As the table shows, the current ratio, which determined by current asset and current liability, decreases sharply from 2007(0.87) to 2008(0.68) and fluctuates in the following four years (around 0.7). According to the balance sheet 2008, both the current asset and current liability increased quite a lot over 2007. However, the increase of current liability is far larger than the current assets, which leads to the drop of current ratio. A current ratio of less than one means that the company has negative working capital and is properly facing a liquidity crisis. (CFA, 2012)
Comparatively, the British American Tobacco maintains a stable ratio around 1.1, which indicates there is a risk of imperial tobacco about paying back its short-term debt and payables by using its short-term assets. It is not a health sign for imperial tobacco compared to the same ratio with its competitor.
Quick ratio
2007
2008
2009
2010
2011
Imperial Tobacco
0.55
0.39
0.38
0.44
0.41
BA tobacco
0.74
0.63
0.70
0.66
0.64
The quick ratio has a similar trend to the current ratio for imperial tobacco. As the quick ratio is more conservative and objective than the current, quick ratio does not count inventory in the nominator. The ratio of Imperial tobacco is still lower than the British American Tobacco, which implies that the ability of using most liquid asset to pay back the short-term liability is quite low.
Suggestion for liquidity ratio: as the analysis above, the company's financial status is not healthy enough to pay back its short-term debt. In order to solve this problem, the company should improve the ability of repaying its liabilities.
Inventory turnover ratio
2007
2008
2009
2010
2011
Imperial Tobacco
12.37
7.18
9.07
9.33
9.57
BA tobacco
5.05
3.82
4.36
4.13
4.40
The inventory turn over ratio measures the efficiency to process and manage inventory. The inventory turnover ratio of Imperial Tobacco declines radically as the result of the substantial rise of inventory from 2007 to 2008, while the sales increase slightly. In the following four years the inventory keeps stable, meanwhile the sales keep growing year by year. Therefore the trend of this ratio is upward. Comparing to the ratio of British American Tobacco, Imperial Tobacco has comparatively lower inventory and almost as twice as the sale leading to the huge difference between these two tobacco companies.
Imperial Tobacco's inventory turnover is more than that the British American, which indicates that the Imperial Tobacco takes shorter to sell its goods. Furthermore, the sales growth supports the conclusion that higher inventory turnover reflects greater efficiency.
Moreover, the accounting policy of Imperial Tobacco indicates that the policy of measuring inventories are stated at the lower of cost and net realizable value. Cost is determined using the first-in, first-out (FIFO) method, which reduces the influence of inflation, might impact the sales (generally decrease the cost of goods). The sales may be overstated while the cost of goods might be understated.
However, when it comes to the inventories policy of British American Tobacco, cost is based on the average cost incurred in acquiring inventories and bringing them to their existing location and condition, which will include raw materials, direct labor and overheads, where appropriate. Therefore the weighted average cost method will produce an inventory less than those produced by FIFO.
Fixed asset turnover ratio
2007
2008
2009
2010
2011
Imperial Tobacco
1.97
0.91
1.08
1.20
1.26
BA tobacco
0.75
1.03
0.77
0.78
0.83
The fixed asset turnover varies a lot over 2007 to 2011. After a decline in 2008(from 1.97 to 0.91), this ratio maintains a constant trend of increase. The sharp drop results from the purchase of property in 2008, which is almost 6 times larger than the property in 2007. However, the new purchased property does not generate new sales accordingly. Anyway, it is good to see that the ratio increases annually, which implies that the efficiency of producing sales from fixed assets improves.
In comparison, the British American Tobacco fluctuates surrounding 0.8 over the five years' period.
The higher fixed-asset turnover ratio of Imperial Tobacco shows that the company has been more effective in using the investment in fixed assets to generate revenues.
Return on Asset ratio
2007
2008
2009
2010
2011
Imperial Tobacco
0.14
0.05
0.04
0.06
0.08
BA tobacco
0.12
0.13
0.11
0.11
0.12
In 2007, the ratio of Return on Asset about the Imperial Tobacco has passed through a huge decline from 0.14 to 0.05 and keeps a trend of slight rise from 2008 to 2011. In the early stage of expanding of imperial tobacco in 2008,the ratio is not attractive once the company matures; the ratio improves as the table shown. According to the formula of calculating this ratio, we can realize the net income is comparatively lower than British American Tobacco since this ratio is a signal of effectiveness of company operation. As we discussed before, the asset of imperial tobacco is far more than the peers due to the great amount of purchased fixed assets.
