Financial Statement Analysis and

Valuation
of
British American Tobacco Bangladesh
Company Ltd and Olympic Industries Ltd.
Submitted To

DR. MAHMOOD OSMAN IMAM

Professor
DEPARTMENT OF FINANCE
UNIVERSITY OF DHAKA

Prepared by
Md. Abdullah-Al-Mamun
ID # 29010

Date of Submission: 27.12.2016

ACKNOWLEDGEMENT

All praises to Almighty Allah, the most Gracious, and Merciful for giving me the
opportunity to study Finance in the EMBA Program at University of Dhaka.
I am indebted to some people for providing me encouragement and support during
my learning and working while making this report and I want to show my gratitude
to these people.
I am very much grateful to DR. MAHMOOD OSMAN IMAM Sir, our honorable
teacher of the course: Corporate Finance (Course # F-602), who provided me
with the opportunity to prepare this report. It was not possible to be able to prepare
this report without his sincere guidance, support and inspiration. I express my
heartfelt gratitude to him.

LETTER OF TRANSMITTAL

27th December, 2016

DR. MAHMOOD OSMAN IMAM
Professor
Department of Finance
University of Dhaka

Permission for Submitting Report

Respected Sir,
This is the report is a requirement for the fulfillment of the Corporate Finance course and it is my
pleasure to present it before you.
I truly appreciate the topics to be an important and significant one to enhance knowledge without
which I would surely be in vague situation. I hope this report will satisfy one of the requirements
for EMBA Program. I deeply regret for any sort of inconvenience in this report and I shall
always be available for any clarification if required.
Yours Faithfully,

Md. Abdullah-Al-Mamun
ID #29010

Table of Contents

Page
no.

Industry Analysis
1.1 Profile of the Industry

1.2 Porters five factor analysis of Food industry in Bangladesh

Company Background

2 to 5

Profile of British American Tobacco Bangladesh Company

2.1 (BATBC) Limited
2.2 Corporate Goals of BATBC

6 to 7
7

2.3 Corporate Social Responsibility of BATBC

2.4 Dividend Policy

7 to 8
9 to 11

2.5 Profile of Olympic Industries Limited

12

2.6 Corporate Goal

12

2.7 Corporate Social Responsibility (CSR)

13 to 14

Reformulation of Balance Sheet and income staement

3.1 Reformulated Balance Sheet of BATBC

15 to 17

3.2 Reformulated Balance Sheet of Olympic Industries Ltd.

18 to 20

3.3 Reformulated Income Statement of BATBC

21 to 23

3.4 Reformulated Income Statement of Olympic

23 to 25

3.5 Sustainable Earnuings

26

Free Cash Flow

27 to 28

Analysis of Profitability
5.1 Analysis of Operating Liability Leverage:

31 to 32

Second Level Breakdown: Drivers of Operating

5.2 Profitability

32 to 34

Analysis of Growth and Sustainable Earnings

6.1 Analyzing Growth in Residual Earning
Earning
Quality

37 to 38
39

Valuation using different methods

7.1 Necessary Data used for Valuation

41

7.2 Valuation Using Residual Operating Income Model (ROI)

42 to 43

7.3 Valuation using Residual Earning Model

43 to 44

7.4 Valuation using Free Cash Flow model

45 to 46

References

47

Industry Analysis

1.1 Profile of the Industry

Food industry is a rapidly growing sector in Bangladesh, employing a significant portion of the
labor force in the country. Between 2004 and 2010, the food processing industry in Bangladesh
grew at an average 7.7 percent per annum. Bangladesh Bureau of Statistics, in its 25006
Economic Census, reported that there were approximately 246 medium-sized food processing
industries employing 19 percent of the industrial manufacturing workforce in Bangladesh or 8
percent of the total manufacturing labor force. The food industry employs 2.45 percent of the
country's total labor force and its share in the GDP was 2.01 percent in 2010. There are also
numerous small scale factories and domestic units engaged in food processing throughout the
country. According to some industry analysts, the food processing sector in Bangladesh is a 4.5
billion US Dollar industry. In 2010, Bangladesh exported over $700 million worth of processed
food and beverages, over 60 percent of them were shrimp and fish products.
Food processing in Bangladesh has traditionally been small scale, with domestic or family
business using common processing knowledge for the conservation and handling of raw
agricultural commodities to make them usable as food and feed. Although commercial scale food
processing using modern technology especially for wheat and milling, mustard crushing and very
limited bread and cookie manufacturing appeared during the 1960s, the growth of this sector did
not gain momentum in terms of operational scale and quality until the 1980s. Recently the
defining characteristics of the industry have been the processing of increasingly diverse products
to meet the changing demands of the Bangladesh population. The major food processing subsectors in Bangladesh include dairy, edible oil, sugar, rice, wheat, fruit and vegetable, tea,
poultry/beaf, pulses and spices and fish processing industries. Induced by the vigorous growth of
the diverse middle class population of Bangladesh and the growing demands for additional
6

consumption, the food processing sector is set to witness further hefty expansion in the coming
years

1.2 Porters five factor analysis of Food industry in Bangladesh

Porters Five Forces analysis gives us an overview of the industry and tells us the current
situation of the industry. It gives us a comprehensive idea of what makes the industry attractive
and also of its current situation. In an industry that is constantly changing and evolving it is
essential to be well aware of the changes and o be able to anticipate of the changes and take
measures accordingly

I.

Competitive rivalry

Rivalry tends to increase in intensity when companies either feel competitive pressure or see an
opportunity to improve their position. The food industry of Bangladesh is extremely competitive.
Most firms in the food industry are aggressive, such as in product innovation and
marketing, thereby exerting a strong force on firms.
Competitive rivalry is also strengthened because consumers can easily shift from one
provider to another (low switching costs).
The growth of Bangladeshs food industry has slowed somewhat. Though the population
is increasing and people have more buying power than before the number of competitor is
also increasing.
Switching cost of buyer is comparatively low in this industry. As there are numerous
rivals in the industry, buyers can easily switch to a different service provider that will
fulfill their needs.
Taking all these factors in consideration, rivalry is very intense in this industry. Firms wanting to
invest must come up with creative ideas to stand out from their rivals. Firms like PRAN, Ruchi,
Haque Brothers, Nestle make the market strongly competitive.
II.

Bargaining power of the buyers:

7

Consumers are among the top priorities in food manufacturing industry. Food industry of
Bangladesh is extremely competitive with many competitors offering varieties of services. Since
the competition is high hence the number of buyers is also high. Bargaining power of buyers of
Bangladeshs Food industry will vary on different factors.
The number of buyers is high compared to sellers. Sellers have very little switching costs
a result buyers cannot force the sellers to lower their prices. This gives buyers have very
little bargaining power over sellers.
If the buyers can gain access to the sellers method and knowledge of supply chain
system then they can cut the suppliers and invest in producing their own raw material.
This can ensure good quality product at a much cheaper price. It can also become one of
the core competencies of the firm. For example the superstore like Shopno decided to
cut off their middle man and get their raw materials directly from the farmers. If more
stores decide to follow this method then is will become a threat for the suppliers.
Considering all these, we can say that bargaining power of buyer is moderate. But in terms of
restaurant business their power is high as people with different choices are willing to pay extra
for customized services from restaurants

III.

Bargaining power of Suppliers

The bargaining power of Suppliers in Bangladeshs food industry there are several factors that
can be taken under consideration. All these factors play an important role in either increasing or
decreasing the bargaining power of suppliers. Bargaining power of the suppliers in this industry
is weak due to some factors such as
Since there is limited number of middle man this gives them a greater power over their
buyers. Apart from that they do not have to worry about substitute system that can harm
their business
The supplier plays a vital role in this industry. Their role cannot be easily replaced or
substituted by any other system or organization. This makes them irreplaceable and gives
them greater power over their buyers.
8

 Threat of forward integration: The suppliers can also pose a threat of forward integration.
The suppliers can choose to not sell their products through a middle man, rather sell it by
themselves.
Taking all these factors in consideration, we can say that suppliers bargaining power is high in
this industry. Firms willing to invest in this industry must consider this and take measures
accordingly some firms engage in vertical integration means raw material produce by them.
IV.

