29
Influence of the economic and industry condition ...................................................................................29
Different organizational strategy...............................................................................................................29
3.2 SWOT analysis.....................................................................................................................................30
3.3Stock Valuation.....................................................................................................................................31
DDM..........................................................................................................................................................31
3.4 Relative Valuation ...............................................................................................................................32
The Price /Book Value Ratio ..............................................................................................................32
The Price/Equity Ratio.......................................................................................................................32
8

9. 3.5 Measures of Value Added....................................................................................................................32
Economic Value Added......................................................................................................................32
Market Value Added..........................................................................................................................32
3.8 Scenario Analysis.................................................................................................................................34
Altman Equation for Bankruptcy/ insolvency prediction...................................................................35
4.0 Findings................................................................................................................................................37
5.0 Recommendation................................................................................................................................37
6.0 Conclusion...........................................................................................................................................38
9

10. INTRODUCTION
1.1 Origin of the report
This report has been made as a part of our Corporate Finance Course (F 401) by instructor Lt.
Col Shawkot Ali to acquire knowledge about how to conclude on investment decision and
analysis on the basis of Top Down approach. The perspective of such a report is to make us
familiar with the key factors of security market that affect the users in decision making. For this
purpose we have chosen the annual report of British American Tobacco Bangladesh Company
Limited, and try to analyze and understand the components according to our best effort.
1.2 Objective of the study
The objective of the study is to apply the theoretical knowledge in the practice field. Therefore
the objective behind conducting this study is as follows:
• The main objective of this report is to find out the company’s overall position through its
annual report
• To find out the prospect of the company for investment decision making
• To conclude some findings and some possible recommendation for an investor who wants to
invest in the share of BAT Bangladesh.
1.3 Methodology of the Report
We have collected the necessary and relevant data from different secondary sources. These
sources are mentioned below -
• Annual report of the British American Tobacco Bangladesh Company Limited 2007-
2008
• Soft Copy of Annual Report (From 2004 to 2008& 2009) of American Tobacco
Bangladesh Company Limited from Dhaka Stock Exchange
• Different websites
• Records from DSE library
• Interview with investor.
10

11. 1.4 Limitations of the study
The limitations of the study are defined by the extensive of the facts covered by the study and
those that left out. However, these limitations can be presented in the following lines:
• The first limitation is the lack of intellectual thought and analytical ability to make it the most
perfect one.
• We have to offset with the quality due to time constraint.
• The analysis is based on complicated data, so it has become difficult to draw a complete
figure.
• As we have to conclude the report by giving an recommendation whether to invest in the
company or not, that required an intellectual and experienced opinion, may not be defensive
up to some extent
• While attempting to analyze the performance many data were missing, we found it rare to
make it consistent with theoretical formula.
1.5Industry analysis
Industry at a glance
We do industry analysis because we believe it helps us to isolate investment opportunities that
have favorable return-risk characteristics. We are doing it as part of our three-step, top-down
plan for valuing individual companies and selecting stocks for inclusion in our portfolio. There
are 12 industry category are listed in the stock market in Bangladesh. Our main concern is for the
food industry. As per the industry analysis we also concentrated on the five major categories of
industries. They are
1. Bank
2. Engineering
3. Food & Allied
4. Pharmaceuticals & Chemicals
5. Textile
11

12. Cross sectional industry performance
Cross sectional analysis consist of the overall condition of different industry. To find out the
rates of return among different industries varied during a given time period, we compared the
performance of alternative industries during a specific time period.
In the below graph we can see the conditions of the industries at a glance. Here Pharmaceuticals
and Chemicals have the highest statue among the other industries on the basis of EPS.
The EPS ratio on the particular companies of Pharmaceuticals and Chemicals industry has higher
average rate then the companies of other industries.
Industry Mean EPS
Bank 61.71
Engineering 40.03
Food & Allied 14.95
Pharmaceuticals & Chemicals 79.16
Textile 26.34
Industry Return On Equity
Bank 0.44
Engineering 0.30
Food & Allied 0.10
Pharmaceuticals & Chemicals 0.20
Textile 0.11
On the perspective of the ROI Bank has the utmost advantage. The return for equity is higher in
the bank sector. Comperatively the profit for Bank on an overall basis is higher then other
sectors.
12

