Table of Contents

1.0….. Introduction. 2

2.0….. Ratio analysis. 3

2.1….. Profitability. 3

2.2….. Liquidity ratio analysis. 7

2.3….. Efficiency ratios. 8

3.0….. Capital structure analysis. 10

4.0….. Capital asset pricing model (CAPM) and Beta. 12

5.0….. References. 13
































1.0  Introduction

Understanding the financial performance and position of a company has become even more important in today’s complex and competitive business environment. This is because; having reliable knowledge regarding how a company is performing enables a number of interested parties to make informed decisions (Gitman & Zutter, 2012). The interested parties include investors, creditors, suppliers, the company’s management itself alliances (Van Horne & Wachowicz, 2008).  The management would want to determine how well the company has performed in order to find out areas where it faces weaknesses that need to be strengthened and areas of strength which it can use to further enhance its “competitive advantage”. Investors on the other hand use the information to determine whether to invest in the company or not while creditors and suppliers want to know the solvency and liquidity of a company. This is in order to decide whether to lend it funds in the case of creditors while suppliers’ interest is to know if the company’s liquidity is adequate to pay for goods and services delivered.

Visa Inc and American Express are among the leading global technology firms that offer payment services. Visa on one hand enables the electronic transfer of funds between various entities by offering a platform that links “customers and financial companies and merchants”[1].

On the other hand, American Express which has been in operation for the past 167 years since its establishment in 1850 “ offers  charge and credit card products and travel-related services offered to consumers and businesses around the world”[2].

Visa Inc. American Express
$ million except per share data $ million except per share data
Net Operating Revenue 15,082 32,119
Operating Profits 7,883 8,096
Net Income 5,991 5,408
Total Assets   64,035 158,893
Earnings per share $2.49 $5.67
Dividend per share $0.56 $1.22
Basic weighted-average shares outstanding 1,906 933

Source: Visa Inc annual report (2016); American Express annual report (2016)

Table 1: Financial Summary

2.0  Ratio analysis

Ratios are helpful indicators of how a company is performing by highlighting areas of strength and weaknesses. This is done through relating the various items in the financial statements of a company (Gitman & Zutter, 2012). Therefore, ratios help in offering insight regarding the profitability, liquidity, capital structure, asset management (management efficiency) and market performance of a company.

2.1.   Profitability

Given the primary objective of company is to create “wealth for its shareholders”, it’s imperative that they generate adequate profits. This is because the higher the profits, the better the dividends that a company be able to pay its shareholders. Secondly, growth in a company’s profits influences the performance of its share value in a positive manner. This is because, as the profits increase, investors’ interest in the company’s stock will rise. The increase in demand in a company’ stock will therefore result in an increase in the value of its share price. Therefore the more profitable a company is, the better it will be able to create wealth for shareholders (Van Horne & Wachowicz, 2008).

Therefore, the use of profitability ratios is to indicate how efficiently a company manages is expenses and assets in order to create value for the shareholders through the profits generated (Brealey, Myers & Allen, 2011).

The operating profit margin reveals the efficiency of a company’s management of its operating expenses to generate profits. Effective management of its operations will result in lower overall total expenses and this result in the company deriving higher operating profit margins. On the other hand, a company which is faced with high operating costs as a result of efficiency in managing them will result in lower operating profit margins.

Figure 2: Operating profit margin

American Express’s operating profit margin increased year-on between 2012 and 2014 but declined in 2015. However, the company recovered in 2016 with the company’s operating profit margin rebounding by 1.02% to 25.21%. The main reason for the strong recovery in American Express’s operating profit margin in 2016 is a 2.39% decrease in Card Member rewards to $6.79 billion in 2016 compared with $7.0 billion in 2015.  The decline in Card Member rewards in 2016 is “primarily driven by lower cobrand rewards expense of $518 million, primarily reflecting lower Costco-related expenses and a shift in volumes to cash rebate cards”[3].  On the other hand, the decline in American Express’s operating profit margin in 2015 is as a result of a 0.94% increase in “Card Member rewards”. “The increase in 2015 was primarily driven by higher cobrand rewards expense of $199 million, driven by rate impacts as a result of cobrand partnership renewal costs, partially offset by a decrease in Membership Rewards expense of $134 million”[4]. In order to improve its performance, American Express set in motion a restructuring exercise meant to increase its operations efficiency while reducing its wage bill. The objective is for the company to reduce its operating expenses by over $1 billion by 2017 so as to increase its operating margins[5]

