COMPANY: BRITISH AMERICAN TOBACCO BANGLADESH

OBJECTIVE: PERFORMANCE ANALYSIS

DATA SOURCE: FINANCIAL STATEMENT

YEARS COVERED: FROM 2004 TO 2008

ANALYTICAL TECHNIQUES:

• Financial Statement Analysis

• Ratio Analysis
• Inventory Analysis
• Depreciation Analysis
 BRITISH AMERICAN TOBACCO BANGLADESH COMPANY

INCOME STATEMENT

2008 2007 2006 2005 2004

TAKA'000 TAKA'000 TAKA'000 TAKA'000 TAKA'000
45414187 37869293 34994149 29508675 27137227
Gross Sales 323.68% 317.34% 317.40% 318.65% 314.40%
Less:Supplementary duty 31383801 25935834 23968768 20248161 18505658
and VAT 223.68% 217.34% 217.40% 218.65% 214.40%
14030386 11933459 11025381 9260514 8631569
Net Sales 100.00% 100.00% 100.00% 100.00% 100.00%
8999361 8388786 6691432 5750696 5048435
Less:Cost of sales 64.14% 70.30% 60.69% 62.10% 58.49%
5031025 3544673 4333949 3509818 3583134
Gross Profit 35.86% 29.70% 39.31% 37.90% 41.51%
2858882 2242677 3522032 2926030 2550263
Less:Operating expenses 20.38% 18.79% 31.94% 31.60% 29.55%
2172143 1301996 811917 583788 1032871
EBIT/operating income 15.48% 10.91% 7.36% 6.30% 11.97%
76212 45573 160504 133045 122537
Less:Interest .54% .38% 1.46% 1.44% 1.42%
2248355 1256423 651413 450743 910334
Profit before tax 16.02% 10.53% 5.91% 4.87% 10.55%
Tax 579577 457452 289830 217861 237022
 4.13% 3.83% 2.63% 2.35% 2.75%
1668778 798971 361583 232882 673312
Net Income 11.89% 6.7% 3.28% 2.51% 7.8%

INTERPRETATION:

• In the 2004, BATBC had the lowest cost of goods sold whereas it was higher in 2005,
2006 and 2008. Cost of goods sold was highest 70.30% in the year 2007 although sales is
much less than 2008. So, in 2008, BATBC performed better to control its cost of sales
with higher sales.
• Operating expense was the lowest in the year 2007. It was much higher in the earlier
years (2004-2006). Later, BATBC managed to reduce its operating expense in 2007 and
2008. In managing operating expense, BATBC has improved a lot. Because in 2008 it is
only 20.38%.It came to almost two-third of earlier years’ operating expense which is
obviously a good indication for investors that BATBC is concentrating to reduce their
operating expense.
• Reflecting these differences, BATBC achieved the highest EBIT(15.48% of sales) in
2008 whereas it is the lowest in the year 2005(6.30% of sales). In 2004, they had higher
EBIT (11.97%) than 2005 and 2006. Their performance in managing all operating
expenses in 2004 was better than in 2005 and 2006.
• BATBC had paid higher interest in the earlier years which can easily be understood from
the income statement. Since they had more percentage of debt in their capital structure,
interest expense was higher in those three years. In 2007 and 2008, they incurred less
interest expense (.38% and .54% respectively) because they reduced their debt
percentage.
• Profit before tax for BATBC is the highest in 2008 (16.02% of sales). It was also much
higher in 2004 and 2007(10.55% and 10.53% respectively). Profit before tax is the lowest
in 2005(4.87% of sales) and a little bit higher in 2006(5.91% of sales).
• Tax was the highest in 2008 (4.13% of sales) and the lowest in 2005 (2.35%). In the other
years, it was somewhere between in these two years depending on the profit before tax.
 • Net income is the highest in 2008 (11.89% of sales) and the lowest in 2005 (2.51%).In
the other years, it fluctuated between these two limits. After, 2005 it was increasing till
2008 which surely indicates something positive about BATBC to the investors.