13. Industry performance over time
The industry performance takes different shape over the time of its activity. It is not necessary
for the industry to perform at the same pace every year. Thus, as over the time analysis shows an
easier way to realize the actual growth or decline.
In the food industry, the graph shows an elaborate performance condition. Due to the decrease in
the profit margin of different companies in the year of 2009 the graph has taken a negative dive.
So the industry as a whole has declined in the last except the preceding years.
2005 2006 2007 2008 2009 2010 2011 2012
Mean Industry EPS 18.58 17.68 22.29 27.05 12.52 10.59 9.67 10.00
0.00
5.00
10.00
15.00
20.00
25.00
30.00
Performance of the company with in industry
Even though the profit margin of the industry as an aggregate measure has taken a declining
position, The British American Tobacco continued its growth. If we look at the graph bellow we
can say it with certainty. The reason for this difference is that, BATBC didn’t follow the pattern
of food industry. As a part of tobacco industry, its value stands apart from the overall industry.
13

14. 2005 2006 2007 2008 2009 2010 2011 2012
Mean EPS for the Industry 18.58 17.68 22.29 27.05 12.52 10.59 9.67 10.00
Mean EPS for BAT 3.88 6.03 13.32 27.81 34.48 43.03 53.10 62.04
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
1.6 The business cycle and the industry sectors
Economic trends can and do affect industry performance. By identifying and monitoring key
assumptions and variables, we can monitor the economy and gauge the implications of new
information on our economic outlook and industry analysis. Recall that in order to “beat the
market” on a risk-adjusted basis, we must have forecasts that differ from the market consensus
and we must be correct more often than not.
Inflation
Higher inflation is generally negative for the stock market, because it causes higher market
interest rates, it increases uncertainty about future prices and costs, and it harms firms that cannot
pass their cost increases on to consumers. Although, some industries benefit from inflation but
food sector is excluded from them.
The graph bellow shows the Graphical presentation of the effect.
Year Inflation Inflation % EPS EPS %
2005 7.16 14.81
2006 7.2 -5.48% 18.58 25.45%
2007 9.94 -40.62% 17.68 -4.82%
2008 6.66 -2.31% 22.29 26.06%
2009 7.31 -39.10% 27.05 21.34%
2010 8.79 15.50% 12.52 -53.73%
2011 11.41 -39.10% 9.67 21.34%
2012 10.12 15.50% 10 -53.73%
14

15. 2006 2007 2008 2009 2010 2011 2012
Inflation % -5.48% -40.62% -2.31% -39.10% 15.50% -39.10% 15.50%
EPS % 25.45% -4.82% 26.06% 21.34% -53.73% 21.34% -53.73%
-60.00%
-50.00%
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
Interest rate
High interest rate is often good for several industries. Risk and the return depend highly on it.
Based on the different bank rate for corporate short term and long term loan, the average of
interest for interest sector is 13%.
International economics
Bangladesh food industry deals with large number of exporting business in the international
market. Hence, it brings a lot of foreign currency. For instance BATBC exports quality leaf to its
parent company which is grown in
Consumer sentiment
BATBC has been able to maintain a unique product at a premium cost that a customer will pay
willingly. It has been serving the mass people of the country. As the production is in a large scale
we can say it is having economies of scale. It is frequently trying to bring new products for the
customers. It has a much diversified product line with frequent research and development to
improve product quality and to offer innovative products according to customers taste. So, they
are mainly following the Differentiation strategy rather than Cost Leadership.
15

16. 1.7 Structural economic changes and alternative industries
Demographic
Demography is the study of human population in terms of size, density, location, age, gender,
race occupation and other statistics.
A large number of people in the world like smoking either in various location or occupation, at
different age. It does not depend on classification of gender. But in our country, Tobacco
Company target mainly adult person like male individuals and so as the young person who like
smoking. Based on income level BATBC produce different types of cigarettes.
Lifestyle
Lifestyle also influences our tobacco industry. At this modern era smoking is the common
phenomena and many people take smoking as of their class lifestyle. So the tobacco industry
always try to offer that kinds of product which must be consistent with their lifestyle.
Technology
There are over 18,000 different food items in today's supermarkets, which are processed to a
greater or lesser degree, and thousands of new products are introduced each year. These products
need different kinds of processing.
Mostly used technologies in food sectors are- Refrigeration, freezing, drying, control of water
activity, microbiological spoilage, enzymatic degradation, chemical degradation, Pasteurization,
Sterilization (canning),Cleaning and sanitizing, Membrane processing, Mixing, Fluid flow, Size
reduction (homogenization), Heat transfer (heating), Fluid flow, Heat transfer (cooling), Mass
transfer (conversion of water to vapor during drying),etc.
Tobacco industries use some technologies of food industries but it also follows some other
technologies. These technologies are:
Filter pellet technology, cigarette menthol, etc.
1.8 Policies and regulation
Smoke-free environments: Bangladesh has a complete smoking ban in healthcare facilities and
educational facilities. Smoking is also banned in other workplaces and public places, however
the law allows for designated smoking areas.
16