In contrast, the operating profit margin for Visa Inc declined by 13.3% to 52.27% in 2016 compared with 65.30% in 2015. The decline in Visa’s operating margin in 2016 is mainly as a result of a “one-off” settlement of $1.88 billion in relation to “Visa Europe Framework Agreement Loss”[6]. The fact that Visa’s drop in operating profit margin is not directly related to its operating expenses is an affirmation of its strong operating profitability. Overall, Visa Inc’s operating over the past five years has remained high with the company achieving an operating profit margin of 60.60% in 2014 which is marginally lower compared with 61.46% in 2013 but far better compared with 20.53% in 2012.

Comparisons between the Visa Inc and American Express reveal that the operating profit margin of both companies was very close in 2012. This is given by Visa’s operating profit margin of 20.57% and 20.44% for American Express. However, the preceding years has seen Visa Inc’s operating profit margins rise sharply compared with American Express whose margins have remained relatively steady as indicated in figure 2 above. Visa’s higher operating profit margins compared with American Express therefore means that the latter’s operating profit margin is strong and better.

The return on assets (ROA) for American Express that offers an indication of how efficiently a company uses its total assets to generate sales revenue increased to 3.40% in 2016 compared with 3.20% in 2015. This increases in an indication that American Express was more efficient in it utilised its assets in 2016 compared with the previous year to generate sales revenue. Over the last five years, the company’s ROA has been relatively steady as indicated in figure 3 below.

Figure 3: Return on assets (ROA)

In contrast, Visa’s ROA declined by a larger margin of 6.37% to 9.36% in 2016 from 15.73% in 2015. This decline can be explained by disaggregating Visa’s ROA into its components which are its operating efficiency given by the net profit margin and asset efficiency which is indicated by the asset turnover[7]. Based on Visa’s financial results, the company’s net profit margin which declined by 25.58% to 39.72% in 2016 is the main reason for the decline in the company’s ROA. Given the decline in the net income is as a result of a one-off event, it means therefore that the decline in ROA does not suggest a decline in the efficiency of its asset management.

Visa’s efficiency in utilising its assets to create revenue is therefore better compared with American Express. This is given by its higher ROA of 9.36% compared with 3.40% for American Express while the latter’s ROA has also been above its competitor over the last five years.

American Express’s return on capital employed (ROCE) which indicates how efficiently a company utilises capital it employs to generate profits increased by 18 basis points to 9.38% in 2016 compared with 9.20% in 2015. This is an indication of an improvement in the efficiency of the company’s use of its capital.  In the past five years, American Express’s ROCE has remained relatively steady with marginal increases and decreases. This is indicated by 12 basis points decrease in the company’s ROCE to 9.20% in 2015 compared with 9.32% in 2014 and 8.60% in 2013. Overall, American Express’s ROCE is above its performance in 2012 given by 6.76% which indicates a general increase in the past five years.

Figure 4: Return on capital employed (ROCE)

In contrast, Visa’s ROCE decreased to 14.08% in 2016 from 26% in 2015. Prior to 2016, Visa’s ROCE increased year-on from 6.67% in 2012 to 22.89% in 2013 and 23.64% culminating in its highest level achieved over the past five years of 26% in 2015. In 2016, the decrease in Visa’s ROCE has been attributed to a decline in its operating profit margin to 53.27% compared with 65.3% in 2015 due to the one-off payment to cover losses resulting to settle losses attributed the agreement “Agreement between Visa and Visa Europe”[8]. Despite the decline in Visa’s ROCE of 14.08% remains strong compared with American ROCE of 9.38%.

American Express’s net profit margin which shows its overall profitability after deducting all costs and taxes increased to16.84% in 2016 compared with 15.73%. In the last five years, American Express’s net profit margin has general been steady with occasional ups and downs. This is highlighted by the increase in company’s net profit margin to 16.84% in 2016 from 15.73% in 2015 but lower compared with 17.21% in 2014. In general American Express’s net profit margin is higher compared with its levels five years ago of 14.20%.

The increase in American Express’s net profit margin in 2016 is as a result of a decrease in its total operating expenses by -3.90% to $22 billion compared with $22.89 billion in 2015[9].