Threat of Substitutes and Substitutions

Substitutes can create intense competition during normal economic times, and reduce potential
profit increases during positive economic times. Identifying substitutes involves searching for
other products or services that can perform the same function as the industrys product or
service.
In case of Bangladeshs food industry, it is difficult to come up with another industry that can
fully replace food industry. Food is the basic need of human being and therefore is irreplaceable.
This makes the food industry also irreplaceable. Hence food industry cannot have any substitute
and so currently there is no threat of substitute.
V.

Threat of new entrants

Bangladeshs food industry is very dynamic with a lot of competitor. There are very few
barriers to entry in this industry. Even then the barriers are not strong enough to prevent
companies from entering in the market. Companies willing to enter this market must take into
consideration the following factors.
Most of the product in food market is standardized and undifferentiated. Only the form
and services offered to customers makes them different but only to a limited extent. So
product differentiation is not so high in this industry and as a result anyone can follow
their competitors strategy and with minimum improvisation can enter the market and do
well in the market. The market is also profitable and still growing so more investors are
entering in the market.

 The capital required to enter this market is very less. The return on investment rate is also
high. New entrants can enter the market with small capital and can survive in the market.
Since less capital is required to enter the market this makes the market less risky in terms
of monetary investment.
Considering all these factors we can assume that threat of new entrants in the market is very
high. However when entering this market a new entrant can expect extreme competition from
other established firms and also may face a market that has slow growth.

10

Company Background
2.1 Profile of British American Tobacco Bangladesh Company (BATBC) Limited
British American Tobacco is a leading tobacco group, with brands sold in around 180 markets.
We employ more than 55,000 people and with over 200 brands in our portfolio, we make the
cigarette chosen by one in eight of the worlds one billion adult smokers.
Founded in 1902, our Group of companies traded through the turbulence of the 20 th century,
including wars, revolutions and nationalizations. The Group was first listed in 1912, and today
we are one of the top 10 companies listed on the London Stock Exchange and feature in the
Fortune 500. We have also had a secondary listing on the JSE Limited in South Africa since
2008.
They hold robust market positions in each of our four regions- Americas; Asia-Pacific; Eastern
Europe; Middle East and Africa; Western Europe- and we are leaders in more than 60 markets.
Our approach to marketing is second to none in our industry, in brand building, innovation and
responsibility. Our companies adhere strictly to the high standards of our voluntary marketing
principles.
In 2012, our subsidiaries enabled governments worldwide to gather more than 30 billion duty,
excise and sales taxes on our products, more than seven times the Groups profit after tax.
They play a significant role in local communities around the world. In many countries we are a
top employer and the company of choice for people in all areas of our business. We have 44
cigarette factories in 39 countries. In addition to cigarettes, we cigarillos, roll your own and pipe
tobacco.
11

They are also proud of their Research & Development facilities, where our people are striving to
reduce the harm associated with tobacco products.
With our geographic diversity, strong brands, talented people and proven strategy, the Group is
well placed to achieve further success. In particular, we are confident that our investments in
both innovative cigarette products and next-generation nicotine and tobacco products will help us
drive.

2.2 Corporate Goals of BATBC

The vision of BATBC is to be worlds best at satisfying consumer moments in tobacco and
beyond. Their goal is to deliver commitments to society, while championing informed consumer
choice. They intend to ensure that the consumers are fully informed about the choices they are
making when they purchase our tobacco products. They have a responsibility to offer a choice of
products across the risk spectrum, but will also defend their rights to choose and provide them
with the products they want. As society changes, and peoples priorities and needs shift, they are
be ready to meet new challenges and take advantage of new opportunities. BATBC is a major
international business and with this status come responsibilities, from being open about the risks
of our products to supporting rural communities in the developing world
The strategic focus areas of BATBC are the foundations upon which the strategy is built and they
have been in place for many years, but we continue to concentrate on our activities in all four
focus areas and constantly review our ways of working. Growth requires understanding and
delivering enjoyable consumer moments. Resources should be effectively deployed to increase
profits and generate funds for better productivity. Winning organizations consists of great people,
great teams and a great place to work. Ensuring a sustainable business that meets stakeholders
expectations is another part of their strategic focus.

2.3 Corporate Social Responsibility of BATBC

12

As a responsible Company, British American Tobacco Bangladesh believes that the business has
a key role to play in helping society to achieve the necessary sustainable balance of economic
growth, environmental protection and social progress. Therefore, its CSR activities are designed
to contribute to the economic, social and environmental sustainability of the community in which
it operates. The Company's CSR initiatives are in perfect alignment with the Millennium
Development Goals (MDGs) of United Nations.

Afforestation: BAT Bangladeshs flagship CSR programme

British American Tobacco Bangladesh (BAT Bangladesh) initiated its afforestation programme in
1980 when the forest department called on the private sector to support its endeavor to conserve
the forests. So far, BAT Bangladesh has contributed around 79.5 million saplings to the countrys
afforestation initiative in the last 34 years. It is presumably the largest private sector driven
afforestation effort in Bangladesh. The Project has also won international recognition for the
company recently when BAT Bangladesh was awarded Asia Responsible Entrepreneurship
Award in 2014 under Green Leadershipby Enterprise Asia, a non-governmental organization
striving for the pursuit of entrepreneurship development in Asia Region. As a national
recognition for special contribution in tree plantation, BAT Bangladesh has received National
Award for five times in the year 1992, 1999, 2002, 2005 and 2007. The programme is designed
to focus on the socio-economic needs of the human society as well as overall environmental
perspectives.
Safe drinking water: Bringing smiles to one hundred thousand people everyday
Having recognized the gravity of water and sanitation and in the context of the Millennium
Development Goals, BAT Bangladesh has stepped forward with a safe drinking water project. As
a part of the safe drinking water initiative, BAT Bangladesh has already installed 53 filtration
plants to make water free from arsenic and other harmful contents in arsenic prone areas in the
country. All the 53 plants now purify 270,000 litres of drinking water, meeting the need of
135,000 people every day. The plants are maintained by local committees consisting of members
from local communities. More than hundred communities in rural areas with the safe drinking

13

water plants are now living a better life than before as safe drinking water is enriching their
livelihood.
Solar home systems: Bringing ray of hope in rural communities
BAT Bangladesh is providing Solar Home Systems free of cost to rural communities of the
country which are currently out of electricity. So far, the Company has installed 1,366 units of
solar home systems in 15 villages of Bandarban and Khagrachari districts, illuminating the
community and its people in the off grid areas of the country. Now, more than 8000 rural people
are connected with electricity for the first time. This initiative will continue its journey to kindle
hope in remote rural communities by bringing in a completely new dimension in the lives of
people and progressing it with the power of energy.

2.4 Dividend Policy

Dividend: A dividend is a distribution of a portion of a company's earnings, decided by the
board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as
shares of stock or other property.
A company's net profits can be allocated to shareholders via a dividend, or kept within the
company as retained earnings. A company may also choose to use net profits to repurchase their
own shares in the open markets in a share buyback. Dividends and share buy-backs do not
change the fundamental value of a company's shares. Dividend payments must be approved by
the shareholders and may be structured as a one-time special dividend, or as an ongoing cash
flow to owners and investors.
Types of Dividend: Dividend can be of three kinds, which are as follows:

Cash Dividend: A cash dividend is money paid to stockholders, normally out of the
corporation's current earnings or accumulated profits. Not all companies pay a dividend.
Usually, the board of directors determines if a dividend is desirable for their particular
company based upon various financial and economic factors. Dividends are commonly
paid in the form of cash distributions to the shareholders on a monthly, quarterly or yearly
14

basis.

All

dividends

are

taxable

as

income

to

the

recipients.

Stock Dividend: It refers to a dividend payment made in the form of additional shares,
rather than a cash payout. Companies may decide to distribute stock to shareholders of
record if the company's availability of liquid cash is in short supply. These distributions
are generally acknowledged in the form of fractions paid per existing share. A stock
dividend is not really a dividend because no cash leaves the firm. Rather, the existing
number of shares increases, which generates no value for neither the stockholders nor the

firm.
Dividend in Kind: It refers to a special kind of dividend where the company pays its
stockholders in the form of products it produces or services it provides, rather than cash
or stocks. For example, a snacks company may pay its customers dividends in the form of
cartoons of snacks, or a food chain may give its customers special discounts as dividends.

