Evaluation Of BRITISH AMERICAN TOBACCO PLC – A Financial Analysis Report

Module aims and objectives

The report has been prepared to identify the various tools to identify the value of a business in the marketplace. A business and the investors are required to identify various tools and techniques on the basis of which the correct worth of the business could be recognized. In this report, BRITISH AMERICAN TOBACCO PLC has been taken into the concern and various financial tools such as EVA analysis, total shareholder return, net asset value, ratios, discounted cash flows etc have been calculated on the company to reach over a conclusion about the overall performance of the company in the market and the investment position of the company (Lumby and Jones, 2007).

BRITISH AMERICAN TOBACCO PLC is a British multinational company which operates its activities under tobacco industry in the US market. Headquarter of the company is in London. The company services its products and revises at worldwide. It is one of the leading companies in around 50 countries in tobacco industry. The company has managed better strategies and financial planning to improve the overall performance of the business in the industry (Home, 2018).

Economic value added is a measurement tool to identify the residual value of an organization. It valuates the financial performance of the business on the basis of the operating profits and the cost of capita of the business. It briefs the exact economic value of the business (Madura, 2014). The EVA analysis has been done on BRITISH AMERICAN TOBACCO PLC to identify the economic worth of the business.

For analyzing the EVA figures of the business, the operating profit of the business has been collected form the annual report of the company. The US corporate tax which is 20% has been taken into the context further. The WACC of each year has been calculated through collecting the data from various authentic websites and the US official websites. On the basis of the overall EVA analysis, it has been found that the EVA position of the company as enough strong in the year of 2013. But along with the time, a decrement has been seen in the economic profit position of the company (lord, 2007).

The current year performance of BRITISH AMERICAN TOBACCO PLC explains that the economic profit level of the company is highest and thus the company is performing better in the market. The investment level of the company has also been improved.

Assignment tasks

Figure 1: Economic Value analysis

(Morningstar, 2018)

Further, the study has been done on the total shareholder return of the company (Lord, 2007). Total shareholder return (TSR) is a measurement tool which evaluates the performance of the stock of a business, it combines the share price, and dividend paid etc items of the company to identify the total return to shareholder which is mainly expressed in the percentage form (Lee and Lee, 2006).

In case of BRITISH AMERICAN TOBACCO PLC, it has been found that the total shareholder return of the company was 51.58%, 19.65%, -2.58%, 44.22% and 29.11% respectively in the year of 2017, 2016, 2015, 2014 and 2013. It expresses that the worth of the shareholders in the business was highest in the year of 2017. The huge changes have occurred due to the great increment in the stock price of the company in the year of 2017 (Morningstar, 2018). Further, it has been found that the overall position of the company is improving constantly and because of it, the total shareholder return of the company is also showing positive result. It briefs a better investment position in the company.  

Figure 2: Total shareholder return

(Morningstar, 2018)

Further, the comparison has been done among the stock price of the British American tobacco Plc and the competitors valuation and it has been found that the overall position of the company is very lowered in the industry in terms of P/E ratio, Price book ratio, price sales ratio etc. (Jiashu, 2009) the below image depicts that the huge changes are required to be done by the company in order to improve the overall performance of the business (Jiashu, 2009). The changes could help the company to improve the overall performance in the market.

Net asset value is the valuation model which describes that total value of the business on the basis of an organization’s assets minus the liabilities value of the business. The net asset value of a company is recognized in order to identify the overall performance of the business and the total equity value of the business to run the operations of the business smoothly (Horngren, 2009). The net asset value method has been applied on BRITISH AMERICAN TOBACCO PLC to recognize the worth of the business on the basis of its equity amount.

In case of BRITISH AMERICAN TOBACCO PLC, it has been found that the net asset value of the company has been improved in the year of 2017 at huge level. The overall value of the company was better in earlier months as well but in the recent year, a huge increment has been seen. The net shareholder value of the business has been improved from $ 348.97 to $ 2974.75 from 2013 to 2017. It express that the worth of the company has been improved at great level and thus the company is a good choice for the purpose of investment.

Company overview

Figure 3: Net asset value method

(Yahoo Finance, 2018)

Ratio analysis is one of the financial analysis tools which are applied on the financial statement of the company to recognize the various financial level of the business. It makes it easier for the business and the stakeholders of the business to identify the changes into the business at different level. The comparable ratios of the BRITISH AMERICAN TOBACCO PLC have been done to recognize the changes into the performance of the company. The different ratios of the company have been calculated which are as follows:

Price earnings ratio is an investment ratio which depicts the total price and earnings relation in a business (Higgins, 2012). The comparison has been done among the price earnings ratio of the British American tobacco Plc and the competitors and it has been found that the overall position of the company is much lowered in the industry in terms of P/E ratio. The below image depicts that the PE ratio of BTI is 2 and the industry average is 14.2 which depict huge differences. And thus the business is required to improve the profitability level and market position so that the PE level could be improved.