BALANCE SHEET

ASSETS 2008 2007 2006 2005 2004

Non-current assets
Property, plant and 3462803 3698164 4105423 4317857 3802781
equipment 34.67% 46.00% 54.39% 61.28% 58.81%
Current assets
3451652 2507601 2271107 2006493 2132167
Inventories 34.56% 31.19% 30.09% 28.47% 32.98%
18430 1524 8162 16590 6129
Letter of credit 00.18% 0.02% 0.11% 0.24% 0.09%
81980 14610 287544 178220 98461
Trade debtors 0.82% 0.18% 3.81% 2.53% 1.52%
21832 9326 81891 52316 52261
Sundry debtors 0.22% 0.12% 1.08% 0.74% 0.81%
122242 25460 377597 247126 156851
Trade and other receivables 1.22% 0.32% 5.00% 3.51% 2.43%
Advance, deposit and 1273169 890895 187756 118889 123595
prepayments 12.75% 11.08% 2.49% 1.69% 1.91%
1678466 917703 606135 356299 250427
cash and cash equivalents 16.80% 11.41% 8.03% 5.06% 3.87%
6525529 4341659 3442595 2728807 2663040
Total current assets 65.33% 54.00% 45.61% 38.72% 41.19%
Total assets 9988332 8039823 7548018 7046664 6465821
 100% 100% 100% 100% 100%
EQUITY AND
LIABILITIES
Equity
600000 600000 600000 600000 600000
Share capital 6.01% 7.46% 7.95% 8.51% 9.28%
3868658 2619880 1928015 1746432 2008550
Revenue Reserve 38.73% 32.59% 25.54% 24.78% 31.06%
64896 64896 196101 196101 208553
Capital reserve 0.65% 0.81% 2.60% 2.78% 3.23%
4533554 3284776 2724116 2542533 2817103
Total equity 45.39% 40.86% 36.09% 36.08% 43.57%
Non-current liabilities
186800 218152 391810 373370 313328
Deferred liability(gratuity) 1.87% 2.71% 5.19% 5.30% 4.85%
426875 501552 475952 449122 368809
Deferred tax liability 4.27% 6.24% 6.31% 6.37% 5.70%
18843 15338 22006 18159 7213
Obligation under finance lease 0.19% 0.19% 0.29% 0.26% 0.11%
632518 735042 889768 840651 689350
Total non-current liabilities 6.33% 9.14% 11.79% 11.93% 10.66%
Current liabilities
183709 53721
Bank draft - - - 2.61% 0.83%
800000 750000 720000
Short term bank loan - - 10.60% 10.64% 11.14%
1333738 1065844 765454 522425 321276
creditors 13.35% 13.26% 10.14% 7.41% 4.97%
1940975 1875820 2105680 2057346 1667349
accruals 19.43% 23.33% 27.90% 29.20% 25.79%
1547547 1078341 263000 150000 197022
provision for corporate tax 15.49% 13.41% 3.48% 2.13% 3.05%
4822260 4020005 3934134 3663480 2959368
Total current liabilities 48.28% 50.00% 52.12% 51.99% 45.77%
5454778 4755047 4823902 4504131 3648718
Total liabilities 54.61% 59.14% 63.91% 63.92% 56.43%
Total liabilities and owners' 9988332 8039823 7548018 7046664 6465821
equity 100% 100% 100% 100% 100%

INTERPRETATION:

• From the common size balance sheet we see that BATBC’s property, plant and
equipment is decreasing in percentage of its total assets. This percentage decrease in
 fixed assets may consist of a cumulative effect of depreciation, low capital expenditure
and disposal of fixed assets. It was the highest in 2005(61.28% of total assets) and the
lowest in 2008 (34.67% OF assets). From 2004 t0 2008 they have been disposing some of
their fixed assets with some gains or losses. As a result, the percentage of fixed assets is
decreasing. It indicates that they have less capital tied up in form of fixed asset out of
their total asset.
• They have been maintaining a sufficient amount of inventory in their storehouse and to
some extent, the percentage of inventory throughout five years is consistent with a little
fluctuation. It means that they are efficient in estimating and managing their inventory at
a lower cost and meeting the demand.
• Their receivables is the highest in 2006 with 5% of total asset. Before this year, it was
increasing. In 2006, their trade debtor was also the highest with 3.81% which reflect that
BATBC maintains an effective credit policy strictly.
• BATBC’s advance, deposit and prepayments are increasing every year except the year
2005. It means they are investing their capital in non-cash generating assets and since this
percentage is increasing, it is obvious that they are relying more on this asset.
• BATBC has the highest cash percentage in the year 2008(16.80%) and it was increasing
since 2004. It indicates BATBC is becoming financially stronger than previous years. It
certainly improves the liquidity position of the company which is a positive signal to the
creditors and short term lenders but shareholders may not like it. Because the percentage
of idle capital is increasing.
• From the common size statement we see that every year except 2005 current assets’
percentage is increasing which improves the liquidity position of the company. As a
result, we see that they can pay their current liabilities by current assets in 2007 and 2008
whereas it is not possible in other years.
• Percentage of share capital is decreasing; revenue reserve is increasing(except 2005) and
capital reserve is also decreasing. Their total equity percentage is also fluctuating in all
the years and it is the highest in 2005.It may be a result of change in capital structure
policy.
• Their long term liabilities was higher in earlier years and is the lowest in 2008(6.33%).
Their credit liablilities is increasing and accruals is decreasing and tax provision is
 increasing.Short term bank loan and bank draft was their in earlier years. As a result,
current liabilities’ percentage is fluctuating.
• Their total liabilities is decreasing year by year which indicates that they relying a little
bit less in external fund but as stated earlier, it may be a result of their capital structure
policy.

RATIO ANALYSIS

ACTIVITY RATIOS

Activity ratios 2008 2007 2006 2005 2004

Short term activity ratios
inventory turnover ratio(in times) 3.63 3.86 3.25 2.78 2.32
Avg. no of days inventory in
stock 100.67 94.65 112.15 131.34 157.06
Receivables turnover ratio(in
times) 290.51 78.99 47.34 66.94 100.59
Avg. no of days receivables
outstanding 1.26 4.62 7.71 5.45 3.63
Payable turnover ratio(in times) 7.90 9.31 10.55 13.33 10.89
Avg. no of days payables
outstanding 46.23 39.19 34.61 27.37 33.51

Long term activity ratios 2008 2007 2006 2005 2004

Fixed assets turnover 3.92 3.06 2.62 2.28 2.28
Total assets turnover 1.56 1.53 1.51 1.37 1.33

INTERPRETATION:

• Inventory turnover Ratio measures how many times inventory has turned over or sold
in a year. Higher the ratio indicates that the company can sell their inventory very
 rapidly. Inventory turnover ratio of BATBC was increasing from the year 2004-2007. So
their inventory management is getting better year by year. In 2008, it decreased slightly,
as a result of decrease in COGS and an increase in inventory level.

• Inventory Turnover Period indicates how many days inventories are kept in the
warehouse to sell. Shorter the ratio is better for the company. Lower ratio indicates that
inventories do not remain rather turn over rapidly from the time of acquisition to sale.
BATBC’s inventory turnover period was decreasing from 2004 to 2007 which indicated
their efficiency was increasing in inventory management but in year 2008, the turnover
period increased due to lower turnover ratio with low COGS and high inventory.

• Receivables turnover Ratio This ratio measures how many times receivables are turned
over in a given year. It also measures the effectiveness of the firm’s credit policy. It also
indicates the level of investment needed to maintain the firm’s sales level. Higher the
ratio is better for the firm as it indicates that the company can convert their account
receivable into cash very quickly. From 2004-2006, it was decreasing. Because
receivables were increasing at higher proportion than sales was increasing. It means that
their credit policy was becoming relaxed. In 2007, their receivables decreased
significantly which caused the turnover ratio to increase and sales also increased. In
2008, receivables increased and sales also increased than previous year. Although there is
an increase in receivables still this ratio increased in 2008 due to lower receivables from
previous year.So, the ratio appeared better in last two years as a result of increase in sales
and significant decrease of receivables in 2007.