Types of Dividend Policies: A company that issues dividends may choose the amount to pay out
using a number of methods.

Stable dividend policy: Even if corporate earnings are in flux, stable dividend
policy focuses on maintaining a steady dividend payout.

Target payout ratio: A stable dividend policy could target a long-run dividend-toearnings ratio. The goal is to pay a stated percentage of earnings, but the share payout is
given in a nominal dollar amount that adjusts to its target at the earnings baseline
changes.

Constant payout ratio: A company pays out a specific percentage of its earnings each
year as dividends, and the amount of those dividends therefore vary directly with
earnings.

Residual dividend model: Dividends are based on earnings less funds the firm retains to
finance the equity portion of its capital budget and any residual profits are then paid out
to shareholders.

Dividend Pattern of BATBC

15

BATBC is one of the few companies that pay weighty cash dividends, especially in recent years.
The amount paid is also somewhat gigantic compared to par value of the share. For example, in
the year 2012-2013, BATBC paid 620% cash dividend per share, which amounts to tk. 62 per
share against a face value of Tk. 10. The dividend pattern for last five years is illustrated below:

Table: Dividend Pattern for BATBC

Dividend paid(percent of
face value)
Dividend paid(BDT million)
no. of shares
DPS
DPR

2011

2012

2013

2014

2015

420
2520
60
42
98.80
%

500
3000
60
50
76.11
%

620
3720
60
62
75.55
%

550
3300
60
55
52.53
%

550
3300
60
55
56.18
%

Dividend Per Share

70
62

60
50

55

50

55
Dividend Per Share

40 42
30
20
10
0
2011

2012

2013

2014

2015

16

2.5 Profile of Olympic Industries Limited

Olympic Industries Limited, one of the leading companies in the country in terms of its visible
presence in the market and revenue generation, incorporated with the name of Bengal Carbide
Limited, a Private Limited Company in June 26, 1979 under the Companies Act, 1913. After the
successful inception and prolonged business activities, the company changed its name to
Olympic Industries Limited in 1996. Olympic Industries Limited was converted to Public
Limited Company by being listed with Dhaka Stock Exchange Limited (DSE) in June 1984 and
Chittagong Stock Exchange Limited (CSE) in September 1996. Olympic Industries Limited has
different manufacturing wings like Biscuits, Batteries, Ball Point Pens, and Confectionery items.
The company markets most of its products under the brand name of Olympic. Shares of the
company are traded under A category in both the bourses. The Face value of each share is TK
10.00. Last Annual General Meeting of the company was held in December 24, 2014 and the
Board of Directors has recommended 35% of Stock Dividend & 20% Cash Dividend for the year
ended in June 30, 2014.

2.6 Corporate Goal

The company has got to where it is today by staying true to its core beliefs, in providing high
quality, innovative products which its consumers can rely on.
Olympic Industries Limited is currently the market leader in the biscuit market and second in
position in the battery market in Bangladesh. It has been able to stride forward due to its
continuous vision for growth, its modern manufacturing facilities, and its extensive sales and
distribution network, and it has always yielded this influence to give back to the community.
As per the company websites implied statement, the goal of the company seems not to be well
defined. There has been found no other stated goal in the annual report. The company sounds to
be too much quality & customer focused to retain its market leadership position. However, the
goal of the company in my opinion should beTo maximize wealth of the current shareholders maintaining social & environmentally
responsible business strategies.
Brand Values

17

Innovation

Excellen
ce /
Quality

Consumer
Focus

Olympic

Integrity

Values

Strategic thinking of Olympic Industries Limited

Annual report June 30, 2014 shows that the board has been pleased having approved
reclassification of the companys industry sector in DSE and CSE from Engineering to Food
& Allied to more accurately reflect the core business of the company. The company received
Halal certification. The board believes that the certification will allow the company to pursue
export opportunities, particularly to geographic regions mandating Halal certification.
The Annual report of FY 2013-14 shows that three officials have been given few shares of the
company. Those three persons hold top position of the management team. This might be a tool of
the board to make maximum output from the persons letting some ownership of the company.
Mr. Md. Nazimuddin, Executive Director & Company Secretary holds 44,503 shares, Mr. Harun
Al-Rashid, Chief Financial Officer holds 30 shares and Mr. Satya Ranjan Mondal, Additional
General Manager (Accounts & Taxation) holds 100 shares. This may be a strategy to make the
top officials feel as a owner of the company and do noting that minimizes the wealth of the
shareholders as they are also among them.

2.7 Corporate Social Responsibility (CSR)

Each and every company should conduct business in a socially responsible way which must go
beyond the mere social obligation meeting and profit maximization of the company. Olympic
Industries Limited should also conduct business in a socially responsible way and for the greater
benefit of the society. Nevertheless, there has been found no data and any statement regarding
CSR activities of Olympic Industries Limited in its Annual report ended on 30 th June, 2014.

18

However, the companys website shows some information regarding CSR activities which they
claim to their most recent.
Olympic Industries is a firm believer in developing the community and enriching the lives of
those whom it can. It especially takes initiatives to promote healthy living and does so primarily
through positive communication and activities geared towards the youths of the country. The two
most recent initiatives are:
Olympic Scholarship Program
The company will be launching a scholarship program whereby it will provide free university
scholarship to the top performing students of each academic year. This initiative, wanting to
promote the need for education, aims to encourage students to take their studies seriously and to
develop their intellectual skills. Olympic Industries strongly believes that a good education is the
key to developing the future of our country and of the future generations.
Energy Plus Football Tournament
The Energy Plus Football tournament was a highly acclaimed and popular event which achieved
great accolade among the press, the participants, and the Bangladesh Football Federation. This
was an initiative taken to encourage the countrys youths to partake in healthy, productive
activities, such as sport, which is vital for continued development of the countrys growing
generations.

Reformulation of Balance Sheet and Income Statement

3.1 Reformulated Balance Sheet of BATBC
19

OA1

Reformulated Balance Sheet of BATBC

Operating Assets
2011
2012
2013
Property, Plant & Equipment
5376.63 5861.63
8513.17

OA2
OA3
OA4
S

Inventories
Trade & Other Receivables
Advance,Deposits & Pre-Payments
Cash & Cash Equivalents

5373.03
926.84
3907.09
4.19

4956.89
937.87
999.02
11.40
12766.8

6626.70
770.92
634.89
9.59

9098.20
1766.82
2451.13
8.70

8553.38
940.76
4074.68
11.79

TOA

Total Operating Assets

15587.78

16555.26

25343.42

27245.61

OL1
OL2
OL3
OL4
OL5
OL6
OL7
TOL

Gratuity
Deferred tax liability
Provisions for expenses and taxes
Trade and other payables
Creditors and accruals
Income tax liability
Provision for Corporate Tax
Total Opearting Liabilities

252.09
669.08
1838.02
3437.76
0.00
0.00
4294.87
10491.81

240.59
723.64
2188.04
3245.68
0.00
1585.73
0.00
7983.68

364.06
883.38
2338.06
3701.89
0.00
2267.28
0.00
9554.67

368.11
1140.56
1073.15
7152.17
0.00
2729.91
0.00
12463.90

461.23
2069.80
1107.18
7842.73
0.00
3500.38
0.00
14981.31

NOA

Net Operating Assets

5095.97

4783.12

7000.60

12879.52

12264.30

2014
12018.58

2015
13665.02

Financial Obligations
Obligation under finance lease (due
FO1
FO2
FO3

after one year)

Bank overdraft
Short term bank loans
Obligation under finance lease (due

17.88
0.00
0.00

7.54
0.00
0.00

0.00
0.00
0.00

0.00
347.61
2800.00

0.00
0.00
0.00

FO4
TFO

within one year)

Total Financial Obligations

0.00
17.88

10.34
17.88

7.54
7.54

0.00
3147.61

0.00
0.00

Financial Assets
Fiancial Cash
Total fiancial Assets

833.21
833.21

2267.69
2267.69

1908.54
1908.54

1731.60
1731.60

2345.22
2345.22

-815.33

-2249.82

-1900.99

1416.01

-2345.22

5911.30
OK

7032.94
OK

8901.59
OK

11463.51
OK

14609.52
OK

Net Financial obligation

Total Equity

20

The reformulated balance sheet is formed in terms of operating and financial basis. The current
assets and non-current assets in the typical balance sheet are divided into operating assets and
financial assets. The same way the liabilities are divided in operating liabilities and financial
obligations.
Issues in Reformulating Balance Sheet:
The GAAP balance sheet for British American Tobacco Bangladesh Company Limited is
reformulated into operating and financial items in table. Some issues arise:

Cash and Cash Equivalence: Cash and cash equivalents are divided into operating cash and
cash equivalents. Operating cash is taken as 0.5% of sales. This is non-interest bearing, in the
form of cash on hand or in a checking account. However, the interest bearing cash equivalents
are investments of excess cash over that required to meet liquidity demands. So, the cash
equivalents above .5% of sales are kept in as financial assets.
Trade and Other Receivables: These are all unsecured and are considered good; as such no
provision was required to be made against these receivables. There are no notes receivable;which
earn interest. So the whole amount has been classified under operating asset. No split has been
done.
Advances, Deposits & Pre-Payments: Advances, Deposits and Pre-Payments are classified as
operating assets and it includes advance to suppliers, supplementary duty and vat, advances to
employees.
Workers Profit Participation (WPP) Fund: The Company made the provision @ 5% of net
profit for Workers Profit Participation Fund (WPPF). This amount has to be incurred no matter
what and this is involved in the business, in selling goods and services. So this has been
classified as operating liability.
Inventory: Inventories are the part and parcel of the operating activities. So we allocate it to
operating assets.
Comments about Reformulated Balance Sheet:
21

The reformulated balance sheet of British American Tobacco Bangladesh Company Limited
shows that the Common Stock Equity has risen from 5911.30 million to 14609.52 million within
the five years. It is more than twice and less than three hold of the initial CSE. The companys
financial position is strengthening day by day. The exploratory part is whether the rising trend is
due to operating activities or financing activities.

14609.52

16000.00
14000.00

11463.51

12000.00
8901.59

10000.00
8000.00

7032.94
5911.30

6000.00
4000.00
2000.00
0.00

2011

2012

2013

2014

2015

Total Equity

The reformulation maintains the balance sheet equation: CSE=NOA-NFO. The balances of
common shareholders' equity (CSE) in the typical balance sheet agree with those in the
reformulated balance sheet.
Net Operating asset (NOA) is the difference between operating assets and operating liabilities. In
this case the company has higher operating liabilities than operating assets. And encounter
negative operating assets that mean net operating liabilities. It indicates the company is very
much efficient about its working capital management.
Net Financial Obligation (NFO) is the difference between financial obligations and financial
assets. If these are negative, the firm has a Net Financial Asset position (NFA). The company has
a substantial amount of NFA. The amount is rising continually except 2015. That means in 2015
it may liquidate some of its financial assets.
22

3.2 Reformulated Balance Sheet of Olympic Industries Ltd.

Reformulated Balance Sheet of Olympic
2011
2012
2013
Property, Plant and Equipment
526.74
679.50
1102.17
Capital Work in Progress
239.83
522.34
330.64
Intangible Assets
0.00
0.00
0.00
Deferred Expenses
7.69
0.00
0.00
Inventories
349.72
416.63
517.70
Account Receivables
24.17
25.54
22.88
Advances, Deposits &

2014
1142.58
701.07
25.81
0.00
661.07
18.26

2015
1679.10
211.48
19.36
0.00
697.85
107.58

OA7
S
TOA

Prepayments
Operating Cash
Total Operating Assets

OL1
OL2
OL3
OL4
OL5
OL6
OL7
OL8
TOL

OA1
OA2
OA3
OA4
OA5
OA6

175.20
26.35
1349.69

232.91
35.72
1912.65

505.03
6.76
2485.19

703.60
24.35
3276.75

507.43
22.85
3245.65

Creditors for Goods

Creditors for Services
Accrued Expenses
Advances Against Sales
Provision for Investment in

270.23
4.52
34.11
129.73

335.47
4.95
48.25
92.77

520.00
5.92
52.41
134.08

582.49
10.50
74.99
158.85

639.95
13.32
64.49
172.34

Shares
Provision for Taxation
Deferred Liabilities
Deferred Tax Liabilities
Total Operating Liabilities

0.00
129.62
78.60
22.78
669.59

0.00
216.30
99.27
28.89
825.92

0.50
477.22
137.56
56.99
1384.69

0.00
580.95
183.80
69.49
1661.08

0.00
388.49
253.07
94.67
1626.34

Net Operating Assets

680.11

1086.73

1100.50

1615.67

1619.32

FO1
FO2
FO3

Financial Obligations
Short Term Loan
Interest Payable
Liabilities for other Finance
Long Term Loan-Current

188.68
4.15
55.29

230.78
2.30
73.62

213.48
1.93
74.83

125.39
12.98
97.96

138.26
0.14
66.90

FO4
FO5
FO6
FO7
TFO

Portion
Lease Finance-Current Portion
Long Term Loan
Lease Finance
Total Financial Obligations

0.00
30.38
132.14
11.15
421.79

0.00
14.69
227.30
29.62
578.32

0.00
13.21
204.54
45.26
553.25

104.59
14.39
444.93
34.59
834.82

172.98
34.36
245.82
53.43
711.90

23

FA1
S
TFA

Financial Assets
Investments
Financial Cash
Total Fiancial Assets

0.00
500.63
500.63

0.00
678.59
678.59

1080.07
128.41
1208.48

1309.30
462.59
1771.89

2083.95
434.08
2518.03

NFO

Net Financial Obligations

-78.84

-100.27

-655.24

-937.07

-1806.13

CSE

Total Equity

758.95
OK

1187.00
OK

1755.74
OK

2552.74
OK

3425.45
OK

From the above balance sheet we can interpret,

The reformulated balance sheet of British American Tobacco Company Limited shows that the
Common Stock Equity has risen from 758.95 million to 3425.45 million within the five years. It
is almost five hold of the initial CSE. The companys financial position is strengthening day by
day. The exploratory part is whether the rising trend is due to operating activities or financing
activities.

Comparative Equity

16000.00
14000.00
12000.00
10000.00

BATBC

8000.00

OLYMPIC

6000.00
4000.00
2000.00
0.00
2011

2012

2013

24

2014

2015

From the above graph we can see that the growth of both CSE is consistently rising of BATBC
and Olympic Limited. The BATBC is going to more stable and strengthen than the Olympic
Industries ltd.
The reformulation maintains the balance sheet equation: CSE=NOA-NFO. The balances of
common shareholders' equity (CSE) in the typical balance sheet agree with those in the
reformulated balance sheet.
Net Operating asset (NOA) is the difference between operating assets and operating liabilities. In
this case the company has higher operating liabilities than operating assets. And encounter
negative operating assets that mean net operating liabilities. It indicates the company is very
much efficient about its working capital management.

3.3 Reformulated Income Statement of BATBC

Reformulated Income Statement of BATBC

2011

2012

2013
31225.4

2014
35641.9

2015
39894.8

OI1

Net turnover

23268.86

27471.344

4
17501.3

9
19332.2

9
21212.5

OE1

Cost of Sales

13455.54

15946.224

2
16309.7

1
18682.3

Gross Profit

9813.326

11525.12 13724.11

OE2
OE3

4219.73

5481.85

9 4775.119
479.141 571.909
5347.02

6
655.767
6137.62

Operating expenses
Workers' profit participation fund

4530.369
258.614

4612.418
342.182

Total Operating Expenses

4788.983

4954.6

4698.88
9025.22

8
10962.7

3
12544.7

Core Operating Income From Sales

5024.343

6570.52

25

Tax on Operating Income from Sales

Rep.Tax
Tax as reported
Tax allocated to other operating income
Tax benefit from net financial expenses
Tax on Operating inocme from Sales
Core Operating from sales After tax
OOI

2363.07
0
49.827
2412.89
2611.45

Other Income
Tax on Other Operating Income
Other operating income afer tax

0
0
0

2559.82
19.582
46.193
2586.43
3984.09

4179.55
39.28
4.913
4145.18
4880.05

4584.36
24.24
62.658
4622.77
6339.97

6585.54
17.036
55.533
6624.04
5920.72

50.82 89.661
60.882
37.68
19.582
39.281
24.244
17.036
31.237
50.37
36.63
20.64

Total operating Income From sales

FE

after tax

2611.45

4015.32

4930.43

6376.61

5941.37

Financial Expenses
Net financial (Income / expense)
Tax benefit from Financial Expenses
After tax Financial Expenses

110.687
49.82
60.85

119.878
46.193
73.684

11.215
4.91
6.301

157.346
62.65
94.68

122.828
55.53
67.29

Net profit After tax

2550.59
3941.640 4924.13 6281.92 5874.07
Correct
Correct
Correct
Correct
Correct

The income statement reports the profits and losses that the net operating assets and net financial
assets have produced. The reformulated statement groups these items into operating and
financing categories. However, the reformulated statement is on a comprehensive basis, so it also
includes dirty surplus items reported within the equity statement. Within these operating and
financing components, some further distinctions are made.
Reformulated statement is on a comprehensive basis, so it also includes dirty surplus items
reported within the equity statement.
The effective tax rate is used here Effective Tax Rate on Operation=Tax on Operating Income
Operating Income from Sales before tax
Four types of income are included here,

26

 Core Operating Income from sales

Core other operating income other than sales
Financial expenses (income)
All items are after tax basis. The operating income includes the core operating income from
sales; core other operating income other than sales and unusual items.

