Comparative Financial Analysis of Stagecoach and National Express

This assignment presents a comparative financial analysis of two publicly traded transportation companies, Stagecoach Plc and National Express Plc. Students are tasked with evaluating various financial aspects, including profitability, liquidity, and dividend policy, using relevant financial ratios. The goal is to assess the relative performance and efficiency of each company by comparing their financial health and strategies.

Financial Management

Contents
INTRODUCTION......................................................................................................................4
Analyzing the financial performance of National Express Plc for the year of 2015.............4
Justifying possible purchase price for the target market by using business valuation
technique................................................................................................................................7
Critically evaluate the alternative methods which are available to Stagecoach for
purchasing the shares of National Express Plc......................................................................8
Discussing the relevance of dividend policies which are employed by the two companies10
CONCLUSION........................................................................................................................11
REFERENCES.........................................................................................................................12

INTRODUCTION
Financial management is highly concerned with the effective and efficient use or
management of money. Moreover, company can accomplish its goals and objectives when
they make optimum use of money. In this, field of financial management assists business unit
in employing fund in the suitable kind of projects. Besides this, it also provides help in
making balance in the financial structure and thereby ensures effectual management of cash
(Financial management, 2016). The present report is based on the case scenario in which
Stagecoach made an offer in relation to the purchasing all the shares of National Express Plc.
Thus, National Express Plc is the leading British multinational transport company which
offers bus, coach, and train and tram services in UK. Further, Stagecoach also operates in
similar industry and both the companies are listed on the recognized stock exchange such as
FTSE 250 Index. In this regard, the present will provide information to the shareholders of
National Express Plc in relation to the potential purchase of Stagecoach.
Analyzing the financial performance of National Express Plc for the year of 2015
Ratio analysis may be served as most effectual tool which helps in analyzing the
financial health and performance of the business organization (Finkler and et.al., 2016). By
taking into account such tool company and their stakeholders can evaluate the profitability,
liquidity and solvency aspect of the firm. Usually, investors undertake ratio analysis tool
before making investment decision (Titman, Keown and Martin, 2015). Moreover,
shareholders invest money with the aim to earn high in form of dividend. On the basis of the
cited case situation, Stagecoach Group plc wants to invest money in the shares of National
Express Plc. In this, the below mentioned ratio analysis will provide deeper insight to
Stagecoach plc about the financial aspects of National Express Plc.
Ratio analysis of National Express Plc for the year of 2015 is as follows:
Particulars Formula 2015
Sales revenue 1920
Gross profit 1860
Net profit 107
Profitability ratio
Gross profit ratio (GPR) GP / Net sales * 100 1860 /1920 * 100 = 96.88%
Net profit ratio (NPR) NP / Net sales * 100 107 /1920 * 100 = 5.57%

Current assets (CA) 329
Inventory 23
Prepaid expenses 52
Current liabilities (CL) 697
Liquidity ratios
Current ratio CA / CL 329 / 697 = .47:1
Quick ratio CA – (Stock + Prepaid
expenses) / CL
329 – (23 + 52) / 697 = .36:1
Solvency ratios
Debt 653
Shareholders’ equity 816
Debt-equity ratio Debt / equity 653 / 816 = .80:1
Efficiency ratio
Fixed assets 2156
Net or total assets 2485
COGS 60
Fixed assets turnover ratio Net sales / Fixed assets 1920 / 2156 = .89:1
Net assets turnover ratio Net sales / Total assets 1920 / 2485= .77:1
Inventory turnover ratio COGS / Inventory 60 / 23 =
Return on Capital employed Net sales / shareholders
equity
1920 / 816 = 2.35:1
Investment ratios
Earnings per share .21
Dividend per share .11
Payout ratio 64
Profitability ratios
 Gross profit ratio: It entails the return which is earned by the business organization by
incurring the direct expenses (Haque, Knight and Jayasuriya, 2015). From the ratio
analysis, it has been analyzed that National Express Plc earned 96.88% gross margin
in the accounting year 2015. By taking into consideration this aspect, it can be said
that customers prefer to make use of vehicles which are manufactured by National