Figure 5: Net profit margin

In contrast, Visa’s net profit margin decreased 39.72% in 2016 from 65.30% in 2015 with the one-off payment of $1.89 billion being the main reason for this decline. In the last five years, Visa’s net profit margin has remained strong while increasing each year from 20.57% in 2012 to 42.28% in 2013 and 65.3% in 2015 which is its highest level over the same period.

Comparing the two companies indicates that Visa’s net profit margin of 39.72% is greater compared with 16.84% for American Express. Further, Visa’s overall profitability in the past five years has been better compared with American Express as shown in figure 5 above.

Overall, Visa’s profitability is stronger and better compared with American Express given its operating profit margin, ROCE, ROA and net profit margin indicators are all greater compared with the latter company.

2.2.   Liquidity ratio analysis

Liquidity ratios offer an indication of the capacity of a company in meeting its short-term obligations[10]. In order to achieve success both in the short-term and ensuring its long-term strategies are met, a company needs to have adequate cash resources to fund its day to day operations. The importance of a company ensuring the fulfilment of its short-term obligations to ensure that it does face disruptions related to lack of inventory as a result of suppliers not offering goods or services or not being able to access short-term credit as a result of having a poor “credit record”. Therefore, liquidity is among the cogs has an influence on whether a company will be able to achieve its objective of maximising wealth for its shareholders[11].

Figure 6: Current ratio

2.3.   Efficiency ratios

The use of efficiency ratios is to offer insight regarding how efficiently a company is managing its assets to generate revenue. The importance of efficiency is attributed to the fact that a company needs to generate high revenue if it’s to achieve greater profitability. Given that both American Express and Visa are service companies, it means they do not operate any inventory. Therefore, the main indicators that can be used to evaluate the efficiency of their respective asset management are the average settlement period for trade receivables (ASPTR); the average settlement period for trade payables (ASPTP) and asset turnover.

The average settlement period for trade receivables (ASPTR) indicates the time it takes a company to collect cash it’s owed by customers from resulting from goods or services offered on credit[12]. The ASPTR plays an importance role in helping a company achieve its overall objective of creating wealth by influencing its revenue. This is because, companies use “credit policies” meant to attract more customers through offering them flexible payment terms. However, the same ASPTR impacts the liquidity of a company since it determines how soon it will be able to collect cash that it can use to fund its activities. Therefore, the ASPTR is like a two sided coin whose interpretation is based on its impact on the company’s revenue and liquidity positively. The desire of a of a company is to for customers to pay as soon as possible but this will not be desirable if it’s at the expense of losing customers[13]. Therefore, there is a trade-off between how the “credit policy” affects the company’s liquidity and ability to attract and maintain customers[14].

Figure 7: Average settlement period for trade receivables (ASPTR)

Visa’s ASPTR increased to 25.19 days in 2016 compared with 22.27 days in 2015. This suggests that the company made its credit policy more flexible to attract more customers. As figure 7 above indicates, Visa’s ASPTR has remained steady over the past five years. This is indicated by an ASPTR of 25.19 days in 2016 compared with 22.27 and 23.62 days in 2014.  Visa’s ASPTR means that the company’s credit period is within 30 days which is the within the norm in the industry to indicates[15].  The fact that Visa’s credit period is lower than 30 days while managing to keep its revenues high means its management of receivables is strong.

In contrast, American Express’s ASPTR has been above 500 days over the past five years. It increased to 569.03 days in 2016 compared with 519.34 days in 2015 and 501.78 days in 2014. This means that American Express’s credit period is higher which is not ideal.  Comparing the two companies indicates that Visa’s management of receivables is better given its lower ASPTR of 25.19 days compared with 569.03 days for American Express.

American Express’s asset turnover which indicates the efficiency of management of its total assets to generate revenue has remained relatively unchanged and steady over the last five years.

American Express’s asset turnover remained the same in 2016 and 2015 at 0.20. This is marginally lower with 2014 and 2012 where American Express’s asset turnover was the same at 0.21. This means that the company has been able to generate revenues of $0.20 in 2016 and 2014 and $0.21 between 2014 and 2012 for each $1 of asset used.