17. Advertising, promotion and sponsorship: Bangladesh does not have a comprehensive national
ban on advertising, promotion and sponsorship. Tobacco companies are permitted to advertise
through international print media, at point-of-sale, and on the Internet among other mediums.
Warning labels: Warnings are text-only and cover 30 percent of the front and back of packages.
Warnings are not applied to smokeless tobacco products.
Tobacco taxes: Tobacco taxes in Bangladesh are below the rate recommended by the World Bank (from
65 percent to 80 percent of retail price) that is commonly present in countries with effective tobacco
control policies. Bidis in particular are available at very low prices.
Evaluating the industry life cycle
Life cycle means the normal stages that a product passes through: research and development, growth,
expansion, maturity, saturation, and decline. In the researchstage, there are no sales at all. In the growth
stage, sales are slow and often need to be supplemented by heavy sales and advertising efforts. In the
expansion stage, sales may grow more rapidly. In the maturity stage, sales start slowing down as most
people who might want the product already has it. In the saturation stage, everyone who wants the
product has it, and there are few opportunities for increasing sales. In the decline stage, sales fall and the
product eventually becomes obsolete.
17

18. The overall growth of the economy in Bangladesh is 6.2%. And compare to that the profit margin for
food industry has risen to 21% in a year. By considering the last few years earning per share of food
industries and as well as the tobacco industry, we found the gradually increase in the earning per share.
So, we assume that this industry still is on its mature growth stage.
1.9 Analysis of Industry Competition
Diamond model from the Porter five forces model
The diamond model is an economical model developed by Michael Porter in his book The
Competitive Advantage of Nations, where he published his theory of why particular industries
become competitive in particular locations .The diamond model of Michael Porter for the
competitive advantages of nations offers a model that can help understand the competitive
position of a nation in a global competition.
Figure: Porters diamond model
18

19. The approach looks at clusters of industries, where the competitiveness of one company is
related to the performance of other companies and other factors tied together in the value-added
chain, in customer-client relation, or in local or regional contexts. The Porter analysis was made
in two steps. First, clusters of successful industries have been mapped in 10 important trading
nations. In the second, the history of competition in particular industries is examined to clarify
the dynamic process by which competitive advantage was created. The second step in Porter's
analysis deals with the dynamic process by which competitive advantage is created. The basic
method in these studies is historical analysis. The phenomena that are analyzed are classified into
six broad factors incorporated into the Porter diamond, which has become a key tool for the
analysis of competitiveness:
• Factor conditions are human resources, physical resources, knowledge resources, capital
resources and infrastructure. Specialized resources are often specific for an industry and
important for its competitiveness. Specific resources can be created to compensate for
factor disadvantages.
• Demand conditions in the home market can help companies create a competitive
advantage, when sophisticated home market buyers pressure firms to innovate faster and
to create more advanced products that those of competitors.
• Related and supporting industries can produce inputs which are important for
innovation and internationalization. These industries provide cost-effective inputs, but
they also participate in the upgrading process, thus stimulating other companies in the
chain to innovate.
• Firm strategy, structure and rivalry constitute the fourth determinant of
competitiveness. The way in which companies are created, set goals and are managed is
important for success. But the presence of intense rivalry in the home base is also
important; it creates pressure to innovate in order to upgrade competitiveness.
• Government can influence each of the above four determinants of competitiveness.
Clearly government can influence the supply conditions of key production factors,
demand conditions in the home market, and competition between firms. Government
interventions can occur at local, regional, national or supranational level.
• Chance events are occurrences that are outside of control of a firm. They are important
because they create discontinuities in which some gain competitive positions and some
lose.
The Porter thesis is that these factors interact with each other to create conditions where
innovation and improved competitiveness occurs.
19

20. 1.10Estimating Industry rates of return
Valuation using the Reduced Form DDM
Pi = the price of industry i at time t
D1 = expected dividend for industry i in period 1 equal to D0 (1 + g)
k = the required rate of return on the equity for industry i
g = the expected long-run growth rate of earnings and dividend for industry i
=0.1420 or 14.20%
Industry valuations using the Free Cash Flow to Equity
CAPM = Rf+(Rm-Rf)β
= 0.05 + (0.219 – 0.05) .461
= 12.8%
Industry Analysis using the relative valuation approach
The Price /Book Value Ratio
AVG Price (6 month) BV P/BV Ratio
BATBC 319.97 86.03 3.72
Bangas 2536.63 164.78 15.39
Gemini 1372.79 -110.18 -12.46
Apex Food 1212.58 317.11 3.82
AMCL (Pran) 1504.13 370.21 4.06
20