Express. Along with, company also has ability to deal with its direct expenses such as
carriage etc. This aspect proves to be more beneficial for the firm.
 Net profit ratio: This measure helps in assessing the profitability aspect of firm.
Through this, one can evaluate the profit which business unit has after fulfilling all the
tax obligations or liabilities (Erasmus and et.al., 2016). In the accounting year 2015,
NP ratio of the firm was 5.57% which is highly lower as compared to the gross profit
margin of firm. This aspect clearly shows that in 2015 company had incurred high
indirect expenses and tax obligation. Thus, National Express Plc requires undertaking
effectual measures for enhancing its profit margin.
Liquidity ratio
 Current ratio: Financial capability of the firm in relation to meeting the current
obligations can be analyzed through current ratio (Emmenegger and et.al., 2016). In
this, current ratio of National Express Plc was .47:1 in the financial year 2015. In this,
it is very far from the ideal ratio which is 2:1.By considering this aspect, it can be said
that National Express Plc is not financially sound. Thus, company requires making
control on expenses which helps them in maintaining the enough amounts of current
assets within the business organization.
 Quick ratio: This ratio helps in determining the assets which can be easily converted
by the business organization into cash (Huang and et.al., 2016). In this, quick ratio of
National Express Plc shows that company has ability to fulfill its quick obligations
within the suitable time frame. Quick ratio of National Express Plc is very near to the
ideal ratio which is .5:1. Hence, it can be stated that company has enough amount of
inventory, prepaid expenses etc.
Solvency ratio
Debt-equity ratio: By making analysis of ratios it has been found that company fulfilled its
financial needs from both debt instruments and equity on equal basis. Thus, company needs
to make focus on attaining the ideal ratio which is .5:1. By this, company can reduce its
financial burden to the large extent.
Efficiency ratios
 Total assets turnover ratio: It provides deeper insight about the return which is earned
by the business organization by making use of its total assets (Tang and et.al., 2016).

In 2015, total assets turnover ratio of National Express was .77:1 which is lower than
the industry average. Thus, company needs to make focus on making competent
strategic and policy framework which helps them in getting the desired level of
outcome or success.
 Fixed asset turnover ratio: By doing ratio analysis, it has been analyzed that fixed
assets turnover ratio of National Express Plc was .89:1.Thus, it can be said that
company needs to make modifications in the existing strategic framework which will
assist them in making optimum use of fixed assets.
 Return on capital employed: ROCE of National Express Plc was lower than the
industry average. On the basis of this aspect, it can be said that company failed to
make optimum use of shareholders equity.
Investment ratios: In the case of National Express Plc, earning per share was £.21. In
addition to this, dividend per share is £.11. Along with this, payout ratio of business
organization was 64.
Hence, by taking into consideration all these aspects it can be said that sales revenue
of the firm is sound. However, due to ineffective management company failed to enjoy high
level of net profit margin. Further, liquidity and efficiency aspect of National Express Plc is
also not sound.
Justifying possible purchase price for the target market by using business valuation
technique
Stagecoach Plc and National Express Plc can determine the suitable price of share by
using valuation as per dividend method. In this, purchasing company undertakes average of
last three years dividend which is offered by National Express Plc. Thus, by dividing the
average dividend with the policy of industry one can assess the suitable price of shares more
effectually and efficiently (Lozano and Caltabiano, 2015). It is the most effectual method
which serves suitable information about the price of share which Stagecoach Plc must pay for
purchasing the equity of National Express.
Valuation as per the dividend method is as follows:
Share price = Weighted average of dividend (last three years) / Dividend according to
industry average * price per share

Particulars Amount
Weighted average of share 10 + 10.3 + 11.3 / 3 = 10.53 p
Average dividend according to the norms of
industry
10
Price per share 10
Share price according to the dividend method 10.53 / 10 * 10 = 10.53
Add: 2% addition as per the case situation 10.53 + (10.53 * 2%)
Actual price 10.53 + .21 = 10.74
In accordance with the cited case situation, Stagecoach Plc ready to pay 2% extra on
actual price. Thus, business organization will purchase per share of National Express @
10.74 each. In this way, National Express Plc will get benefit of .21 by selling the each share
of it. Hence, by taking into consideration this method both the company will get benefits by
selling and purchasing the shares.
Critically evaluate the alternative methods which are available to Stagecoach for purchasing
the shares of National Express Plc
There are several methods or sources which Stagecoach Plc can undertake for meeting
its financial requirements. Moreover, Stagecoach requires huge amount for financing the
shares. In this, company can undertake the below mentioned sources for raising the finance
are as follows:
Issue of shares and debentures
Business enterprise can raise finance by issuing shares and debentures to the large
extent. In this, Stagecoach Plc can generate enough amount of fund by issuing shares to the
existing and potential shareholders (Tang and et.al., 2016). It is also the most effectual source
from which company can raise fund at low cost. In this, Stagecoach Plc will free from
financial burden because in this company does not obliged to give dividend to the
shareholders. Moreover, in this, business organization requires giving dividend to the
shareholders when they earn enough amount of profit. Along with this, company can also
raise finance by issuing debenture to the investors. Moreover, it is the safe kind of instrument
which attracts investor to employ money in debentures and thereby enjoys regular or fixed
return. In this, by offering the shares and debentures Stagecoach Plc can raise money to the
desired level.