• Receivables turnover period indicates how many days a company takes to collect its
receivables. Shorter the receivable is better for the firm because it indicates that the
company takes fewer days to collect cash from the receivables. From the analysis we can
say that the receivable turnover period was increasing from 2004-2006. It was not a good
standing for BATBC.But it started to decrease in subsequent years. In, 2008 it decreased
significantly due to a significant increase in receivables turnover ratio.
• Payable turnover ratio measures how many times the payable is turned over in a year
that means how many times the accounts payable has been paid in a given year. The
period starts from purchasing raw material on credit and ends at the time of payment.
Lower the ratio is better. From 2004-2008, the ratio increased in 2005 only but in other
years it was decreasing. In 2005, it increased because of purchase account which is
calculated by adding COGS to change in inventory. In 2005 payables were lower than
2004 and thus average payables decreased and made the ratio higher although the
inventories were lower in 2005.From 2006, payables were increasing at a higher rate than
inventories were,So, the ratio started to decrease in subsequent years.

• Payable turnover period indicates how many days the company takes to pay its
creditors. The higher the ratio is better but from the analysis we can see the turnover
period decreased in 2005 because turnover ratio increased in the year but in subsequent
years it was increasing as a result of decrease in payable turnover ratio.

• Total asset turnover ratio indicates that with a given level of total assets how much
sales a company can generate or how much total assets are required to generate a given
level of sales. Higher the ratio is better and indicates the efficiency in using total assets.
From analysis we can see that BATBC has an increasing or positive trend in its turnover
ratio. From 2004-2008, the ratio is increasing and indicating that every year BATBC is
adding some assets and these additional assets are generating sales.

• Fixed asset turnover ratio indicates how effectively the company can use its fixed
assets to generate sales or how much fixed assets are required to generate a given level of
sales. Higher the ratio indicates the efficiency in using fixed assets. The ratio is same in
2004 and 2005. It started to increase from 2006 up to 2008.Sales was increasing from
2004 to 2008 but it happened due to increase(2005) and decrease(2006-2008) in fixed
assets.
 LIQUIDITY RATIOS

Liquidity ratios 2008 2007 2006 2005 2004

Current ratio 1.35 1.08 0.88 0.74 0.90
Quick ratio 0.53 0.30 0.29 0.16 0.14
Cash ratio 0.35 0.23 0.15 0.10 0.08
Cash cycle(in days) 56.10 61.47 87.47 111.48 128.41
Cash flow from operation 0.30 0.38 0.21 0.37 0.43

INTERPRETATION:

• Current Ratio: Current ratio measures the ability of a firm to payout its current liability
by using its all current asset. Higher the ratio indicates a good liquidity position. After
calculating the ratios of BATBC we can see that from 2004 to 2008 the ratio is increasing
except the year 2005 in which the ratio decreased. So, it can be a signal of good liquidity
position. Because last two years have ratio of more than 1. It means that BATBC is
capable of paying out its current liabilities by its current assets.
• Quick Ratio: It is more conservative measurement of liquidity ratios as it excludes
inventory and prepaid expenses from its current assets. The ratio of BATBC is showing
an increasing trend which is good. There is a huge difference between current ratio and
quick ratio in every year. It means that inventories and advanced, deposits and
prepayments are large in amounts which are not quick assets. Although it is increasing,
the company is not able to pay all its current liability using only the quick assets (cash
and receivables). There is a large amount of inventory (It is two steps away into cash) and
 prepayments (That does not generate any cash) are included in the current asset. So this is
not a healthy quick ratio position of the company.
• Cash Ratio: The most conservative measurement of liquidity: This ratio shows an
increasing trend over five years starting from 2004 to 2008 which is good. But these are
not enough to pay current liabilities for the company. This ratio represents a weak
liquidity position of the company.From the box, we see that, there is tk. .35 available
against every tk.1 liablility. In balance sheet, we see that, this company does not have
investment in marketable or short term securities. BATBC can easily improve liquidity
position by investing in money market securities.
• Cash cycle is the length of time between paying for purchases and receiving cash from
the sales of the goods. Lower the length indicates the more efficient the firms operation.
It means that the firm is making the payment delayed and collecting the money quickly.
Negative cash cycle is preferred. From the given table, it can be seen that cash cycle of
BATBC is getting shorter year by year which is a positive indication that the firm is
performing better than preceding years. BATBC is shortening its cash cycle by making
the payable outstanding period longer and inventory period and receivables outstanding
period shorter.
• Cash flow from operation: Cash flow from operation ratio measures liquidity by
comparing actual cash flows (instead of current and potential cash resources) with current
liabilities. This ratio avoids the issues of actual convertibility to cash turnover and the
need for minimum level of working capital(cash) to maintain operations.From the
analysis, we can see that cash flow generated from operation is not sufficient to pay out
or cover current liabilities. From 2004 to 2006 it decreases and from 2006 to 2008 it
starts to increase. It is because of variation in cash from operation and current liabilites.
This ratio does not represent any strong liquidity position for BATBC.
 PROFITABILITY RATIOS