Comprehensive Income of BATBC

7000.00
6000.00
5000.00
Net profit After Tax

4000.00
3000.00
2000.00
1000.00
0.00
2011

2012

2013

2014

2015

From the above chart it can be observed that for BATBC, the profit has risen smoothly over the
past five years. In 2015 it shows slightly down turn. Comprehensive income rose from 2550.59
to 5874.07 million.
The income statement of BATBC above shows the total breakdown of income from operations
and financial activities. It is stated that over the past years operating profit after total tax
adjustment for the year 2011 was 2550.59 million, 3941.64 million for 2012, 4924.13 million for
2013, 6281.92 million for 2014, 5874.07 million for 2015

3.4 Reformulated Income Statement of Olympic

Reformulated Income Statement of Olympic
OI1

Turnover

2011

2012

2013

2014

2015

3885.018

6003.342

7093.179

7922.353

8996.148

27

OE1

Cost of Goods Sold

Gross Profit

2913.463

4542.710

5271.458
1821.72124

5639.775

6338.235

971.556

1460.632

2282.579

2657.913

Operating Expenses
Administrative & General
OE2

Expenses
Selling and Marketing

111.542

141.740

176.002

216.196

229.292

OE3

Expenses

467.875

621.323

714.451

881.468

997.451

OE4

WPPF

17.671

32.543

45.219

60.343

77.277

597.086

795.605

935.670

1158.006

1304.02

374.470

665.027

886.051

1124.573

1353.893

97.19

185.64

289.02

337.81

451.21

8.521

17.926

35.882

41.005

85.208

financial expenses
Tax on Operating

14.340

21.966

30.026

17.975

29.256

inocme from Sales

Core Operating from sales

103.00

189.68

283.16

314.78

395.26

After tax

271.46

475.34

602.89

809.79

958.64

146.49

291.86

Total Operating Expenses

Core Operating income from
sales
Tax on Operating Income
from Sales
Tax as reported
Tax allocated to other
operating income
Tax benefit from net

Total other nonoperating

OOI

112.27

Income
Tax on Other operating

30.97

62.849 9

income
After tax Other Operating

8.520

17.926

35.881

41.005

85.207

Income

22.456

44.923

76.397

105.486

206.659

Total operating Income after

293.92

520.27

679.29

915.28

1165.30

28

tax
Financial Expenses
Tax benefit on Financial
Expenses
Tax benefit from

52.13

77.01

93.96

64.21

100.21

14.340

21.966

30.026

17.97

29.25

37.79

55.05

63.93

46.24

70.96

256.13
OK

465.22
OK

615.36
OK

869.04
OK

1094.34
OK

Financial Expenses
After tax Financial Expenses
Net Operating Income

Comparative Income
7000.00
6000.00
5000.00
4000.00
BATBC
3000.00

OLYMPIC

2000.00
1000.00
0.00
2011

2012

2013

2014

2015

The comprehensive earnings of British American Tobacco Company Limited are much higher
than Olympic Industries Limited. In 2011, it was BDT 256.13 million for Olympic Industries
Limited and BDT 2590.59 million for BATBC Limited and in 2015, it was BDT 4,105 million
for Jamuna Oil Company Limited and BDT 1,928 million for Padma Oil Company Limited.

29

3.5 Sustainable Earnuings

Sustainable Earnings(BATBC)

RNOA
OPLLEV*Spread
ROA
Total assets

2011
51.25%
2.0588
15.9031%
16420.99

2012
83.95%
1.6691
26.7074%
15034.49

2013
70.43%
1.3648
26.7032%
18463.80

2014
49.51%
0.9677
23.55%
27075.02

2015
48.44%
1.2215
20.08%
29590.83

2014
57.43%
26.74%
18.13%
5048.64

2015
72.89%
34.26%
20.22%
5763.68

Sustainable Earnings (Olympic)

RNOA
OPLLEV*spread
ROA
Total Assets

2011
44.78%
20.05%
15.88%
1850.32

2012
49.33%
19.47%
20.08%
2591.24

2013
62.07%
32.01%
18.39%
3693.67

In the above figure, we can see that the RNOA of BATBC increases as the operating liability
leverage increases in the reporting period. And the Return on asset increases as the Total asset
increases. It has the higher Return on Net Operating (RNOA) than Return on Assets (ROA).
Same thing happens in case of Olympic Industries Limited except 2015. So it can be said that
both companies have the earnings sustainability.

30

Free Cash Flow

Free cash flow- the difference between cash flow from operations and cash invested in
operations- is the main focus in DCF analysis, liquidity analysis, and financial planning. Free
cash flow is the net cash generated by operations, which determines the ability of the firm to pay
off its debts and equity claims. FCF can be calculated using two methodsMethod 1: CI=OINOA
Method 2: CI=NFENFO+d
Here we have calculated FCF using method 1.
Calculation of Free
Cash Flow
2011
Free Cash Flow, (C-I)=OI-NOA
2611.4

2012

2013

4015.3

4930.4

Operating Income (OI)

Net operating Assets

5
5095.9

2
4783.1

(NOA)

2014

2015

3
7000.6

6376.61
12879.5

5941.37
12264.3

2
-

0
2217.4

312.85
4328.1

7
2712.9

5878.92

-615.22

2611.4
5

497.69

6556.59

NOA
Free Cash Flow, (C-I)

In the above figure BATBC has positive free cash flow from 2011 to 2015. That means the
company performed well in the reporting period and they used their free cash flow to paid
dividend and consistent in doing so. This indicates that the BATBC has turned itself into a cash
cow company in terms of capacity to produce free cash flow.

From the Stock & Flow Statement, we can calculate Net Dividend:
31

Net Dividend = Free Cash Flow - NFE + NFO

Year
Free Cash Flow, (C-I)
NFE
NFO
NFO
Net dividend=(Free Cash flowNFE+NFO)

2011
2611.45
60.85916
-815.33

2012
4328.17
73.68449
-2249.82
-1434.49

2013
2712.95
6.301632
-1900.99
348.82

2014
497.69
94.68767
1416.01
3317.00

2015
6556.59
67.29402
-2345.22
-3761.23

2550.59

2820.00

3055.48

3720.00

2728.07

Free Cash Flow of Olympic

Calculation of Free Cash Flow

2011

2012

2013

2014

2015

Operating Income (OI)

293.92

520.27

679.29

915.28

1165.30

Net operating Assets (NOA)

656.39

1054.58

1094.42

1593.76

1598.75

398.19

39.83

499.34

5.00

293.92

122.08

639.45

415.94

1160.30

2011

2012

2013

2014

2015

293.92

122.08

639.45

415.94

1160.30

NFE

37.79

55.05

63.93

46.24

70.96

NFO

-102.56

-132.42

-661.32

-958.98

-1826.69

-29.86

-528.90

-297.66

-867.71

37.17

46.62

72.03

221.64

Free Cash Flow, (C-I)=OI-NOA

NOA
Free Cash Flow, (C-I)
Year
Free Cash Flow, (C-I)

NFO
Net dividend=(Free Cash flowNFE+NFO)

256.13

The same way Olympic is quite good in generating free cash flow. They also have positive free
cash flow from 2011 to 2015. They use their free cash flow in paying dividends and the company
paid cash dividend in the reporting period consistently.

