Interpretation and Assessment of the Financial Performance and Position - Paper Example

This section provides a detailed interpretation and assessment of the financial performance and position of the National Express Group and the Stagecoach Group. The analysis is based on their recent financial statements as documented in their Annual Reports. Various financial ratios will be used to assess the performance and the position for the two companies. The ratios have been categorized as profitability, liquidity, efficiency in use of assets, and solvency/gearing ratios. Investor ratios are also included in the analysis.

Profitability Analysis

The return on capital employed is a ratio that measures the efficiency of a company in generating profits from the capital employed. The ratio expresses the companys operating profit as a percentage of its capital employed (Robinson, 2012). A higher value of the return on capital employed is preferred because it shows the business has generated more earnings per pound of investment. A lower value indicates low profitability. The National Express Group had a ratio of 5% and 6% in 2016 and 2015 respectively. The drop in the 2016 value was attributed to the increase in non-current liabilities when compared to the 2015 figure. Stagecoach Group on the hand had ratios of 3.9% and 13.9% in 2017 and 2016 respectively. The significant drop in the value between the two years was a consequence of the drop in total operating profit, which dropped from 171m in 2016 to 47m in 2017. The ratio represents the performance of the company in utilizing its assets with respect to long-term financing. The ratio is thus a more comprehensive measure of profitability as compared to the return on equity.

The return on equity assesses a business ability to generate income using the input of the shareholders. The ratio is calculated by dividing the net income by the shareholders equity. Thus, for National Express Group, the figures of imply that for every 1 of investment from the shareholders, the company generated 11% and 13% in profits in 2016 and 2015 respectively. For every 1 of investment from the shareholders in Stagecoach Group, the firm was able to generate 26.4% and 55.7% as profit from that investment in 2017 and 2016 respectively. From an investors standpoint, the ratio is a measure of the financial position of the company since a higher value of the ratio will indicate a greater ability of the company to generate income from new investment into the business (Noreen, Brewer, & Garrison, 2013).

The operating profit margin is a profitability ratio that measures the percentage of total revenue that is comprised of the operating income 

(Noreen, Brewer, & Garrison, 2013). The margin thus represents the amount of revenue that remains after all the operating and variable costs have been paid. Stagecoach Group had operating profit margins of 1.2% and 4.4% in 2017 and 2016 respectively while National Express Group had ratios of 9% for both 2016 and 2015 financial years. The reason for the decline in the margin for Stagecoach Group in 2017 is the low total operating profit that was realized that year despite having generated comparable revenue to that of 2016. The firm also incurred more operating costs and registered much less operating profit from its Group companies in 2017 as compared to its performance in 2016. The operating profit margin is useful to investors and creditors to gauge the financial performance of the company because it measures the strength and profitability of the companys operations. A high margin implies that the company runs its operations smoothly and that the income generated is also used to pay for its operating and variable costs (Robinson, 2012). A low margin such as that registered by Stagecoach imply that very little income remains after settling the variable and fixed costs.

The net profit margin is a percentage representation of the revenue that remains after all expenses have been deducted from the sales (Noreen, Brewer, & Garrison, 2013). The ratio weighs the net profit against the net sales. National Express Group registered a net profit margin of 6% in 2016 and 2015 whereas Stagecoach Group registered margins of 0.5% in 2017 and 2.6% in 2016. The net margin dropped in 2017 for Stagecoach because the net profit was a low value of 18m even though the revenue for the same year was greater than the value recorded for 2016. The 2016 figure for National Express Group was slightly weaker than the 2015 figure because of an increase in total operating costs in 2016 as compared to 2015. The net profit margin measures the success of the business and thus a high margin is indicative of effective cost control and better pricing of commodities.

Liquidity Analysis

The current ratio indicates the ability of the company to settle its short-term liabilities using its current assets (Noreen, Brewer, & Garrison, 2013). To obtain the ratio, the current assets are divided by the current liabilities. The current ratios for National Express Group for 2016 and 2015 were at 0.62 and 0.47 respectively. The increase in the figure in 2016 was due to an increase in current assets to a figure almost twice the amount in 2015. However, the current liabilities in that same year also increased significantly because of more borrowings that the company made in that year. The current ratios for Stagecoach Group for the 2017 and 2016 fiscal years were at 0.75 and 0.79. The current assets in the two years were comparable with the current liabilities in 2017 being more than those in 2016, thus translating into a lower current ratio in 2017. The ratios for the two companies are below 1 and do not necessarily imply that the companies are in bad financial health but may be indicative of the companys ability to negotiate long credit periods with its suppliers and shorter credit periods for customers given the industry in which they operate (Noreen, Brewer, & Garrison, 2013). This is illustrated by the high account payables compared to the lower account receivables they have.