Profitability ratio 2008 2007 2006 2005 2004

Gross profit margin 35.86% 29.70% 39.31% 37.90% 41.51%
operating profit margin 15.48% 10.91% 7.36% 6.30% 11.97%
margin before interest and taxes 15.48% 10.91% 7.36% 6.30% 11.97%
pretax margin 16.02% 10.53% 5.91% 4.87% 10.55%
net profit margin 11.89% 6.70% 3.28% 2.51% 7.80%
return on asset(ROA) 18.51% 10.25% 4.95% 3.45% 10.38%
return on equity(ROE) 42.69% 26.59% 13.73% 8.69% 26.27%

INTERPRETATION:

• Gross profit margin shows how much gross profit is earned from the total sales and it
also show the relationship between sales and manufacturing costs.. Because the ability to
control costs in relation to revenues enhances earnings power. It expresses gross profit as
a percentage of sales. The higher the cost, the the lower the ratio. Higher the ratio is
better, because cost is lower. From the analysis, no consistent trend can be found out. It
fluctuates throughout five years. It is the lowest in 2007 indicating that manufacturing
cost is the highest in this year. It is the highest in 2004 indicating that manufacturing cost
is the lowest here. As it is lower in recent years among past several years, it should not be
considered as a positive indication, because BATBC is has inefficiency in managing its
manufacturing cost.

• Operating profit margin shows how much operating profit is earned from its core
business which excludes all effect of non operating activities, investment position, capital
 structure and tax differences between the companies. In this case, operating margin has
gone down substantially due to deduction of operating margin from gross profit. But
operating expense is much higher in 2004, 2005 and 2006 amounting to approximately
30% of sales although they had profit on sales of property, plant and equipment in 2004
and 2006. In 2007 and 2008, operating expense has been reduced (with a loss on disposal
of property, plant and equipment) to approximately 20% of sales which is a good
indication for BATBC.

• Margin before EBIT shows the margin which ignore the capital structure differences
and tax differences between the companies but include the effect of non operating
activities. From the analysis we see that operating profit margin and margin before
interest and taxes are same. This is because there are no non-operating activities or
investment in other affiliates.

• Pretax Margin shows the margin which ignores the tax differences between the
companies but include the effect of financing cost. From the analysis we observe that
pretax margin has decreased in 2005 and after that it had increased in 2006,2007 and
2008. In 2005 it decreased because EBIT was lower but interest expense was relatively
higher. In subsequent years the margin increases because EBIT was increasing and
interest expense was relatively lower than previous years. They used more percentage of
debt out of their total capital in earlier years. Their debt percentage was less in 2007,
2008. This is the reason why interest expense fluctuated over time.

• Net profit margin shows the net income generated from sales. Higher the ratio indicates
that the company can earn more income from its operation. From the table, it can be seen
that net profit margin decreased in 2005 but it started to increase in subsequent years,
because profit before tax was lower in 2005 and it increased in later years.

• Return on asset ratio compare income with total assets. It measures management’s
ability and efficiency in using the firm’s assets to generate profits. It reports the total
return accruing to all providers of capital. Higher the ratio is better. Compared to year
 2004 it decreased to almost one-third portion in 2005. Compared to assets employed, the
return is much lower which is not good for the company. The ratio started to increase in
later years and significantly in last two years. If we disaggregate ROA we get net profit
margin and total asset turnover ratio. Total asset turnover ratio is increasing which
indicates that BATBC is efficient enough in managing its assets. ROA mainly decreased
due to a decrease in net profit margin.