32

Analysis of Profitability
Return on common equity is broken into its drivers over three levels of analysis.

The first level identifies the effect of financing and operating liability leverage.
Second level identifies the effect of profit margins and asset turnovers on operating

profitability.
Third level identifies the drivers of profit margins, asset turnovers, and the net borrowing
costs.

Analysis of Financial Leverage:

ROCE=RNOA+[FLEV(RNOANBC)]
The expression of ROCE is broken down into three drivers:

Return on net operating assets (RNOA).

Financial leverage (FLEV).
Operating spread between the return on net operating assets and the net borrowing cost
(RNOA-NBC).

This formula says that the ROCE is levered up over the return from operations if the firm has
financial leverage and the return from operations is greater than the borrowing cost. The firm
earns more on its equity if the net operating assets are financed by net debt, provided those assets
earn more than the cost of debt.

BATBC
Particulars
FirstLevel

2011

2012

2013

2014

2015

RNOA=OI/NOA

51.25%

83.95%

70.43%

49.51%

48.44%

FLEV=NFO/CSE

-0.1379

-0.3199

-0.2136

0.1235

-0.1605

NBC=NFE after tax/NFO

Spread=(RNOA-NBC)

-7.46%
0.5871

-3.28%
0.8722

-0.33%
0.7076

6.69%
0.4282

-2.87%
0.5131

33

FLEV*Spread

-0.0810

-0.2790

-0.1511

0.0529

-0.0824

ROCE=RNOA+(FLEV*SPREAD)
ROCE=CI/CSE

43.15%
43.15%
OK

56.05%
56.05%
OK

55.32%
55.32%
OK

54.80%
54.80%
OK

40.21%
40.21%
OK

2011

2012

2013

2014

2015

19.3%
2.05
0.039
0.1549
0.3190

34.1%
1.66
0.043
0.2984
0.4981

32.1%
1.36
0.0393
0.2812
0.3838

27.23%
0.97
0.042
0.2302
0.2228

23.92%
1.22
0.038
0.2008
0.2453

(OPLLEV*OpSpread)

51.25%
OK

83.95%
OK

70.43%
OK

49.51%
OK

48.44%
OK

Particulars

2011
23268.8

2012
27471.3

2013
31225.4

2014
35641.9

2015
39894.8

9
12879.5

9
12264.3

5095.97
11.22%
4.5661

4783.12
14.62%
5.7434

7000.60
15.79%
4.4604

2
17.89%
2.7673

0
14.89%
3.2529

Particulars
FirstLevel

ROOA=(OI + Implicit Cost)/OA

OPLLEV=OL/ONA
STBR
OpSpread=ROOA-STBR
OPLLEV*OpSpread
RNOA=ROOA+

Second Turnover
-Level
Net Operating Assets
Profit Margin=OI/Turnover
ATO=Turnover/NOA

34

ROCE of BATBC
ROCE
56.05%

55.32%

54.80%

43.15%

40.21%

2011

2012

2013

2014

2015

As a cash cow company BATBC is deleveraging company. It has no financial leverage instead
deleverage. But the SPREAD is positive that means the leverage effect is favorable.
60.00%
50.00%
40.00%
30.00%
20.00%

ROCE

10.00%

FLEV

0.00%
-10.00%

2011

2012

2013

2014

-20.00%
-30.00%
-40.00%

5.1 Analysis of Operating Liability Leverage:

35

2015

Just as financial liabilities can lever up ROCE, so can operating liabilities lever up the return on
net operating assets. Operating liabilities are obligations incurred in the course of operations and
are distinct from financial obligations incurred to finance the operations. Operating liabilities
reduce the net operating assets that are employed and so lever the return on NOA.
RNOA=ROOA+(OLLEVSPREAD)
RNOA=OIImplicit Interest after Tax Operating assets+{OLNOA(ROOAShort term
borrowing rate)}
In case of BATBC, ROOA>Short Term Borrowing Rate for all period; which indicate favorable
operating liability leverage. We also know if ROOA is greater than short term borrowing rate the
leverage is favorable. In case of BATBC it has favorable operating liability leverage and its
OLLEV is positive as well.

5.2 Second Level Breakdown: Drivers of Operating Profitability

The two drivers of RNOA are:

Operating profit margin (PM) :

Asset turnover (ATO) :

PM =OI (after tax)/Sales

ATO =Sales/NOA

Profit margin reveals the profitability of each dollar of sales. BATBC has a positive profit margin
from 2011 to 2015 and the average profit margin for the reporting period is 14.882 percent. That
means the firm has a high percentages of profitability in term of its operation. On the other and
the company shows positive ATO that means the companys operating assets are efficient. We
can interpret PM as for Tk.1 sales the average operating profits only Tk. 0.14882 for the
reporting period.
OLYMPIC
Classification
s
CI
CSE
OI

Particulars
Comprehensive Income
Equity
Operating Income after tax

2011
256.13
758.95
293.92
36

2012
465.22
1187.00
520.27

2013
615.36
1755.74
679.29

2014
869.04
2552.74
915.28

2015
1094.34
3425.45
1165.30

NOA
NFO
NFE
OA
OL
STBR

Net Operating Assets

Net Financial Obligations
Net Financial Expenses After Tax
Total Operating Assets
Total Operating Liabilities
Short-Term Borrowing Rate After Tax
Implicit cost of OL

656.39
-102.56
37.79
1325.98
669.59
5.075%
33.978

1054.58
-132.42
55.05
1880.50
825.92
5.003%
41.324

1094.42
-661.32
63.93
2479.11
1384.69
4.763%
65.952

1593.76
-958.98
46.24
3254.83
1661.08
5.041%
83.728

1598.75
-1826.69
70.96
3225.09
1626.34
4.956%
80.608

Particulars
RNOA=OI/NOA
FLEV=NFO/CSE

2011
44.78%
0.5558

2012
49.33%
0.4872

2013
62.07%
-0.3001
-

2014
57.43%
-0.1859

2015
72.89%
-0.4005

NBC=NFE after tax/NFO

Spread=(RNOA-NBC)
FLEV*Spread

8.960%
0.3582
0.1991
64.684

9.518%
0.3982
0.1940
68.732

12.135%
0.7420
-0.2227
39.803

-9.745%
0.6717
-0.1249
44.943

-5.172%
0.7806
-0.3127
41.621

%
33.748

%
39.193

%
35.048

%
34.043

%
31.947

%
2011
24.729%
102.01%
5.07%
19.654%
0.2005

%
2012
29.864%
78.32%
5.00%
24.860%
0.1947

%
2013
30.061%
126.52%
4.76%
25.298%
0.3201

%
2014
30.693%
104.22%
5.04%
25.652%
0.2674

%
2015
38.632%
101.73%
4.96%
33.675%
0.3426

(OPLLEV*OpSpread)

44.78%

49.33%

62.07%

57.43%

72.89%

Particulars

2011
3885.01

2012
6003.34

2013
7093.17

2014
7922.35

2015
8996.14

2
1054.58

9
1094.41

4
1593.75

8
1598.75

656.392
7.6%

3
8.7%

6
9.6%

8
11.6%

4
13.0%

Classification
s

First-Level

ROCE=RNOA+(FLEV*SPREAD)

First-Level

Second-Level

ROCE=CI/CSE
Particulars
ROOA=(OI+Implicit Cost)/OA
OPLLEV=OL/NOA
STBR
OpSpread=ROOA-STBR
OPLLEV*OpSpread
RNOA=ROOA+

Turnover
Net Operating Assets
Profit Margin=OI/Turnover
37

ATO=Turnover/NOA

5.919

5.693

6.481

4.971

1. BATBC has higher profit Margin than Olympic Industries ltd. for all the reporting years. That
means BATBC has the higher profitability than Olympic.
2. On the other hand, BATBC has a lower average asset turnover than Olympic Industries
limited.

38

5.627

Analysis of growth and Sustainable earnings

Firms having growth in residual earing is growth firm. Change in Residual earing is the growth
in firm. And this change is Abnormal Earning Growth. RE change depends on change in ROCE
and change on CSE. Thus the change in ROCE is measured by the change in profitability. And
the change in CSE depends on the change in NOI and change in NFE.