The quick/acid test ratio evaluates whether the firm has enough short-term assets to cover its immediate liabilities (Robinson, 2012). Stagecoach Group had acid test ratios of 0.73 and 0.76 in 2017 and 2016 respectively. The higher current liabilities in 2017 were responsible for lower ratio in 2017. National Express Group had quick ratios of 0.64 and 0.44 in 2016 and 2015 respectively. The high current assets in 2016 were responsible for the higher ratio despite the increase in current liabilities that was also registered. The acid-test ratios for both firms are lower than the current ratio and this implies that the current assets in the two firms are highly dependent on the inventory.

Efficiency in Use of Assets

The asset turnover ratio measures the efficiency of the company in using its assets to generate revenue (Noreen, Brewer, & Garrison, 2013). It compares the companys sales to its assets. A company that can generate more revenue using few assets implies that the company is quite efficient in utilizing its assets. National Express Group had asset turnover values of 0.9 and 1.0 in 2016 and 2015 respectively. The increase in total equity and non-current liabilities in 2016 as compared to the previous year were responsible for the slight decrease in the ratio. Stagecoach Group had values of 3.2 and 3.1 in 2017 and 2016 respectively. The revenue in 2017 was slightly higher in 2017 as compared to 2016 hence, the value rose in that financial year.

Payable days tell how long it takes a company to pay its invoices from its creditors or suppliers. The ending accounts payable is divided against the cost of sales and the result multiplied by the number of days (Noreen, Brewer, & Garrison, 2013). Stagecoach had 25 days and 27 days in 2017 and 2016 respectively. National Express had 38 days and 43 days in 2016 and 2015 respectively. The longer a firm takes to pay its creditors is both good and bad for the business. It is good because it implies the company has more money on hand that is beneficial for its working capital and free cash flow. However, the longer the company takes to pay its creditors may also move the latter to refuse to extend credit in future. To improve its cash flow, Stagecoach may opt to stretch its payment period if that will not make it lose a discount. The figure is however dependent on the performance of the company, and its industry (Robinson, 2012). From the two groups, each has demonstrated that they are committed to paying their creditors on time as evidenced by the decreasing payable days.

Inventory days refers to the average number of days it takes the business to sell average inventory during a one-year period. Thus, it is the number of days that sales were held in inventory before the actual selling (Noreen, Brewer, & Garrison, 2013). National Express had inventory days of 4.8 and 5.3 in 2016 and 2015 respectively. The decrease was attributed to the increase in operating costs incurred before intangible amortization. For Stagecoach Group, the values were given as 2.3 and 2.7 days in 2017 and 2016 respectively. These figures are almost comparable although the increase in the 2016 figure could be attributed to the higher inventory registered during that year against a lower operating cost.

Solvency

Gearing ratio assesses the proportion of a companys borrowed funds to its equity. It is a measure of the financial risk to which a business is subjected to because excess debt can lead to financial difficulties (Noreen, Brewer, & Garrison, 2013). National Express had gearing ratios of 50% and 53% in the 2016 and 2015 financial years whereas Stagecoach had gearing ratios of 94% and 86% in 2017 and 2016 respectively. Stagecoach had lower total equity attributable to the parent that saw the ratio rise to 96%, a significant rise from the previous year. The high ratio is indicative of a greater financial leverage because the company uses debt to pay for its continuing operations. Thus, the company may have difficulties in meeting its repayment schedules and risk bankruptcy.

Investor Ratios

Dividend per share is the sum of declared dividends that a company issues for every ordinary share outstanding (Robinson, 2012). It is the total dividends that is paid out by the business divided by the number of ordinary shares that were issued in the given fiscal year. The Dividends per share for National Express in 2016 were at 0.12 whereas in 2015 the figure was 0.11. The increase was due to the increase in the dividends that were issued in 2016 as compared to those issued in 2015. For Stagecoach the figures were 0.11 and 0.12 in 2017 and 2016 respectively. In 2017 the dividends issued were decreased significantly and as a result the ratio dropped too.

Earnings per share refers to the portion of a companys profit allocated to each outstanding share of common stock (Noreen, Brewer, & Garrison, 2013). This ratio reflects the profitability of the company. The earnings per share for National Express was 0.23 in 2016 and 0.21 in 2015. The higher profit registered in 2016 was responsible for the increase in that year. Stagecoach had figures of 0.03 in 2017 and 0.17 in 2016. The low net profit recorded in 2017 was responsible for the drop in earnings per share that year.

Reappraisal of Financial Performance and Position

The Strategic Reports in the An...