In comparison, the asset turnover for Visa declined to 0.24 in 2016 compared with 0.34. The reason for the decrease in Visa’s asset ratio is attributed to the company’s growth strategy that resulted in an increase in the valuation of its intangible assets resulting in an overall increase in total assets. Visa’s takeover of “Visa Europe resulted in an increase in its intangible assets to $27.61 billion in 2016 compared with $11.7 billion”[16]. Regarding the future, Visa’s asset turnover will be able to improve as a result of increased revenue from its expansion into Europe.

Figure 8: Asset turnover

Comparisons between the two companies indicate that Visa’s overall management of its assets is strong compared with American Express. This is given by Visa’s lower average settlement period for trade receivables. Further, Visa’s asset turnover is higher compared with American over the past five years.

3.0  Capital structure analysis

Capital structure ratios offer insight regarding the capacity of a company to meet its long-term obligations. Increased competition and the pressure by investors to deliver favourable returns means companies have to find strategies necessary to achieve this objective[17]. This puts pressure on companies to seek extra financing options beyond equity.  Companies therefore turn to debt to bridge the gap that equity cannot fulfil. The second reason for the choice of debt is because it’s a deductible expense in computation of tax. Further, the returns that a company can derive from using debt are usually better compared to the interest payable on the debt[18].

However, the use of debt can create problems in case a company fails to repay. This is in the form of the company being declared bankrupt and therefore ceasing from operating. Secondly creditors can take control of the company’s management with their decisions not in favour of investors since they want to recoup their money[19]. Therefore, the evaluation of the capital structure of a company is to determine whether its debt level could create “financial risks”.

As figure 9 below indicates, Visa’s use of debt to finance its activities is low compared with American Express. This means its level of financial risk is low and hence its capital structure is better. Visa Inc’s favourable capital structure is further enhanced by the fact that its operating profit margins are stronger compared with American. This means its ability to finance its assets through the use of debt is stronger.


Figure 9: Debt ratio

The debt ratio for Visa Inc which offers an indication of the proportion of debt it uses to finance its assets increased to 48.6% in 2016 compared with 25.83% in 2015. The reason for the sharp increase in Visa’s debt ratio is as a result of the company borrowing $15.88 billion for the implementation of its “growth strategy into Europe. The use for the debt is to finance part of the price in acquiring “Visa Europe and for repurchase of shares”[20]. Overall, Visa’s debt usage has been below the 30% prior to 2016 to indicate its strong capital structure.

In contrast, American Express’s debt ratio has remained steady over the past five years within the 80% range. As figure 9 above indicates, American Express’s ratio is 87.1% in 2016 compared with 87.17% in 2015 and 87.67% in 2012. The stability of the company’s capital structure points to consistency in its long-term objectives.

Overall, Visa’s capital structure is better compared with American Express. This because of its low debt ratio of 48.6% compared with 87.1% for American Express.


4.0  Capital asset pricing model (CAPM) and Beta

Being able to find a stock that offers favourable returns is one of the challenges faced by investors. This is because of the existence of the risk element in all the investments. Therefore to mitigate the impact of risk, investors make a wide selection from the stocks available in the market and combine them in a manner that reduces the total risk[21].

The risk mentioned above is attributed to two causes namely the prevailing economic conditions where this type of risk is referred to as market risk; and secondly risk caused by company or industry specific conditions and this is referred as “diversifiable risk or unsystematic risk”[22].

“Unsystematic risk” affects a specific company or a small number of assets and to deal with it, investors usually combine different stocks to come up with an “optimal portfolio”[23].

In contrast, it’s not possible to mitigate against market risk because it has a broad effect on whole industries and sectors. This is because all the companies operating in a particular business environment are all prone to changes in the economic conditions of the particular economy. For example changes in interest rates will have an effect on liquidity flow in the economy and this will affect the level of consumption. All companies ranging from retailers to the telecommunication sectors will be affected since consumers will change their consumption patterns by limiting the amount of cash they spend.

Therefore, it’s the level of “market risk” in a stock that determines its risk level and hence returns. In this case, stocks that offer high returns are faced with high risk level while investors face the prospect of receiving modest returns by investing in stocks that are of low risk.