21. AVG P/BV of the industry 2.91
The Price/Equity Ratio
AVG Price (6 month) EPS P/E Ratio
BATBC 319.97 25.71 12.45
Bangas 2536.63 12.03 210.86
Gemini 1372.79 27.09 50.68
Apex Food 1212.58 9.25 131.09
AMCL (Pran) 1504.13 17.03 88.32
AVG P/E of the industry 98.68
Financial Analysis
2.1 Financial Statement Analysis
Commonsize Income Statement
To understand the pattern or flow of operating activity, company’s marginal income, overhead
cost management, more easily we present the income statement as a percentage of sales. Before
2007 BAT Bangladesh used to include its operating expenses under cost of sales. So instead of
gross profit it is better to analyses the net operating profit before Interest and tax. There is a rise
in the net operating profit as well as a decrease in the total cost over 5 years of period, though the
supplementary duty has been raised. However profit after tax is increase in last two years. For
investment purpose it is very important to get a proper bottom line so that dividend can be
distributed.
21

22. Commonsize Income Statement
2012 2011 2010 2009 2008 2007 2006
Gross Turnover
100.00
%
100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Supplymentary duty and
VAT
68.69% 68.48% 68.62% 68.09% 69.11% 68.49% 68.49%
Net turnover /Sales 32.07% 33.05% 31.97% 31.91% 30.89% 31.51% 31.51%
Cost of sales 20.42% 29.39% 29.40% 20.82% 19.82% 22.15% 29.19%
Gross profit 19.10% 17.32% 12.98% 11.10% 11.08% 9.36% 2.32%
Operating Expenses 5.72% 0.00% 6.00% 5.82% 6.03% 5.92% 0.00%
Net operating profit
before Interest and tax
7.28% 6.42% 5.98% 5.28% 5.04% 3.44% 2.32%
Interest
Net finance income 0.06% 0.00% 0.00% 0.06% 0.17% -0.12% 0.00%
5.34% 0.00% 0.00% 5.34% 5.21% 3.32% 0.00%
Workers profit
participation fund
0.27% 0.00% 0.00% 0.27% 0.26% 0.00% 0.00%
Profit before Tax 7.07% 6.06% 5.53% 5.07% 4.95% 3.32% 1.86%
Tax
Current tax 2.44% 1.75% 1.51% 1.44% 1.44% 1.11% 0.75%
Deffered tax 0.12% 0.06% 0.23% -0.12% -0.16% 0.10% 0.08%
profit after tax transfer
to revenue reserve
5.76% 4.43% 3..79% 3.76% 3.67% 2.11% 1.03%
Earnings per share 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Commonsize Balance sheet
2012 2011 2010 2009 2008 2007 2006
ASSETS
Non Current assets
Proparty, plant and equipment 22% 28% 32% 32% 35% 46% 54%
22

23. Current assets
Inventories 22% 23% 27% 25% 27% 28% 28%
Trade and other receivables 4% 8% 6% 4% 9% 4% 7%
Advance,deposits and prepayments 18% 15% 2% 18% 13% 11% 2%
Cash and Cash eqivalents 17% 17% 4% 17% 17% 11% 8%
Total Current Assets 88% 85% 73% 68% 65% 54% 46%
Total Assets 100% 100% 100% 100% 100% 100% 100%
EQUITY AND LIABILITIES
Equity
Share Capital 5% 6% 9% 5% 6% 7% 8%
Revenue reserve 33% 37% 31% 37% 39% 33% 23%
Capital Reserve 1% 1% 3% 1% 1% 1% 3%
Proposed final dividend 3% 2%
Tax Holiday reserve 2%
37% 41% 37% 43% 45% 41% 36%
Non-current liabilities
Deffered liability (gratuity) 2% 2% 5% 2% 2% 3% 5%
Deffered Tax liability 2% 5% 6% 3% 4% 6% 6%
Obligation under finance lease 0% 0% 0% 0% 0% 0% 0%
4% 8% 11% 5% 6% 9% 12%
Current liabilities
Creditors and accruals 33% 33% 37% 33% 33% 37% 38%
Provision for corporate tax 21% 15% 12% 19% 15% 13% 3%
Bank overdraft 0% 0% 1% 0% 0% 0% 0%
Short term Bank loans
52% 58% 51% 52% 48% 50% 52%
Total equity and liabilities 100% 100% 100% 100% 100% 100% 100%
Statement of Cashflow
2012 2011 2010 2009 2008 2007
Cash flow from operating
activities:
Collection from distributors, leaf
export and others
55,088,25
9
45,346,82
1
38,142,22
6
55,088,25
9
45,346,82
1
38,142,22
6
Payment for costs and expenses
(15,102,41
7)
(12,893,74
8)
(10,367,30
5)
(15,102,41
7)
(12,893,74
8)
(10,367,30
5)
Supplementary duty and vat paid
(36,832,04
4)
(30,568,01
9)
(25,932,87
7)
(36,832,04
4)
(30,568,01
9)
(25,932,87
7)
Cash generated from operation
3,153,79
8
1,885,05
4
1,842,04
4
3,153,79
8
1,885,05
4
1,842,04
4
Interex tax paid
(623,06
1)
(517,24
5)
(277,51
0)
(623,06
1)
(517,24
5)
(277,51
0)
23

