Following on from the brief look at some of Vodafone‘s more ambiguous entries, we are going to see if we can delve into the balance sheet from British American Tobacco (LSE: BATS) (NYSE: BTI.US) for the year ended 31 December 2012. If you are new to investing, or are just baffled by some of the terms that make up a balance sheet, then read on.
Again, I will start by noting the balance sheet is only one of three main financial statements. Both the cash flow and income statements are as important, and should be viewed in conjunction to gain the full picture.
Intangible assets are again of interest as, contrary to Vodafone’s treatment, goodwill is contained within intangible assets as a whole. Goodwill was explained previously as the premium paid for purchasing a company compared with the net asset value at the time. In note 9 of British American Tobacco’s financial statements, it can be seen that goodwill makes up £10.8bn of the £11.7bn total with trademarks completing the majority of the difference.
Isn’t it just gambling?
A small but interesting line in the balance sheet is ‘derivative financial instruments’. With £373m split between non-current (typically more than one year to maturity) and current assets, this includes amounts used for hedging — conventionally used by companies to minimise the risk of interest rate and currency movements.
As an example of hedging, if you are owed $1m due in three months, you could simply arrange now to sell $1m at that future date to offset the risk of the currency fluctuating. Such instruments can also be used for speculating and it can be seen within note 16 that £25m of the £373m is indeed used for this purpose.
Take a look behind the curtain
Leaving the face of the balance sheet, the notes are often a more valuable source of information since more detail can be disclosed. Note 22, other provisions for liabilities and charges, includes a remaining provision of £274m for cleaning up sediment in the lower Fox River. Searching even further down, note 30 reveals the full scale of the environmental neglect in Fox River in addition to numerous other ongoing legal actions.
Finally, it is useful to have some knowledge of corporate acquisitions and disposals, as they give a good indication of where the business is being positioned for the future. Note 26, ‘business combinations and disposals’, show the purchases of CN Creative Ltd, an e-cigarette developer, for £40m and Protabaco, the second largest cigarette company in Colombia, for £296m. Again we have an example of goodwill as Protabaco was worth just £164m, creating a premium of £132m.
Hopefully that whistle-stop tour was helpful although, as ever, there are many more terms that could be cleared up, too.
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> Barry does not own shares in British American Tobacco. The Motley Fool has recommended shares in Vodafone.