Further, the Price book ratio has been calculated which is also an investment ratio and depicts the total market price of a stock against the book stock price of the company. The comparison has been done among the price book ratio of the British American tobacco Plc and the competitors and it has been found that the overall position of the company is very lowered in the industry in terms of price book ratio (Horngren, 2009). The below image depicts that the Price book ratio of BTI is 1.3 and the industry average is 7.2 which depict huge differences. And thus the business is required to improve the market position so that the PE level could be improved.

Further, the EV/EBITDA ratio has been calculated which is also an investment ratio and depicts the total enterprise value of a business against the earnings before the interest, taxes, dividend and the amortization of the company (Hillier, Grinblatt and Titman, 2011). The comparison has been done among the price book ratio of the British American tobacco Plc and the competitors and it has been found that the overall position of the company is very lowered in the industry in terms of managing the enterprise value against the EBITDA. The company is required to make the changes into the financial strategies and policies so that the profitability level of the company could be improved and the company get succeed to make a better position in the market.

EVA analysis

Discounted cash flow method is one of the crucial business valuation models. It takes the concern on the historical cash flows position of the business to estimate the future cash flows of the business. On the basis of which an intrinsic value of the business is calculated and it is compared to the market book price of the company to identify that how much changes have taken place into the overall position of the company in a given period of time (Higgins, 2012).

The discounted cash flow method has been applied on BRITISH AMERICAN TOBACCO PLC. Firstly, the future cash flows of the business have been calculated on the basis of the last 5 years cash flows of the business. It has been found that the FCFF of the company is $ 34,27,444.60. the growth rate among the dividends of the company are 12.67% which is quite higher in the industry and thus the industry data has been taken to measure the overall growth of the business which s 3.33% (Appendix).

In addition, firstly the future cash flows of the next 10 years have been calculated and it has been found that the terminal cash flow of the business is $ 49,14,644.57. The present value method has been applied on the future cash flows and the terminal cash flows of the business to identify the current worth of the business (Appendix). The WACC i.e. 1.17% rate has been applied on the future cash flows and terminal cash flows of the business and it has been found that the total PV of next 10 year cash outflows of the business are $ 38,569,707.91 (Investing, 2018).

The present value of terminal cash flows of the business is $ 52,622,162.78 which was earlier $ 4,914,644.57. On the basis of present value of terminal cash flows of the business, the valuation process has been applied on the financial figures of the company. Firstly, the total worth of the business has been calculated through adding the terminal cash flows and the PV of future cash flows of the business (Appendix). The total value of the firm is $ 91,191,870.68. Further, the total debt amount of the company has been deducted from the total value of the firm to recognize the value of the equity of the business.

The total value of equity of the business has been estimated $ 26.501,870.98. The total stock price of the company has been dividend by the outstanding shares of the company i.e. 20,440 to identify the per share value of equity off the business which is 1296.57. It express that the intrinsic value of the company is $ 1296.57. However, the market price of the company is $ 4848 (Yahoo Finance, 2018). It express that the market position of the company is overvalued.  

Conclusion:

On the basis of the various valuation model of the company, it has been found that the BRITISH AMERICAN TOBACCO PLC has made various changes into the financial strategies and policies in last 5 years which impact could be seen in the valuation process of the business. However, on the basis of the overall financial valuation model, it has been found that the stock price of the company is undervalued. The market price of the company is $ 4848 in current market. On the other hand, the intrinsic value of the company from the entire valuation model is lower the market value and thus it is concluded that the stock price of the company is undervalued.

The valuation method makes it easier for the investors and the financial analyst to identify the economical profit and worth of the business and make better decision about the investment level of the business.

References:

Gapenski, L.C., 2008. Healthcare finance: an introduction to accounting and financial management. Health Administration Press.

Government publications. 2018. Rates and allowances. [online]. Available at: https://www.gov.uk/government/publications/rates-and-allowances-corporation-tax/rates-and-allowances-corporation-tax (accessed 17/9/18).

Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.

Hillier, D., Grinblatt, M. and Titman, S., 2011. Financial markets and corporate strategy. McGraw Hill.

Home. 2018.Britsih American tobacco plc. [online]. Available at: https://www.bat.com/ (accessed 17/9/18).

Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education India.

Investing. 2018.Bond rates. [online]. Available at: https://uk.investing.com/rates-bonds/uk-5-year-bond-yield-historical-data (accessed 17/9/18).

Jiashu, G., 2009. Study on Fair Value Accounting——on the essential characteristics of financial accounting [J]. Accounting Research, 5, p.003.

Lee.C.F and Lee, A, C,.2006. Encyclopedia of finance, Springer science, new York

Lord, B.R., 2007. Strategic management accounting. Issues in Management Accounting, 3 (2). P. 17.

Lumby,S and Jones,C,.2007. Corporate finance theory & practice, 7th edition, Thomson, London

Madura, J. 2014. Financial Markets and Institutions. Cengage Learning.

Morningstar. 2018.Britsih American tobacco plc. [online]. Available at: https://investors.morningstar.com/ownership/shareholders-overview.html?t=BTI&region=usa&culture=en-US (accessed 17/9/18).

Yahoo finance. 2018.Britsih American tobacco plc. [online]. Available at: https://finance.yahoo.com/quote/bti?ltr=1 (accessed 17/9/18).

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