24. Interest (paid)/ Income
32,21
3
76,21
2 45,573
32,21
3
76,21
2
(45,57
3)
3,562,95
0
3,444,02
1
2,518,96
1
2,562,95
0
1,444,02
1
1,518,96
1
Acquisition of property, plaant
and equipement
(836,20
2)
(271,21
1)
(231,46
7)
(836,20
2)
(271,21
1)
(231,46
7)
Proceeds from sale of property,
plant and equipment
20,87
6
69
2
8,69
2
20,87
6
69
2
8,69
2
Net cash used in investing
activities
(815,32
6)
(270,51
9)
(222,77
5)
(815,32
6)
(270,51
9)
(222,77
5)
Cash flows from financing
activities
Net short term bank loan
received/(repayment)
(800,00
0)
(800,00
0)
Net proceeds from obligator
under finance lease
10,01
5
5,54
9
(5,10
4)
10,01
5
5,54
9
(5,10
4)
Dividend paid
(1,435,94
0)
(418,28
8)
(179,51
4)
(1,435,94
0)
(418,28
8)
(179,51
4)
Net cash used in financing
activities
(1,425,92
5)
(412,73
9)
(984,61
8)
(1,425,92
5)
(412,73
9)
(984,61
8)
Net increase/(decrease) in cash
and cash equivalents for
theyear
521,69
9
560,76
3
3421,5
68
321,69
9
760,76
3
311,56
8
Cash and cash equivalent at the
beginning of the year
1,678,46
6
917,70
3
606,13
5
1,678,46
6
917,70
3
606,13
5
Cash and cash equivalent at
the end of the year
2,000,16
5
1,678,46
6
917,70
3
2,000,16
5
1,678,46
6
917,70
3
2.2 Analysis of Financial Ratio
2012 2011 2010 2009 2008 2007 2006
Information for - Ratio
analysis
Net Sales
119334
59
110253
81
175764
90
14030
386
11933
459
11025
381
92605
14
Average Equity
3,004,4
46
2,633,3
25
4,847,8
37
3,909,
165
3,004,
446
2,633,
325
2,679,
818
Net Income
798,97
1
361,58
3
2,068,5
66
1,668,
778
798,97
1
361,58
3
232,8
82
Average Assets
9,964,7
50
7,241,5
51
14,266,
713
14,447
,672
9,964,
750
7,241,
551
3,467,
542
24

25. ROE 57% 54% 43% 43% 27% 14% 9%
ROA 28% 15% 14% 12% 8% 5% 7%
ROS 17% 13% 12% 12% 7% 3% 3%
Internal liquidity
Ratios
1. Current ratio 3.08 2.88 1.51 1.35 1.08 0.88 0.74
2. Quick ratio 0.52 0.34 0.74 0.79 0.52 0.34 0.22
3. Cash ratio 0.23 0.15 0.32 0.35 0.23 0.15 0.07
Operating
Profitability Ratios
Gross profit margin 39.70% 37.36% 34.78%
35.86
%
29.70
% 7.36%
6.30
%
Operating profit margin 20.91% 17.36% 16.55%
16.33
%
10.91
% 7.36%
6.30
%
Net profit margin 16.70% 13.28% 11.77%
11.89
% 6.70% 3.28%
2.51
%
Operating Efficiency
Ratios
Total Asset Turnover 1.20 1.52 1.23 0.97 1.20 1.52 2.67
Tim
es
Net Fixed Asset
Turnover 5.23 5.09 4.61 4.05 3.23 2.69 2.14
Tim
es
Equity Turnover 4.97 4.09 3.63 3.59 3.97 4.19 3.46
Tim
es
Solvency Ratios
i. Receivables Turnover 28.71 23.32 25.67 24.55 28.71 23.32
Tim
es
1. Average Receivable
Collection Period 13 16 14 15 13 16
Day
s
ii. Inventory Turnover 3.86 5.16 3.64 3.63 3.86 5.16
Tim
es
2. Average Inventory
Processing Period 95 71 100 101 95 71
Day
s
iii. Payables Turnover
Ratio 2.09 3.25 3.19 2.90 2.89 3.75
Tim
es
3. Cash Conversion
Cycle Payables
Payment Period 128 197 114 126 126 97
Day
s
25

