What Do These Ratios Tell Us About British American Tobacco?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

LONDON -- Before I decide whether to buy a company's shares, I always like to look at two core financial ratios -- return on equity and net gearing.

These two ratios provide an indication of how successful a company is at generating profits using shareholders' funds and debt, and they have a strong influence on dividend payments and share-price growth.

Today, I'm going to take a look at cigarette giant British American Tobacco (LSE: BATS  ) (NYSEMKT: BTI  )  to see how attractive it looks on these two measures.

Return on equity
The return a company generates on its shareholders' funds is known as return on equity, or ROE. ROE can be calculated by dividing a company's annual earnings by its equity (i.e., the difference between its total assets and its total liabilities) and is expressed as a percentage.

BAT's share price has risen by an impressive 89% since 2008, and its dividend payout has increase by 61%, so shareholders have been well rewarded.

Let's take a look at BAT's ROE for the last five years:

British American Tobacco














BAT's brand-led pricing power and emerging market growth have enabled it to deliver substantial ROE over the last five years, during which it has gained a loyal following from U.K. income investors.

A ruthless focus on profitability has helped drive up margins, and BAT's operating margin hit 35.6% last year.

What about debt?
One weakness of ROE is that it doesn't show how much debt a company is using to boost its returns. A good way of assessing a company's debt levels is by looking at its net gearing -- the ratio of net debt to equity.

In the table below, I've listed BAT's net gearing and ROE alongside those of its U.K. peer, Imperial Tobacco. The difference is remarkable:


Net Gearing

Average ROE

Imperial Tobacco



British American Tobacco



BAT's higher returns and lower debt make a strong case for the firm, and Imperial's performance looks pretty unappetizing in comparison. It's no surprise that Imperial's share price has lagged behind that of BAT in recent years.

Is BAT a buy?
BAT's share price has fallen back by 7.5% since the FTSE 100 peaked in May, placing BAT shares on a forward P/E of 15.2, with a prospective yield of 4.3%.

Although this isn't cheap, I think that BAT shares still have more to offer and rate them a buy.

Finding market-beating returns
Finding shares that can beat the market over a long period is hard, but if you already hold BAT's stock, then you might be interested in learning about five star shares that have been identified by the Fool's team of analysts as "5 Shares to Retire On."

I own three of the shares featured in this free report, and I don't mind admitting they are among the most successful investments I've ever made.

To find out the identity of these five companies, click here to download your copy of this report now, while it's still available.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2484359, ~/Articles/ArticleHandler.aspx, 10/28/2016 7:30:04 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,161.19 -8.49 -0.05%
S&P 500 2,126.41 -6.63 -0.31%
NASD 5,190.10 -25.87 -0.50%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/28/2016 12:05 PM
BATS $4663.16 Up +52.16 +1.13%
British American T… CAPS Rating: No stars
BTI $114.09 Up +2.01 +1.79%
British American T… CAPS Rating: *****