• Return on equity ratio measures the returns that are available to the firms’ shareholders.
Higher the ratio is better. In year 2005, the ratio decreases extensively and in subsequent
years it increases. If we divide this ratio, we get profit margin ratio, total asset turnover
ratio and capital structure ratio (asset/equity). This ratio decreases due to extensive
decrease in profit margin ratio (one of the component of ROE) in 2005 although in this
year asset to equity ratio was higher(debt to capital was higher). But in later years it
increases due to increase in its component ratios.
 LONG TERM DEBT AND SOLVENCY RATIOS

Long term debt and sovency

ratios 2008 2007 2006 2005 2004
debt to total capital 54.61% 59.14% 63.91% 63.92% 56.43%
120.32% 144.76% 177.08% 177.15% 129.52%
debt/equity ratio or 1.20 or 1.45 or 1.77 or1.77 or 1.30
time interest earned(in times) 28.50 28.57 5.06 4.39 8.43
CFO to debt ratio(in amount) 0.26 0.32 0.17 0.30 0.35

INTERPRETATION

• Debt to Asset Ratio indicates the proportion of debt that company uses in its capital
structure or how much of the total capital of the firm has been financed by external
sources. Lower the ratio indicates that company is less reliant on outside fund. From the
analysis we see that BATBC has used more percentage of debt in 2005, 2006.In the last
two years they have used reduced their debt portion which is a good signal to the
investors as it will lower their financial risk. Shareholders claim after the creditors’ and
lenders’ claim has been met. We can say that from BATBC has improved their capital
structure by lowering debt and making it relatively more attractive to the investors than
that of previous years. It should strive to maintain low amount of debt in order to reduce
the risk of investors.
• Debt to Equity Ratio indicates for every Tk.1equity, how much liability an equity holder
bears. In 2004 for every tk. 1 there was a liability of tk. 1.30. This liability increased to
1.77 in 2005 and 2006 as they have used more debt in these two years. So, the firm
became more riskier for the investors to invest in. It also indicated a weak solvency
problem for BATBC since they were becoming more reliant on debt. In subsequent years
this liability decreased to 1.45 in 2007 and 1.20 in 2008 which sent a positive signal to
 the investors as their financial risk has decreased. Still, the firm suffers from solvency
problem. As equity capital is not sufficient to cover the liability and investors might loose
their interest in making investment decision.
• Time Interest Earned measures the protection available to creditors as the extent to
which earnings available for interest cover interest expense. Higher the ratio is better. But
after analysis we see that this ratio decreased due to extensive use of debt in 2005 and
2006 which caused interest expense to rise and sales did not increase that much to
increase to the ratio. This ratio increased significantly in 2007 and 2008 due to low use of
debt and increase in sales. It means that BATBC’s ability to pay interest expense has
increased extensively which indicates a good solvency position.

• CFO to debt ratio measures the coverage of principal repayment requirements by the
current CFO. A low CFO to debt ratio could signal a long term solvency problem, as the
firm does not generate enough cash internally to repay its debt. This ratio decreased in
2005,2006 because cash flow from operation was lower and use of debt was higher. In
2007, cash flow from operation increased and debt amount also decreased. That is why
this ratio appeared better in this year. In the year 2008, the ratio decreased due to
decrease in cash flow and increase in debt amount. However, in all these years the ratio
we get does not signal anything good for BATBC. Because BATBC is not able to pay out
its debt in any of the years from its cash from operation. The cash generated every year
from operation is not sufficient which may put pressure on investing and financing
activities.
 LEVERAGE RATIOS

Leverage ratios(in
times) 2008 2007 2006 2005 2004
operating leverage effect 2.32 2.72 5.34 6.01 3.47
financial leverage effect 0.97 1.04 1.25 1.30 1.13
total leverage effect 2.24 2.82 6.65 7.79 3.94

INTERPRETATION:

• Operating leverage effect: If a firm has any fixed operating cost in its total cost
structure then we say that the firm has some operating leverage. The operating leverage
effect is used to estimate the percentage change in income and ROA resulting from a
given percentage change in sales volume. If operating leverage effect is more than 1, then
operating leverage is there. From the analysis we see that this operating leverage effect
increased significantly in 2005 and after that it was decreasing in subsequent years. This
ratio was higher in 2005 and 2006 because of significant decrease in EBIT. As a result
we can say that operating risk was much higher or EBIT was much volatile with respect
to sales.