26. Internal liquidity Ratios
In internal liquidity ratios there are Current ratio, Quick ratio and Cash ratio which shows the
condition of the liquidity of the organization in terms of liquidity. They have a progressive state
in the years to come.
Operating Profitability Ratios
Before 2007 their annual report used to show the operating expenses under cost of sales, as a
result the gross profit margin is significantly lower in 2005 and 2006 compare to the rest.
However if we analyze the table the fact reveal that, the turnover across last 5 years has
increased tremendously. The reason behind this might be an increase in the per unit selling price
of their consumer product. Whatever the fact is, their Net Income tends to increase gradually and
for the last two years maintaining a sustainable position.
Operating Efficiency Ratios
This is an indicator for management’s performance in the operations of business. The main
emphasis remains on the utilization of the organization’s resources. There are two categories for
evaluation this portion. In addition the calculation is also done on the basis of equity as well.
BATBC also has a progressive trend in this portion as well
Solvency Ratios
This ratio is a qualitative analysis of a firm’s marketing and credit policy and debtors
realizations. In other words, if the firm sells goods on credit, the realization of sells revenue is
delayed and the receivables (both debtors and/or bills) are created. It is calculated to know the
uncollected portion of credit sales in the form of debtors by establishing relationship between
trade debtors & net credit sales of the business. Higher the value of debtors’ turnover, the more
efficient is the management of debtors. An increase in this ratio is an indication of firm’s
marketing superiority and efficiency in credit realization.
On the other hand Average collection period shows the time in which the customers are paying
for credit sales. A higher debt collection period is thus, an indication of the inefficiency and
negligence on the part of management. On the other hand, if there is decrease in debt collection
period, it indicates prompt payment by debtors which reduces the chance of bad debts
26

27. 2.3Risk Analysis
Business risk
Sales Variability is the prime determinant of earnings variability. In turn, the variability of sales is mainly
caused by a firm’s industry and is largely outside the control of management.
2006 2007 2008 2009 2010 2011 2012
Sales 29,508,675 34,994,149 37,869,293 45,414,187 55,074,651 69,508,675
74,994,14
9
Mean 40572191
Variance 98646966937510.00
SD 9932117.95
Sales Volatility 0.24
2.4Analysis of Growth Potential
2007 2008 2009 2010 2011
Operating income after tax 232,882 361,583 798,971 1,668,778 2,068,566
Dividend 30% 30% 70% 240% 300%
Retention Rate 70% 70% 30% -140% -200%
ROE 9% 14% 27% 43% 43%
Growth Rate 6.08% 9.61% 7.98% -59.77% -85.34%
The analysis of sustainable growth potential examines ratios that indicate how fast a firmshould
grow. Analysis of a firm’s growth potential is important for both lenders and owners. Creditors
27

28. also are interested in a firm’s growth potential because the firm’s future success is the major
determinant of its ability to pay obligations, and the firm’s future success is influenced by its
growth. The growth of business, like the growth of any economic entity, including the aggregate
economy,depends on
1. The amount of resources retained and reinvested in the entity, and
2. The rate of return earned on the resources retained and reinvested.
Due to the high rate of dividend declared the growth has decreased in the present year. It has also
effected the retention rate.
2.5Comparative Analysis
The importance of ROE as an indicator of performance makes it desirable to divide the ratio into
several components that provide insights into the causes of a firm’sROE or any changes in it.
This breakdown of ROE into component ratios is generally referred toas the DuPont system. To
begin, the return on equity (ROE) ratio can be broken down into tworatios that we have
discussed—net profit margin and equity turnover.This breakdown is an identity because we have
both multiplied and divided by net sales. Tomaintain the identity, the common equity value used
is the year-end figure rather than the averageof the beginning and ending value.
28

29. 2012 2011 2010 2009 2008 2007 2006
Profit Margin
0.03279
6
0.02514
8
0.11768
9 0.11894
0.06695
2
0.03279
6 0.025148
Total Asset Turnover
1.46069
9
1.33531
4
1.46232
3
1.40467
8
1.48429
4
1.46069
9 1.335314
Financial Leverage
2.77081
4
2.72762
8
2.32841
6
2.20320
1
2.44760
2
2.77081
4 2.727628
ROE
0.23273
4
0.08159
4 0.40072
0.36809
5
0.24323
5
0.13273
4 0.091594
It shows that BATBC generally increased their profit margin in the last tow years. However for higher
financial leverage last year’s performance was better.
3.Company analysis
3.1 Nature of the company and stock
1. BATBC Ltd.is a public limited company incorporated in Bangladesh.
2. BATBC is a food and beverage types of company.
3. It is listed in the Stock Exchange Securities.
4. BATBC have category“A” share in the stock market.
Influence of the economic and industry condition
Different organizational strategy
In case of BATBC we see that, it has been able to maintain a unique product at a premium cost
that a customer will pay willingly. It has been serving the mass people of the country. As the
production is in a large scale we can say it is having economies of scale. It is frequently trying to
bring new products for the customers. It has a much diversified product line with frequent
research and development to improve product quality and to offer innovative products according
to customers taste. So, they are mainly following the Differentiation strategy rather than Cost
29

