2012 Financial Analysis on future investment in Stagecoach Plc. Denisse Varilla, Ha Nguyen, Jasmin Atwal, Sui Fong Shum University of Greenwich 2/14/2012 Contents Text Executive Summary 2 Introduction 2 Method 2 Findings 3 Growth 3 Profitability 3 Liquidity 3 Efficiency 4 Borrowing 5 Investors Ratios 5 Conclusions 6 Recommendations 6 Bibliography 7 Tables and Diagrams Appendices Appendix 1 Ratios 8 Calculations 9 Appendix 2 -1- 11 Executive Summary: This report investigates Stagecoach Plc. on the following aspects; profitability, liquidity, efficiency, borrowing and investor ratios of Stagecoach Plc.
Methods of analysis include trends, current news and ratios such as ROCE, Current and Acid ratios. The analysis has found that Stagecoach Plc. is reducing its debt whilst expanding and investing heavily into more environmentally friendly projects such as the greener buses. The company is also continually growing, by investing in more buses in order to provide a good (sufficient) service for the 2012 Olympics. The only negative factor found is the reduction in ROCE percentage due to the almost doubled borrowings. This may be countered by future growth. An investment into Stagecoach Plc. ill prove successful due to the increase in population and media providing a good advertising opportunity. An acknowledgement was that during the analysis, several short falls occurred. Sufficient information could only be gathered from only the last three financial years. This restriction contains the possibility to create an inaccurate trend, moreover creating a false prediction. Carrying out no calculations on ratios for the year 2008, fails to demonstrate how Stagecoach Plc. responded during the recession. Introduction: The objective of this investigation is to question whether it would be rofitable to invest in Stagecoach Plc. given its current economic status and its future potential for growth. Method: A number of resources were used to carry out this investigation, varying from the company’s official website to its annual financial reports for the years 2010 and 2011. The published financial statements were analysed to calculate several useful financial ratios. These were used to compare performance throughout the years 2009 – 2011. The main source used was the company’s official website; it proved to be very useful by providing us with relevant and up to date material.
Furthermore an alternative source was the use of Stagecoach Plc. ’s annual reports. The financial statements contained a high level of detail providing a more than sufficient amount of data. These were accurate and reliable by providing us with statistics that could not be fabricated or altered. However during evaluation of the resource used, a limitation was noted that using the comments provided in the annual reports had the potential to be biased. These methods were chosen over alternatives such as questionnaires and interviews as they were inappropriate for this investigation.
Other methods such as library search and focus groups after evaluation were found to be inadequate methods. The library search contains out of date information which would become a problem when focusing on a growing company. The focus groups seemed time consuming and ineffective for this inquiry. All the -2- information necessary for this report was available via the company’s website and annual reports. Findings: Growth: Stagecoach Plc. have experienced a 10% growth in revenue between the years 2010 and 2011 with the net profit margin also recovering from the decrease in 2010 up to 9. %. This growth has been due to fare rises. Non-current assets increased by 17. 4% as expected with the company with continued acquisitions and heavy investment in greener buses (Graph 2) with no increase in shareholders’ funds and a 5. 4% decrease in borrowings. This shows the ability of the company to internally fund its investments. This may signify no change in speculation from shareholders; however will rise due to expected growth from the 2012 Olympic Games. Future growth of the company in the coming year is expected to decrease by ? 5m due to fuel costs rising; however these are to be compensated by fare prices and service patterns which should leave operating profit similar to that of 2011. Profitability: The return on capital employed shows a steep decline over recent years. Between the years 2009 – 2010 ROCE has more than halved and then further decreased in April 2011 (Table 1). It can be seen from the figures that profit before interest and tax had decreased by 12% while borrowings had almost doubled. However this is reduced by 5. 4% by 2011 showing a decreased risk and better management of the company’s costs.