• Financial leverage effect: If a firm has some fixed financing costs in its total cost
structure, then we say that the firm has financial leverage. The financial leverage effect
finds out for a given percentage change in EBIT, how much net income will change. If
financial leverage effect is more than 1, then financial leverage is present. From the
analysis we can see that this ratio increased in 2005 and after that it started to decline in
subsequent years. So, it is clear that financial risk was much higher in 2005 and 2006
upon its higher operating risk. It was also higher in 2004. It happened due to increased
 interest expense in these three years and later, the ratio decreased because of decline in
interest expense.
• Total leverage effect: The total leverage effect finds out for a given percentage change
in sales how much net income will change. We can see that this effect is the higher in
first three years. Because FLE and specially the OLE was higher in these years. But in the
last two years, TLE was much lower, since OLE was lower and FLE as well.

INVENTORY ANALYSIS

Inventories: Inventories are assets items held for sale in the ordinary course of business or
goods that will be used or consumed in the production of goods to be sold.
Methods of Valuation of Inventories:
 Average Cost Method
 First-In, First-Out (FIFO)
 Last-In, First-Out (LIFO)

BRITISH AMERICAN TOBACCO BANGLADESH COMPANY

Their inventories comprise of leaf, wrapping materials, work in process, finished goods,
consumables stores etc. Inventories are measured at the lower of cost and net realizable value.
The cost of inventories includes expenditures incurred in acquiring the inventory, production or
conversion costs and other cost incurred in bringing them to their existing location and condition.
Net realizable value is the estimated selling price in the ordinary course of business, less the
estimated costs of completion and selling expenses.
If the companies followed LIFO inventory method in a rising price situation it would have
different effects as:
1. LIFO reports a higher cost of goods sold which indicates a lower amount of income for
the company.
2. LIFO shows lower ending inventory that’s why it shows lower asset in Balance sheet.
3. From income statement perspective LIFO is better method because it considers the most
recent price of Cost of goods sold. For which income statement reports the actual net
income.
 4. From balance sheet perspective LIFO is not a good measure because for ending inventory
it considers earlier cost for inventory which ultimately reduces asset amount. So it
indicates the understated asset of the company.

If the companies followed FIFO inventory method in a rising price situation it would have
different effects as:
1. FIFO reports a lower cost of goods sold which indicates a higher amount of income for
the company.
2. FIFO shows higher ending inventory that’s why it shows higher asset in Balance sheet.
3. From income statement perspective FIFO is not a better method because it considers the
earliest price of Cost of goods sold. For which income statement overstates the net
income.
4. From balance sheet perspective FIFO is a good measure because for ending inventory. It
considers most recent cost for inventory which ultimately increases asset amount. So it
indicates the actual asset of the company.
 DEPRECIATION

Depreciation: Depreciation is defined as the accounting process of allocating the cost of

tangible assets to expense in a systematic and rational manner to those periods expected to
benefit from the use of the asset.
Depreciation Methods:
 Activity Method (units of use or Production)
 Straight-line Methods
 Accelerated Depreciation Methods
• Sum-of-Years’ Digit Method
• Declining-balance Methods.
 Special Depreciation Methods
• Group and Composite Methods
• Hybrid or Combination Methods

British American Tobacco Bangladesh Company

Year 2008 2007 2006 2005 2004

Depreciation
Expense 505200 484351 461473 405701 366739
Depreciation base 6585624 6554922 6532129 5653216 5513435
Depreciation Method Straight Straight Straight Straight Straight
Line Line Line Line Line

Interpretation:
There is an argument that since the revenues generated by the asset are same each year, the
income shown each year should also be the same. The result of this line of reasoning is the
straight line method. This method indicates that the depreciation expense of an asset will be same
in all of the years from acquisition to sale. BATBC follows straight line depreciation method.
Straight line method, with lower depreciation expense in the earlier years of asset life, tend to
satisfy both net income and stockholders’ equity when compared with the accelerated
depreciation method. As the percentage effect on net income is usually lower than the effect on
net assets, return ratios tend to be lower when straight line methods are used. In balance sheet,
carrying value of assets is higher in earlier years if the firm uses straight line method rather than
accelerated method. Here, we can see that depreciation expense is increasing every year. Because
total fixed asset is increasing due to capital expenditures or adding some more fixed assets.