To measure the level of market risk of a stock, a coefficient referred to as “beta” is used[24]. The beta coefficient indicates the extent to which a stock is move relative to fluctuations in returns in the market[25]. A stock that has a beta that is above 1.0 respond by a greater proportion relative to changes in market returns compared with stock whose beta is below 1.0[26]. This means for example that a stock with a beta of 1.5 will see its returns increase by 1.5% for each 1% increase in market returns. In contrast, a stock that has a beta that is below 1.0 for example 0.6 will have its returns increase by 0.6% for each 1% increase in market returns. this indicates that a beta that is above 1.0 is associated with high risk and higher returns while a beta that is lower than 1.0 will result in lower returns since the stock’s market risk is also low[27].

Estimation of a company’s beta can be done using either regression analysis or by using a formula based on dividing the company’s covariance by its variance. Whichever of the method that is applied, the results obtained will be similar.

  • In estimating beta, a company’s and market; a 5 year historical share price data is required. In this case, the S&P 500 index is used a proxy for the market. The data that is collected is based on the monthly share price performance of each company and the S&P 500 index. The reason for using the 5-year historical share price is because it’s the most widely used frequency in most cases.
  • The second step is compute the historical returns based on the data derived. In this regard, Visa Inc and American Express





























5.0  References

American Express Annual Report. (2015). Annual Report, 2015. [Online]. Available

From [Accessed: 15 May 2017].

American Express Annual Report. (2016). Annual Report, 2016. [Online]. Available


[Accessed: 15 May 2017].

Brealey, R. A, Myers, S. C. & Allen, F. (2011). Principles of corporate finance,

10th Ed New York: McGraw−Hill.

Gitman, L, J, Zutter, C, J. (2012).  Principles of Managerial Finance (13th Ed)

London:  Pearson. (2017). American Express: Balance Sheet.  [Online]. Available

From [Accessed: 14 May 2017]. (2017). American Express: Income Statement.  [Online]. Available


[Accessed: 14 May 2017].

Ross, S, A, Westerfield, R, W., & Jordan, B, D. (2001) Essentials of corporate finance.

Boston: McGraw-Hill Irwin.

Van Horne, J, C, Wachowicz, J, M. (2008).Fundamental of financial management.

London: Pearson education ltd.

Visa Inc Annual Report. (2016). Annual Report, 2016. [Online]. Available from [Accessed: 15 May 2017].

Wahlen, J, M, Baginski, S, P, Bradshaw, M, T. (2010).Financial reporting, financial

     Statement analysis and valuation: A strategic Perspective. Ohio: Cengage learning

[1] (Inc, Visa, 2016, p. 3)

[2] (American Express, 2016, p. 1)

[3] (American Express, 2016, p. 42)

[4] (American Express, 2016, p. 42)

[5] (American Express, 2016, p. 2)

[6] (Inc, Visa, 2016, p. 48)

[7] (Ross, Stephen A; Westerfield, Randolph W; Jordan, Bradford D, 2001)

[8] (Inc, Visa, 2016, p. 46)

[9] (American Express, 2016, p. 79)

[10] (Van Horne, James C; Wachowicz, John M;, 2008, p. 138)

[11] (Brealey, R. A, Myers, S. C. Allen, C, 2011)

[12] (Wahlen, Baginski & Bradshaw, 2010)

[13] (Wahlen, Baginski & Bradshaw, 2010)

[14] (Brealey, R. A, Myers, S. C. Allen, C, 2011)

[15] (Ross, Stephen A; Westerfield, Randolph W; Jordan, Bradford D, 2001, p. 490)

[16] (Inc, Visa, 2016, p. 99)

[17] (Brealey, R. A, Myers, S. C. Allen, C, 2011)

[18] (Wahlen, Baginski & Bradshaw, 2010)

[19] (Van Horne, James C; Wachowicz, John M;, 2008)

[20] (Inc, Visa, 2016, p. 51)

[21] (Ross, Stephen A; Westerfield, Randolph W; Jordan, Bradford D, 2001, p. 318)

[22] (Ross, Stephen A; Westerfield, Randolph W; Jordan, Bradford D, 2001, p. 318)

[23] (Wahlen, Baginski & Bradshaw, 2010)

[24] (Van Horne, James C; Wachowicz, John M;, 2008)

[25] (Van Horne, James C; Wachowicz, John M;, 2008)

[26] (Brealey, R. A, Myers, S. C. Allen, C, 2011)

[27] (Wahlen, Baginski & Bradshaw, 2010)


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