In addition to this, company can make balance in the financial structure by issuing
both shares and debentures. However, in the case of debenture firm is obliged to pay interest
to the debenture holders (Firth and et.al., 2016). This aspect also imposes high financial
burden in front of the business organization. Along with this, in shares if company fails to
offer high dividend to the shareholders then it will negatively hampers the brand image of
firm.
Bank loan
Stagecoach Plc can also meet its financial requirements by taking loan from the
financial institution. Moreover, banks are ready to offer loan to the business organization that
have good credit rating. Further, by giving collateral security company can take loan from
bank. This method of raising finance is also most effectual which offers high level of tax
benefits to the business enterprise (Haque, Knight and Jayasuriya, 2015). Along with this, in
bank loan company has to repay the amount of loan in the form of periodical installments. It
also provides high level of convenience to the corporation.
However, in this Stagecoach Plc has to fulfill documentary formalities which may
result into delay in the functioning. Further, under bank loan company has to give any
security to the lending institution (Titman, Keown and Martin, 2015). In this, company also
suffers loss of the amount or profit which it will earn from collateral security. Besides this,
high interest rates also impose financial burden in front of the firm. Thus, business
organization needs to consider all these aspects while making section of source.
Retained profit
It refers to the amount which business organization keeps with itself from the profit
after tax. In the present time, each and every organization places emphasis on retaining profit
rather than distributing it to the shareholders. In this, Stagecoach can make use of retained
profit for purchasing the shares (Lozano and Caltabiano, 2015). It is the most effectual source
which company can undertake for purchasing the shares of National Express Plc. However,
retained profit imposes opportunity cost in front of the business organization. Moreover, if
Stagecoach undertakes retained profit for financing the shares then it would unable to grab
the most profitable opportunities which will arise in the near future. In addition to this,
company will also not is position to give dividend to the shareholders if they make use of

retained profit for purchasing the shares (Shi and Kang, 2016). This in turn, negatively affects
the goodwill and image of the business organization.
Discussing the relevance of dividend policies which are employed by the two companies
In the present era, it is highly difficult for the investors to analyze the extent to which
business organization will offer high dividend. Moreover, decision of the firm in relation to
their dividend policy is highly influenced by their financial heath and performance (Shi and
Kang, 2016). Usually company offers high dividend only when they earn enough amount of
profit. In this, dividends policies of both the companies can be evaluated by the amount
which is offered by them to the shareholders in the several financial years are:
Stagecoach Group Plc National Express Plc
Particulars / year 2014 2013 2014 2013
Total dividend 10.50 p 9.50p 11.33p 10.3p
Dividend
growth
10.53% 10.47% 10% 3%
Dividend yield 2.90% 2.60% 3.40% 4.10%
From the above table, it has been analyzed that dividend policy framework prepared
by Stagecoach Plc is highly effectual. Moreover, company had offered dividend in the
financial year 2013 and 2014 according to its financial health and profitability aspect. On the
other hand, National Express declared and distributed high dividend irrespective to the
financial aspect with the aim to attract large number of investors. This aspect shows that both
the companies offer dividend with the increasing rate.
Along with this, growth had taken place in the dividend aspect of Stagecoach from
10.47% to 10.53%. In contrast to this, high level of growth can be seen in dividend aspect of
National Express Plc from 3% to 10%. These figures indicate that high level of growth had
taken place in dividend aspect of the firm which is not fruitful. Moreover, in the present era,
it is highly required for the business organization to keep some money with itself rather than
distributing to the shareholders. In this, the above table shows that suddenly National Express
Plc had provided shareholders with high dividend with the aim to retain them for the long
span of time. Hence, it can be said that effectual and wisely decisions are taken by
Stagecoach Plc in relation to the dividend aspect in comparison to the competitor firm.

CONCLUSION
From this report, it can be concluded that products or services of National Express Plc
are more effectual. However, it can be stated that ineffective management causes low level of
profitability within the business enterprise. Besides this, it can be inferred that liquidity
position of the company is not sound. Hence, effective management is highly required within
National Express Plc which helps them in enhancing their performance level. Further,
Stagecoach Plc needs to select source of finance by taking into account its benefits and
drawbacks. It can be revealed from the report divided policies which are employed by
Stagecoach Plc are most effectual rather than National Express Plc.

REFERENCES
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