30. Leadership. Besides the brand value of BATBC has made the customers less price sensitive as
they emphasize more on the brand value.
3.2 SWOT analysis
Strengths:
1. Strong brand image.
2. Adequate financial resources.
3. Well thought of by buyers
4. An acknowledged market leader.
5. Well –conceived functional area strategies.
6. Insulated from strong competitive pressures.
7. Proven management.
8. Better manufacturing capability.
9. Superior technological skills.
10.Strong distribution network.
Weakness:
1. Lack of advertisement.
2. Higher overall unit costs relative to key competitors.
Opportunities:
1. Serve additional customer group.
2. Enter new markets and segments.
3. Expand product line to meet broader range of customer needs.
30

31. Threats:
1. Restriction imposed by the government.
2. Entry of lower-cost foreign competitors
3. Rising sales of substitute product
4. Lack of raw materials
3.3Stock Valuation
DDM
Pi = the price of industry i at time t
D1 = expected dividend for industry i in period 1 equal to D0 (1 + g)
k = the required rate of return on the equity for industry i
g = the expected long-run growth rate of earnings and dividend for industry i
=0.333574 or 33.36%
CAPM = Rf+(Rm-Rf)β
= 0.05 + (0.219 – 0.05) .414
= 12%
31

32. 3.4 Relative Valuation
The Price /Book Value Ratio
AVG Price (6 month) BV P/BV Ratio
BATBC 319.97 86.03 3.72
The Price/Equity Ratio
AVG Price (6 month) EPS P/E Ratio
BATBC 319.97 25.71 12.45
3.5 Measures of Value Added
In addition to DDM, there has been growing interest in a set of performance measures
referred to as “value added” measures. These value added measures of performance are directly
considering economic profit. There are two main considerations of value added measures as:
• Economic value added (EVA), and
• Market value added (MVA).
Economic Value Added
EVA is closely related to the net present value (NPV) technique where we can evaluate the
expected performance of an investment by discounting its future cash flows at the firm’s WACC
and when there is positive NPV, it implies that it will add to the value of the firm. In EVA, the
evaluation of the annual performance of management is done by comparing the firm’s net
operating profit less adjusted taxes to the firm’s total cost of capital in dollar terms, including the
cost of equity.
Market Value Added
In contrast to EVA, which generally is an evaluation of internal performance, MVA is a measure
of external performance-how the market has evaluated the firm’s performance in terms of the
market value of debt and market value of equity compared to the capital invested in the firm.
Market Value Added (MVA) = (Market Value of Firm)-Capital-Market Value of Debt
–Market Value of Equity
3.6 Sensitivity Analysis
32

33. Change in Sales
Base 10% Increase 10% Decrease
Gross Turnover 55,074,651 60,582,116 49,567,186
Supplymentary duty and VAT 37,498,161 37,498,161 37,498,161
Net turnover /Sales 17,576,490 23,083,955 12,069,025
Cost of sales 11,463,840 11,463,840 11,463,840
Gross profit 6,112,650 11,620,115 605,185
Operating Expenses 3,204,204 3,204,204 3,204,204
Net operating profit before Interest and
tax 2,908,446 8,415,911 (2,599,019)
Interest
Net finance income
32,21
3
32,21
3 32,213
2,940,659 8,448,124 (2,566,806)
Workers profit participation fund 147,033
147,03
3 147,033
Profit before Tax 2,793,626 8,301,091 (2,713,839)
Tax
Current tax 790,588
790,58
8 790,588
Deffered tax
(65,528
)
(65,528
)
(65,528
)
725,060
725,06
0 725,060
profit after tax transfer to revenue
reserve 2,068,566 7,576,031 (3,438,899)
Change in COGS
Base 10% Increase 10% Decrease
Gross Turnover 55,074,651 55,074,651 55,074,651
Supplymentary duty and VAT 37,498,161 37,498,161 37,498,161
Net turnover /Sales 17,576,490 17,576,490 17,576,490
Cost of sales 11,463,840 12,610,224 10,317,456
Gross profit 6,112,650 4,966,266 7,259,034
Operating Expenses 3,204,204 3,204,204 3,204,204
Net operating profit before Interest and tax 2,908,446 1,762,062 4,054,830
Interest
Net finance income
32,21
3 32,213 32,213
2,940,659 1,794,275 4,087,043
Workers profit participation fund 147,033 147,033 147,033
Profit before Tax 2,793,626 1,647,242 3,940,010
33