Greater detail found that the net profit margin had almost recovered from the decrease in 2010, up 1. 2% (Table 2) . This is due to the increase in profit before interest and tax. There may have been a problem with controlling costs and expenses in 2010 while the company had anticipated a recovery and regain in control of costs by 2011. Liquidity: To measure the liquidity of the company we have made use of the current and acid test ratios. It has shown that inventory plays little role within the company’s current assets as the current ratio (including inventory) and the acid test (excluding inventory) are very similar.
For this company the current ratio is increasing year on year (Table 3) . At present, the current ratio is not above one showing that the current assets are slightly below in comparison to the current liabilities, causing a problem if the company has to liquidate. However this is due to the company being a transport industry, the fixed assets in proportion to current assets are quite high. The company does not hold too many current assets or waste resources and holds only the necessary amount to pay its current liabilities. The trend shows a gradual increase from 2010 onward therefore the problem of liquidation is reducing. 3- Moreover the acid test is very similar to the current ratio, with no difference in 2009 and less than 0. 05 differences in the following two years (Table 4-5, Graph 3). This is consistent with the nature of the company being that they are a transport company and so does not require inventory. Therefore when comparing the total assets with total liabilities which would include the core of the company (the fixed assets) (Graph 1) , it is obvious that total assets are increasing year on year over the past three years with the ratio being 1. 16: 1 in 2011 (Table 6) . This could signify further growth over the upcoming years.
Efficiency: To measure the efficiency of Stagecoach, the fixed assets turnover ratio and the debtors days ratio is calculated. Due to Stagecoach being a transport service, relying heavily on its fixed assets, the ratio is calculated to demonstrate the proportion of how much the fixed assets contribute to the company’s final revenue. The debtor days show a steady reliable trend. This provides the company with an alternative route for receiving money and allows them to pay their own creditors sooner. The fixed assets turnover ratio is a measure of how effectively the fixed assets are being used to generate revenue.
The ratio originally increased from 2009 to 2010 (Table 7) . In 2010 Stagecoach’s fixed assets contributed less towards the company’s overall turnover. Therefore Stagecoach made its turnover with less reliability on its fixed assets and used other resources to generate revenue. Despite bad weather at the beginning of 2010, which negatively affected the transport sector, Stagecoach Plc. was still able to make turnover with less dependability on its fixed assets. However in the period of 2010-2011 the ratio decreased, showing that the fixed assets had more involvement.
This decrease is not negative as it was due to changes and adjustments taken place in the operations of the company. Stagecoach Plc. has expanded its company by increasing its number of fixed assets through the purchase of hybrid electric buses and other acquisitions. As the fixed assets turnover ratio over the duration of three years has decreased it demonstrates that Stagecoach is expanding and as a result aims to increase its profits. The fixed assets turnover ratio has a high probability that it will continue to decrease especially in the upcoming year of 2012 as Stagecoach Plc. as gained a contract with the London 2012 Olympic and Paralympic Games. The increased use of Stagecoach Plc. ’s facilities during the Olympics will increase customers, profits and reliability on Stagecoach Plc. ’s as a whole. The immediate change in the usage of their coaches will increase the value of the company’s fixed assets, further decreasing the ratio for the fixed asset turnover. Furthermore, the debtor day values, over the period of three years, were gradually decreasing and as a result were therefore showing an increase in efficiency in the credit control system 4- (Table 8) . This also resulted in increased liquidity as it affects how quickly current assets can be turned into cash. The decrease in debtor days meant Stagecoach received money more quickly which increased liquidity and decreased the risk of bad debts. The trend is decreasing which is an advantage as the company is holding more money within the business. Borrowings / Gearing: The gearing ratio of Stagecoach Plc. is decreasing over the 3 year period. From 2009 to 2010, the ratio slightly fell by 4. 8% and then dropped by 27. 4% between the years 2010 and 2011.
The gearing level of the firm is high, showing that the firm has a high amount of liabilities compared to shareholder funds. This allows the company to take on more profitable projects which give the company the opportunities to expand increase income, thereby reducing its gearing ratio in the future. However higher gearing means a larger proportion of the profits will be used to pay interests on long-term liabilities instead of being paid to the shareholders. The current high gearing ratio puts the company at higher risk due to the higher interest charges.