Particulars
Turnover
Sales Growth

BATBC
2011
2012
3885.018 6003.342
0.181

2013
7093.179
0.137

2014
7922.354
0.141

2015
8996.148
0.119
14609.51

Common Equity

5911.300

7032.940

8901.590

11463.511

9
13036.51

0.431

6472.120
0.190
0.560

7967.265
0.266
0.553

10182.551
0.288
0.548

5
0.274
0.402

3941.640
0.11
2820.00
4224.90
3160.56

4924.127
0.11
3055.48
5237.31
3935.52

6281.923
0.11
3720.00
6621.26
5008.79

5874.074
0.11
2728.07
6287.21
4251.54

2908.53
3160.56
1266.48

3522.44
3935.52
774.95

4449.09
5008.79
1073.27

3793.78
4251.54
-757.24

Analysis of Residual Earnings

2012
2013
2014
4783.12
7000.60
12879.52
-2249.82
-1900.99
1416.01
4939.54
5891.85
9940.05
-1532.57
-2075.4
-242.49
6472.12
7967.26
10182.55
27471.34 31225.43
35641.98

2015
12264.30
-2345.22
12571.91
-464.60
13036.51
39894.89

Avg. CSE
Common Equity growth rate
ROCE
Net income after tax to common stock
holders
Required Return or cost of equity,RR
Net Dividend
Cum-dividend earning
Residual Earnings=[ROCE1 - RR]*CSE0
Residual Earnings=[ROCE1 -

2550.591
0.11
2550.59

RR]*AvgCSE0
Residual Earnings=Earning-(RR*CSE)
Abnormal Earning Growth (RE)

0
1894.08

NOA
NFO
Avg NOA
Avg NFO
Avg CSE
Turnover

1894.08

2011
5095.97
-815.33

23268.86
39

OI
ROCE
RNOA
PM
ATO
FLEV
RE
RE
ROCE-RR
(ROCE-RR)
CSE
RE=[ (ROCE-RR)*CSE0]+

2611.45
43.148%
51.25%
11.22%
4.566
-0.138
1894.08

4015.32
56.045%
83.95%
14.62%
5.743
-0.320
3160.56
1266.48
0.449
0.129
1121.640

4930.43
55.317%
70.43%
15.79%
4.46
-0.214
3935.52
774.96
0.442
-0.007
1868.650

6376.61
54.799%
49.51%
17.89%
2.767
0.124
5008.79
1073.27
0.437
-0.005
2561.921

5941.37
40.207%
48.44%
14.89%
3.253
-0.161
4251.54
-757.24
0.291
-0.146
3146.008

{ CSE*(ROCE-RR)1]
changes due to change in ROCE over the

1266.48

774.955

1073.27

-757.24

RR
changes due to change in common Equity
changes in RE

762.421
504.05
1266.48

-51.201
826.15
774.96

-46.119
1119.38
1073.27

-1672.7
915.52
-757.24

0.320

Sales growth is the primary driver of CSE. But sales growth requires more investments in net
operating assets, which is financed by either net debt. The sale growth of BATBC is gradually
decreasing except in 2014. It has several times ups and downs. And it has residual earnings and
change in residual earnings is also positive except 2015 that means the company has abnormal
earnings growth except 2015.

6.1 Analyzing Growth in Residual Earning

RE
RE
ROCE-RR
(ROCE-RR)
CSE
RE=[(ROCE-RR)*CSE0]+

BATBC
1894.08
3160.56
1266.48
0.320
0.449
0.129
1121.640

3935.52
774.96
0.442
-0.007
1868.650

5008.79
1073.27
0.437
-0.005
2561.92

4251.54
-757.24
0.291
-0.146
3146.0

1266.48

774.95

1073.27

-757.24

{CSE*(ROCE-RR)1]
40

changes due to change in ROCE over the

RR
changes due to change in common Equity
changes in RE

Particulars
Turnover
Sales Growth
Common Equity
Avg. CSE
Common Equity growth rate
ROCE
Net income after tax to common stock

762.421
504.05
1266.48

OLYMPIC
2011
2012
3885.01 6003.34
54.53%
758.95 1187.00
972.974
56.40%
0.3374 0.39192

-51.201
826.15
774.95

-46.119
1119.
1073.27

1672.770
915.527
-757.24

2013
7093.17
18.15%
1755.74
1471.36
47.91%
0.35048

2014
7922.35
11.69%
2552.74
2154.23
45.39%
0.34043

2015
8996.14
13.55%
3425.45
2989.09
34.19%
0.31947

holders
Required Return or cost of equity,RR
Net Dividend
Cum-dividend earning
Residual Earnings=[ROCE1 -

256.13
0.1091
256.13

465.22
0.10919
37.17
469.278

615.36
0.10919
46.62
620.447

869.04
0.10919
72.03
876.901

1094.34
0.10919
221.64
1118.54

RR]*CSE0
Residual Earnings=[ROCE1 -

173.25

335.610

423.646

590.300

720.314

RR]*AvgCSE0
Residual Earnings=Earning-(RR*CSE) 173.258
Abnormal Earning Growth (RE)

275.096
335.610
162.352

355.030
423.646
88.0366

498.150
590.300
166.653

628.557
720.314
130.014

Particulars
NOA

2011
656.39

2012
1054.58

2013
1094.42

2014
1593.76

2015
1598.75
-

NFO
Avg NOA
Avg NFO
Avg CSE
Turnover
OI
ROCE
RNOA
PM
ATO
FLEV
RE

-102.56

-132.42
855.487
-117.49
972.974
6003.34
520.27
39.19%
49.33%
0.087
5.693
0.487
335.610

-661.32
1074.5
-396.87
1471.36
7093.17
679.29
35.05%
62.07%
0.0958
6.481
-0.300
423.646

-958.98
1344.08
-810.15
2154.23
7922.35
915.28
34.04%
57.43%
0.1155
4.971
-0.186
590.300

1826.69
1596.25
-1392.8
2989.09
8996.14
1165.30
31.95%
72.89%
0.1295
5.627
-0.401
720.314

3885.01
293.92
33.75%
44.78%
0.076
5.919
0.556
173.258
41

RE
ROCE-RR
(ROCE-RR)
CSE
RE=[(ROCE-RR)*CSE0]+

162.352
0.283
0.0545
428.05

88.0366
0.241
-0.0415
568.74

166.653
0.231
-0.0101
797.01

130.014
0.210
-0.021
872.70

{CSE*(ROCE-RR)1]
changes due to change in ROCE over the

162.352

88.0366

166.653

130.014

RR
changes due to change in common Equity
changes in RE

41.325
121.026
162.352

-49.195
137.232
88.0366

-17.647
184.300
166.653

-53.501
183.515
130.014

0.228

Earning Quality
S-score measure the percentage changes in NOA. An S-Score of greater than +2 is associated
with significant positive sentiment, while an S-Score of lower than -2 is associated with
significant negative sentiment. A score greater than +3 is considered extremely positive, while
one below -3 is considered extremely negative. Anything between -1 and +1 is considered
neutral. Higher scores could be also associated with higher Sharpe ratios, while lower
scores could be associated with lower Sharpe ratios.
BATBC
Particulars
Net Operating Asset(NOA)

2011

2012
4783.1

5095.97

B/S based Aggregate

Accruals
Avg. NOA (3years moving

-312.85

Avg.)
B/S based Aggregate

2013
7000.6

7
5626.5

39.41%

Ratio=NOA/Avg NOA
s-score

42

2015

0 12879.52 12264.30
2217.4

Accruals

2014

5878.92

-615.22

8221.08 10714.81
71.51%

-5.74%

32.10%

-77.25%

WACC Calculation:
DSEX return has taken for the calculation of market return from 2013 to 2016.
Also the closing market prices of BATBC and Olympic have taken for the calculation of
Firms return from 2013 to November 30th, 2016.
Standard Deviation and Variance of the market return and firms return has derived.
BETA value for the firm as well as for the market has been calculated through formula.
364 days Treasury bill yield has taken for risk free rate.