34. Tax
Current tax 790,588 790,588 790,588
Deffered tax (65,528) (65,528) (65,528)
725,060 725,060 725,060
profit after tax transfer to revenue reserve 2,068,566 922,182 3,214,950
3.8 Scenario Analysis
Suppose Sale will Change By 25% in Best & Worst Case
Best Case Base Case Worst Case
Gross Turnover
68,843,31
4
55,074,6
51
41,305,9
88
Supplymentary duty and VAT
37,498,16
1
37,498,1
61
37,498,1
61
Net turnover /Sales
31,345,15
3
17,576,4
90
3,807,8
27
Cost of sales
11,463,84
0
11,463,8
40
11,463,8
40
Gross profit
19,881,31
3
6,112,6
50
(7,656,01
3)
Operating Expenses
3,204,20
4
3,204,2
04
3,204,2
04
Net operating profit before Interest
and tax
16,677,10
9
2,908,4
46
(10,860,21
7)
Interest
Net finance income
32,2
13
32,2
13
32,2
13
16,709,32
2
2,940,6
59
(10,828,00
4)
Workers profit participation fund
147,0
33
147,0
33
147,0
33
Profit before Tax
16,562,28
9
2,793,6
26
(10,975,03
7)
34

35. Tax
Current tax
790,5
88
790,5
88
790,5
88
Deffered tax
(65,5
28)
(65,5
28)
(65,5
28)
725,0
60
725,0
60
725,0
60
profit after tax transfer to revenue
reserve
15,837,22
9
2,068,5
66
(11,700,09
7)
3.9 Financial distress cost calculation (possibility of
bankruptcy)
Altman Equation for Bankruptcy/ insolvency prediction
Z-Score= 1.2{Net working capital/total asset} + 1.4{Retained Earnings/Total asset} +
3.3{Earnings before interest and tax/Total asset} + 0.6 {Market value of
Equity/Book Value of liability} + 1.0{Sales /total asset}
Net working Capital 6249251
Retained earnings 4497224
Earning beofre interest and
tax 2908446
Market Value of Equity 5162120
Sales 55074651
Total assets 12019565
Book balue of liability 6857445
Calculation for Z-score
X1 0.62390787
X2 0.52382209
X3 0.79852073
X4 0.4516656
X5 4.58208354
Z-Score 6.97999983
Z-Score is more then 3.0. So, there is a low probability of bankruptcy. On the hand, the
management ability is very strong when it come Managements ability to compete.
35

36. 36

37. 4.0 Findings
 The profit margin was fairly consistent throughout the years.
 The Company pays dividend consistently in fact pays in an increasing trend every year.
 The Company has no chance of being bankrupt.
 The Company was successful to bring down noncurrent liabilities to a minimum level.
 The Company’s liquidity is not enough over the years. Liquidity Ratios show that BATB is
not in a good position as standard to meet its current obligation.
 The industry average of price earnings ratio is 12.44, if we compare it with the BAT
Bangladesh we find that since 2007 its EPS is above industry average. And in 2009 their EPS
has climbed to 34.48 approximately, so the earning multiplier is Tk429 (=12.44x34.48). But
during that period, December 9, 2009, market value of its share was Tk 409. As earning per
share is increasing and that gives a positive aspect for the existing shareholders to hold their
shares. Any new investor will want to include BAT Bangladesh’s share in their portfolio.
5.0 Recommendation
 From the commons size balance sheet it is understood that the inventory is not so high at this
moment compare to Company’s historical data. But the company should always be careful so
that inventory does not pile up.
 Rise of operating cost, supplementary duties and surcharge on both raw materials and
finished products, stiff competition from smuggled cigarettes and lack of protection from the
law of the land led the turnover of the company to fall. It resulted that the profitability of the
company slipped downwards sharply. BATB should create pressure on Government on
smuggled cigarette issue as.
 From the trend analysis it is seen that the value ratios are better in case of BATBC. BATBC
gives good dividend and earnings per share are also good. The company always keeps its
shareholders happy but the company should remember that their main job is to increase
shareholder’s wealth not only offering high dividend.
37

38. 6.0 Conclusion
In the end it is only fair to mention that British American Tobacco is a multination Corporation
with strong brand value. In this study we have showed that the condition of the entire industry of
security market in Bangladesh. In compare to that the total security market and industry in
particular, food sector has a different position in the market. To be precise in the time of the
recession the food sector remained unchanged in the security market. The security condition for
BATBC is also holds promising return compared to the security market. It is highly noticeable
that the stock of BATBC has higher return with lower risk. So, it would be wise to add this stock
in the portfolio. Beside that the Z-score shows that the management’s ability to compete and the
brand value along with it makes quite promising for the cautious investors.
38