The Imperial Tobacco is worse than British American Tobacco in terms of converting investment in profit. The manager of Imperial Tobacco should make a better choice in allocating its recourses and reduce the cost and expenses, especially finance costs allocated from the Income Statement.
Profit Margin ratio
2007
2008
2009
2010
2011
Imperial Tobacco
0.07
0.02
0.03
0.05
0.06
BA tobacco
0.23
0.22
0.21
0.21
0.22
The figure of the Imperial Tobacco stays stable under 0.1. In comparison, the data of British American Tobacco is approximately around 0.22.
The huge difference between these two companies indicates that the imperial tobacco is a less profitable company that has worse control over costs.
As the Income Statement indicates, Imperial Tobacco has more total sale but lower net income owing to the large amount of financial costs and some operation costs. Under consideration of the large sales of Imperial Tobacco, in the process of raising sales, Imperial Tobacco should improve the management and reduce the costs in order to gain more net income and keep the ratio improve.
Debt ratio
2007
2008
2009
2010
2011
Imperial Tobacco
0.87
0.78
0.79
0.77
0.75
BA tobacco
0.62
0.99
0.70
0.66
0.69
The ratio of Imperial Tobacco does not vary a lot during the five years.
In the recent years, compared to British American Tobacco, the debt ratio of Imperial Tobacco is higher due to its big deal of liabilities. On the one hand the higher ratio indicates the strong ability to borrow money and activity of Imperial Tobacco, which could help the company collect capital easily and erase from heavy tax. On the other hand, if the debt is larger than the bearing capability of loaners it will impact on raising capital in the future. Furthermore, in 2007, Imperial Tobacco started to borrow money to buy some asset to keep the ratio lower, which is a strategy after 2007(the financial crisis) according to the financial report from Imperial Tobacco. Simultaneously, British American Tobacco did not work as well as Imperial Tobacco, which almost raised this ratio to 1. In that case, it is extremely dangerous for a company to pay back its liabilities.
What's more, the financial risk of Imperial tobacco is a little higher and it will lay the burden of the financial cost.
Interest coverage ratio
2007
2008
2009
2010
2011
Imperial Tobacco
7.83
1.73
1.68
6.17
5.42
BA tobacco
7.88
6.95
6.98
7.58
8.62
The ratio of Imperial Tobacco in 2008 and 2009 is extremely abnormal compared to the rest of years since the merge and acquisition by raising capital. It indicates the ability of imperial Tobacco in the two years to meet interest expense is questionable. However, in the following two years the interest expense decrease back to a normal level. When comparing to British American, the earning before interest and tax of Imperial tobacco is comparatively less, which leads to a lower ratio in the recent two years. The lower the ratio, the more the company is burdened by financial costs.
(CFA, 2012) book 3 page:150 SchweserNotes
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开头：In October 1996, after ten years with Hanson PLC, Imperial regained its corporate independence and the Imperial Tobacco Group PLC was listed on the London Stock Exchange as a FTSE 100 company.
At this time, the imperial tobacco company has become Britain's largest tobacco producers.
Imperial Tobacco is now firmly established as a leading international tobacco company, with their products sold in over 160 countries worldwide. The Group currently has around 37,000 employees and operates 47 manufacturing sites across the globe.
In the first part, we will analyse different ratios such as liquidity， asset, profitability, and debt ratios changed over the five years periods in both Imperial Tobacco and its competitor British American Tobacco.
结°ï¼šIn conclusion, the main problems of the Imperial Tobacco are: 1. The great deal of liabilities, which could lead to financial risk. But in another word, it is also a strategy Imperial Tobacco used to keep the debt ratio lower than 1 to keep a comparative health finance situation, which we will analyze in the second part. The second is Imperial tobacco, as the Britain's largest tobacco producers, has a great amount of sales each year however, the figure of net income is not as attractive as sales, which means Imperial Tobacco is burdened by its financial cost and some other costs.