WACC
Particulars
Beta
Market Return
Market Return Yearly
Ke
Covariance
Variance of BATBC
Risk free rate

BATBC
0.19041294
1
0.00517390
2
0.06208682
5
0.05230148
8
0.00054557
8
0.00809688
2
0.05
0.0121

Risk premium
Debt

638.18
9583.77

Equity
Weight of debt
Weight of Equity

0.06243235
8
0.93756764
2
43

OLYMPIC
0.97280479
3
0.00517390
2
0.06208682
5
0.06175812
1
0.00278731
6
0.01469876
0.05
0.01208682
5
485.776402
1935.97451
1
0.20058892
1
0.79941107
9

104.39

Interest

0.16357564

Kd

77.5055464
0.15954983
8
0.11322530
4
0.06175812
1
0.29034522
8

Tax rate

0.09408997
1
0.05230148
8
0.42479227
7

WACC

5.491
%

7.208%

Assumed WACC

11.00%

11.00%

11.106%
9.409%

10.919%
11.323%

Kd after tax
Ke

Cost of Equity
cost of debt

Valuation Using Different Methods

7.1 Necessary Data used for Valuation
Average Sales
Avg. Growth rate
Avg. DPS
Avg. DPS Growth
Avg. NOA
Average NFO
ATO
Avg. ATO
avg. Effective tax rate
Profit margin
Avg. Profit Margin
Operating Profit Margin
Avg. Operating profit Margin
FCF
WACC
Cost of Equity
Number of share outstanding
Average No. of Share
44

2011
31500.5044
0.1445
52.8
7.939%
8404.70
-1179.07
4.5661
4.1580
0.42479
10.96%
14.69%
0.1122
0.1488
2611.45
11%
11.11%
60.00
60.00

Outstanding

7.2 Valuation Using Residual Operating Income Model (ROI)

Residual earning from the net operating assets is residual operating income (ROI).
ROI=Operating income after tax-Required income on net operating assets.
Valuation Using Residual Operating Income with 11% WACC and 3% TV
2015 2016E
2017E
2018E
2019E
2020E
31500.504 36052.516 41262.321 47224.9 54049.2 61859.7
Sales

Profit Margin

Cost of Operation
Benchmark of Operating
Income

14.69% 14.69% 14.69% 14.69%

6059.6294 6935.28 7937.47 9084.48

02
4.1580371

2
2
2
5
4.1580371 4.15803 4.15803 4.15803

62

62
8670.5614

62
7
7
7
9923.5096 11357.5 12998.7 14877.1

8404.70

21

0.11

0.11
953.76175

0.11
0.11
0.11
0.11
1091.5860 1249.32 1429.86 1636.48

63
4340.7752

62
7
4968.0433 5685.95

4.1580371

NOA

94

14.69%
5294.5370

Operating Income
Avg. ATO

61

Residual Operating Income

46

57

57

6
7447.99

5 6507.61

Year

1
0.9009009

2
3
4
5
0.8116224 0.73119 0.65873 0.59345

PV of Discount factor

01
3910.6083

33
1
1
1
4032.1754 4157.52 4286.76 4420.02

PV of ROI

29
45

38

20807.094
Total PV of ROI

73

Tarminal Growth rate

0.03
56907.8

Continuing tarminal Value

2
33772.021

PV of tarminal Value

73

Book Value of NFO

Equity value(NOA+PV of

-1179.07

ROI+ PV of TV-NFO)

61804.75

No. of Outstanding Share

60.00
1030.0791

Value per share

38

Value Per Share

WACC
12.00%
11.00%
10.00%

3.50%
991.644
1070.518129
1157.748061

Terminal Growth
3.00%
955.412
1030.079138
1112.594435

2.50%
923.443
994.397676
1072.753

Residual operating income model of valuation represents a price range from 923.443 to 1157.748
for different WACC and terminal growth rate. Where WACC is inversely related to the price and
terminal growth rate is positively related to the price.

7.3 Valuation using Residual Earning Model

46

Residual earning is the earning in excess of these required dollar earnings. An asset will earn a
return on its book value greater than its required return; it must be worth more than book value
and vice versa.
Valuation of RE using 11.11% cost of Equity and 3% tarminal growth rate
Average
2016E
2017E
2018E
2019E
2020E
31500.50 36052.51 41262.32 47224.97 54049.26 61859.71
Sales
Net Profit Margin
Earning
DPS
transfer to the Equity
Book Value of Equity
cost of Equity
Banchmark Income
Residual Income

52.800

9583.772
0.111

PV discount factor
PV of rsidual earning

7
0.147
5294.537
56.992
5237.545
14821.31

2
0.147
6059.629
61.517
5998.113
20819.43

5
0.147
6935.282
66.401
6868.882

8
0.147
7937.472
71.673
7865.800

2
0.147
9084.485
77.363
9007.122

7
0.111
1646.047
3591.498
1.000
0.900
3232.498

0 27688.311 35554.111
0.111
0.111
0.111
2312.194 3075.048 3948.620
3685.918 3793.833 3917.180
2.000
3.000
4.000
0.810
0.729
0.656
2985.872 2766.090 2570.540

0.111
0.000
9007.122
5.000
0.591
5319.852

16874.85
total pv of residual earning
Tarminal growth rate

2
0.030
68493.09

Continuing Value

6
40453.89

PV of Continuing value

3
66912.51

total pv of equity
no. of share outstanding
Value per share

7
60.000
1115.209

Value Per Share

Terminal Growth
Cost of
Equity

0.035
47

0.03

0.025

11.11%

1163.648558

1115.209

1072.467501

5.50%

1785.319278

1704.026507

1632.297592

5.23%

1824.070075

1740.668419

1667.078722

5.00%

1857.907711

1772.659842

1697.441134

Residual Earnings model of valuation represents a price range of 1072.753 to 1157.748 for
different Cost of equity and terminal growth rate. Where cost of equity is inversely related to the
price and terminal growth rate is positively related to the price.

7.4 Valuation using Free Cash Flow model

The difference between the cash flow from operations and cash outlays for new investment is
called free cash flow. Using free cash flow we can value the firms equity using present value
formula that means
Value of firm= present value of expected free cash flows.

Valation using Free Cash Flow at 11% WACC and 3.0% TV

Average
2016E
2017E
2018E
2019E
2020E
31500.504 36052.516 41262.321 47224.975 54049.268 61859.712
Sales
Operating Profit
Margin
Operating income

61

94

45

23

33

0.1488

0.1488
5365.5095

0.1488
6140.8578

0.1488
7028.2487

0.1488
8043.8729

0.1488
9206.2609

4.1580371

1
4.1580371

82
4.1580371

53
4.1580371

38
4.1580371

22
4.1580371

62

62

62

62

62

62

after tax
ATO

48

Net operating

8670.5614

9923.5096

11357.516

12998.745

14877.142

21

57

44

83

73

265.86
5099.65

1252.95
4887.91

1434.01
5594.24

1641.23
6402.64

1878.40
7327.86

0.11
1
0.9009009

0.11
2
0.8116224

0.11
3
0.7311913

0.11
4
0.6587309

0.11
5
0.5934513

Discount Factor
PV of Free Cash

01
4594.2792

33
3967.1371

81
4090.4615

74
4217.6196

28
4348.7306

Flow
Total PV of FCF
Tarminal Growth

81

24

38

Asset
Changes in Net

8404.70

Operating Assets
Free Cash Flow
Cost Of capital
(WACC)
Year

0.11

rate
Continuing value
PV of Continuing

21218.23
0.03
55989.91

Value
Enterprise value
Net Debt
Book Value of

33227.29
62850.21
-1179.07

Equity
Number of Share

64029.28

Outstanding
Value per share

60
1067.16

Value Per Share

Terminal Growth
WACC

3.50%

3.00%

2.50%

11%

1087.290295

1067.154747

1012.397653

10%

1172.890819

1129.335517

1090.904368

9%

1225.526857

1197.457754

1135.700464

49

Free Cash Flow model of valuation represents a price range of 1012.398 to 1225.537 for
different WACC and terminal growth rate. Where cost of equity is inversely related to the price
and terminal growth rate is positively related to the price.

50

References

Financial Statement Analysis and Security Valuation, by Stephen H. Penman, Fourth

edition-2014.
Class Lecture of Respected Teacher, Dr. Mahmood Osman Imam.
Annual report of British American Tobacco Company Limited. From 2009-15
Annual report of Olympic Industries Limited. Form 2009-14.

51