Nevertheless, the trend is decreasing as a result of the rise in equity during this 3-year period. This shows a good sign as the equity financing dependence is higher, the shareholders will be benefit more and the risk will be reduced. Lower gearing reduces interest payments and decreases risk which would attract potential investors. Investor’s Ratios: The earnings per share show that the returns for investors of Stagecoach Plc. with only 0. 20. 3p differences between the basic and diluted amount. This positively impacts the shareholders as the dividends are not affected excessively by being diluted.
There was a slight decrease in 2010 but recovered well in 2011 surpassing the previous EPS in 2009 by 31. 6%. The adverse impact on 2010 is perhaps because of the severe weather in the early quarter of the year. The recovery in 2011 was actually predicted by the company as they have anticipated reduction in fuel costs, as well as receiving more revenue support from SouthWestern Trains. Other methods to increase EPS used by Stagecoach is the acquisition of other companies evidenced by the purchase of East London Bus business in late 2010. The dividends per share ratio showed the security of dividend payouts in the years 2009 and 2011.
However there was no dividend payout in 2010 possibly due to a negative balance in retained earnings. On the other hand, year 2011 surpass the DPS in 2009, which shows that the company is performing well financially and will meet the needs of the shareholders as their dividend is guaranteed. -5- Conclusion: In conclusion, Stagecoach Plc. is continuously growing and expanding with the intentions in the short term to increase growth by acquisitions and ultimately maximise its profits. Methods of analysis were implemented in order to calculate trends and forecasts to have an understanding of future year performances for Stagecoach Plc.
Accounting and financial ratios alongside up-to-date news, historic past trends and the recent company’s annual report were all used to carry out the analysis. Stagecoach does not have any inventory as it provides a transport service and does not sell products. It has invested in more ‘greener’ buses. Stagecoach Plc. uses eco-friendly methods to gain a competitive advantage. Furthermore Stagecoach Plc. relies highly on its fixed assets to generate revenue. Although it has invested in more coaches, it has increased its fixed assets and is already seeing results in an increase in turnover. Stagecoach Plc. is gradually growing and expanding.
It has increased its investments to prepare for the Olympics which will process a large profit for Stagecoach Plc. , enough to make a return on the company’s investments as well as generating large net profits. Recommendations: After persistent and in depth analysis and evaluation of Stagecoach Plc. ’s financial statements and recent historic records, forecasts can be made to predict the performance of the company for future years. As a whole the company’s trends are positive, foretelling financially profitable upcoming years. Investing in Stagecoach Plc. in this economic period will prove very successful. Stagecoach Plc. as signed a major contract, providing an advantage against its competitors during the Olympic period. This would also provide the company with long term benefits after the Games. Our company advises investment in Stagecoach Plc which is likely to reward shareholders with dividends in the next few years by creating profits. -6- Bibliography ? Stagecoach Plc. , (2012) [ONLINE] Available at: http://www. stagecoach. com/ [Assessed: 13 February 2012] ? Stagecoach Plc. , (2012) [ONLINE] Available at: Investors > Financial Analysis > Reports > 2010 http://www. stagecoach. com/investors/financialanalysis/reports/2010. spx [Assessed: 13 February 2012] ? Stagecoach Plc. , (2012) [ONLINE] Available at: Investors > Financial Analysis > Reports > 2011 [Assessed: 13 February 2012] -7- Appendices Appendix 1: Ratios: ROCE Net Profit Margin Current Ratio Acid Test Debtors receipt period EPS DPS Dividend cover Gearing 2009 59. 9% 9. 6% 0. 54 : 1 0. 54 : 1 36. 9 days 2010 27. 7% 8. 2% 0. 97 : 1 0. 93 : 1 33. 8 days 2011 26. 9% 9. 4% 0. 98 : 1 0. 94 : 1 33. 8 days Basic = 18. 7p Diluted = 18. 5p Interim paid = 1. 8p Final proposed = 4. 2p 4. 5 times 102. 8% 15. 6p 15. 4p Interim paid = 6. 5p Final proposed = 0 0 98% 24. p 24. 3p Interim paid = 2. 2p Final proposed = 4. 9p 5. 0 times 70. 6% Table 1: ROCE 2009 59. 9% 2010 27. 7% 2011 26. 9% 2009 9. 6% 2010 8. 2% 2011 9. 4% 2009 0. 54 : 1 2010 0. 97 : 1 2011 0. 98 : 1 2009 0. 54 : 1 2010 0. 93 : 1 2011 0. 94 : 1 Table 2: Net Profit Margin Table 3: Current Ratio Table 4: Acid Test -8- Table 5: Current Ratio Acid Test 2009 0. 54 : 1 0. 54 : 1 2010 0. 97 : 1 0. 93 : 1 2011 0. 98 : 1 0. 94 : 1 2009 0. 99 : 1 2010 1. 01 : 1 2011 1. 16 : 1 2009 2. 12 : 1 2010 2. 18 : 1 2011 2. 05 : 1 2009 36. 9 days 2010 33. 8 days 2011 33. 8 days Table 6: Total Assets: Total Liabilities Table 7:
Fixed Assets Turnover Table 8: Debtors receipt period Calculations: ROCE (Profit before interest and tax/Equity + Borrowings) x 100 2009: (202. 2/-9. 6+347. 4)x100 = 59. 9% 2010: (177. 1/12. 7+626. 1)x100 = 27. 7% 2011: (225. 7/246. 2+592. 1)x100 = 26. 9% Net Profit Margin (PBIT/Revenue) x100 2009: (202. 2/2103. 3)x100 = 9. 6% 2010: (177. 1/2164. 4)x100 =8. 2% 2011: (225. 7/2389. 8)x100 = 9. 4% -9- Current Ratio (Current assets/ current liabilities) 2009: 517. 2/950. 4 = 0. 54 : 1 2010: 627. 2/645. 1 = 0. 97 : 1 2011: 658. 6/669. 5 = 0. 98 : 1 Acid Test (Current assets-inventory/current liabilities) 009: (517. 2-22)/950. 4 = 0. 54 : 1 2010: (627. 2-24. 1)/645. 1 = 0. 93 : 1 2011: (658. 6-26. 6)/669. 5 = 0. 94 : 1 Debtors receipt period 2009: (212. 4/2103. 3) x 365 = 36. 9 days 2010: (200. 3/2164. 4) x 365 = 33. 8 days 2011: (221. 5/2389. 8) x 365 = 33. 8 days Dividend cover (Basic EPS/final proposed) 2009: 18. 7/4. 2 = 4. 5 times 2010: 15. 6/0 = 0 2011: 24. 6/4. 9 = 5. 0 times Total Assets: Total Liabilities 2009: 1510. 1/1519. 7 = 0. 99 : 1 2010: 1621. 9/1609. 2 = 1. 01 : 1 2011: 1826. 4/1580. 2 = 1. 16 : 1 Gearing (borrowings / borrowings + equity) 2009: 347. 4×100/(347. 4-9. 6) = 102. 8% 2010: 626. x100/(626. 1+12. 7) = 98% 2011: 592. 1×100/(592. 1+246. 2) = 70. 6% – 10 – Fixed Assets Turnover (Turnover/NBV non-current assets) 2009: 2103. 3/992. 9 = 2. 12 : 1 2010: 2164. 4/994. 7 = 2. 18 : 1 2011: 2389. 8/1167. 8 = 2. 05 : 1 Appendix 2: Graphs: Graph 1: Graph 1: Total Assets and Liabilities Value (? m) 1900 1800 1700 1600 Total Assets 1500 Total Liabilities 1400 2009 2010 2011 Year Non current assets Graph 2: Value (? m) 1500 1000 Non current assets 500 0 2007 2008 2009 2010 2011 Year Graph 3: Current Ratio and Acid Test Ratio ( : 1) 1. 5 1 Current Ratio 0. 5 Acid Test 0 2009 2010 Year – 11 – 2011