Financial Analysis And Competitive Strategy Of Capital One
Horizontal analysis of dollar and percent change over the last three years
1.Level 1
Business and Industry Analysis
Capital one is one of the largest companies in New York and is working in the industry of financial services offering to the customer. It is listed on the New York stock exchange and also S&P 100 and S&P 500. Its major products include retail banking, credit card loans, consumer banking, commercial banking, etc. It employs more than 47000 employees and is the 8th largest commercial bank in United States in terms of assets and deposits. It is ranked 100 in Fortune top 500 companies and is one of pioneer companies in credit card issuance (Alexander, 2016). Among the major competitors are JP Morgan Chase, American Express, Citigroup and Bank of America. Some of the topics of discussion from industry perspective are mentioned below:
- Rivalry among existing firms : The industry is full of banks which are competing against each other in terms of the banking products and coming up with the various initiatives and offers for the customers. Due to prosperity in the business and several initiatives, the companu’s shares have hit a new high of last 10 years. Furthermore, the company has been pouring money in the advertisement and marketing campaigns largely to attract customers.
- Threat of new entrants into the market: The market is aleady filled up by the top competitors who are offering attractive services to the end consumers at very attractive rates. IT would be very difficult for a new entrant to sustain the pressure and compete with the existing companies. Moreover, it would have to come up with innovative products and technologies which have not yet been used, the possibility of which is very low and hence the threat of new entrant into the industry is low(Belton, 2017).
- Bargaining power of customers: The bargaining power of the customers is quite high as the market seems to be an example of perfect competition. The customer has got all the choices in the world and can easily switch on to the products being offered by the other companies and the switching cost is very low. All the companies are in the mode of attracting customers by implementing and bringing in new initiatives and offers as they are aware that every customer brings with him a pool of services that can be sold by bank to them and thus the customer is the ultimate king who can bargain to maximum extent(Boccia & Leonardi, 2016).
Competitive Strategy Analysis
The company has been competing with its competitors in the credit card and auto loans segment. It has also ventured a great deal into the retail banking sector meeting the business needs of the big corporate houses. It is also trying to expand its reach to the end customer by venturing into consumer banking which accounts for almost 26% of its revenue. It has been acquiring a number of companies in the past few years and also venturing into different businesses like the health care industry in order to have inorganic growth.
As per the present scenario, the company would be able to sustain the its competitive edge over the others in the market due to the lost cost of maintenance in the credit card segment, increasing popularity of the brand and the company entering into different market segments (Bromwich & Scapens, 2016).
As far as the competitors are concerned, banking industry is a kind of industry where every bank is selling almost the similar kind of products with a slight variation in the features. Due to this, there seems to be no big threat from the competitors as of such, however, due to the growing popularity of JP Morgan and American Express in the recent times, the market share is in risk.
The potential change in the industry structure of the company that could bring about a change in the competitive strategy of all the companies and make their competitive policies ineffective are introduction of the oligopoly of the banking companies or merger of all of them or bringing about a regulatory norm by the US government as per which the policies and rates of interest of all the companies would be same (Chaudron, 2018).
Trend analysis of financial statements over the last three years
Level 2: Analysis of Historical Financial Data
1.Ratio Analysis
Below mentioned is the ratio analysis of the company.
|
Particulars |
Year (2017) |
Year (2016) |
Year (2015) |
|
Current ratio |
1.0782 |
1.0667 |
1.0770 |
|
Acid test ratio |
1.0782 |
1.0667 |
1.0770 |
|
Cash ratio |
0.0587 |
0.0525 |
0.0413 |
|
Accruals ratio |
1.0197 |
1.0155 |
1.0376 |
|
Cash Flow Yield |
6.6991 |
3.1448 |
2.5242 |
|
Cash Flow to Sales |
0.4727 |
0.4308 |
0.4045 |
|
Cash Flow to Assets |
0.0388 |
0.0332 |
0.0303 |
|
Current Cash Debt Coverage Ratio |
0.0580 |
0.0498 |
0.0462 |
|
Free Cash Flow |
NA |
NA |
NA |
|
Accounts receivable turnover |
0.1207 |
0.1145 |
0.1108 |
|
Days’ sales outstanding |
3,023.6026 |
3,189.0116 |
3,293.2802 |
|
Accounts payable turnover |
0.0066 |
0.0051 |
0.0050 |
|
Days’ payable outstanding |
55,525.1124 |
71,245.1113 |
72,839.7479 |
|
Inventory turnover |
NA |
NA |
NA |
|
Days’ sales in inventory |
NA |
NA |
NA |
|
Cash Turnover |
2.0902 |
2.2028 |
2.7697 |
|
Fixed Asset Turnover |
7.4384 |
7.4882 |
6.9860 |
|
Total Asset Turnover |
0.0820 |
0.0771 |
0.0750 |
|
Cash Conversion Cycle |
NA |
NA |
NA |
|
Basic Defense Interval |
3,698.7882 |
4,185.0587 |
4,413.5714 |
|
Expense Coverage Days |
3,969.0854 |
4,281.9091 |
4,596.9301 |
|
Debt |
316,963.0000 |
309,519.0000 |
286,764.0000 |
|
Equity |
48,730.0000 |
47,514.0000 |
47,284.0000 |
|
Debt to Equity |
6.5045 |
6.5143 |
6.0647 |
|
Times Interest Earned |
5.7345 |
7.8124 |
12.0131 |
|
Cash Interest Coverage |
16.1353 |
17.8571 |
23.4644 |
|
Cash Debt Coverage |
0.0388 |
0.0332 |
0.0303 |
|
Interest Expense to Total Debt |
0.0037 |
0.0026 |
0.0019 |
|
Financial Leverage |
NA |
NA |
NA |
|
Gross Profit Margin |
0.9466 |
0.9559 |
0.9564 |
|
Operating Profit Margin |
0.2217 |
0.2285 |
0.2562 |
|
Pre-Tax Profit Margin |
0.1831 |
0.1993 |
0.2349 |
|
Net Profit Margin |
0.0661 |
0.1363 |
0.1618 |
|
Return on Total Assets |
0.0054 |
0.0105 |
0.0121 |
|
Return on Common Equity |
NA |
NA |
NA |
|
Book Value for Common Share |
100.3708 |
98.9463 |
89.6719 |
|
Market Capitalization |
NA |
NA |
NA |
|
Effective Tax Rate |
0.6145 |
0.3125 |
0.3178 |
|
Basic Earnings per Share |
3.5200 |
6.9600 |
7.1500 |
|
Price-Earnings |
NA |
NA |
NA |
|
Price-Sales |
NA |
NA |
NA |
|
Price-Book |
NA |
NA |
NA |
|
Dividend Payout |
0.3944 |
0.2175 |
0.2030 |
|
Dividend Yield |
NA |
NA |
NA |
|
Dividend Coverage |
8.9243 |
32.0064 |
35.2281 |
|
Current liability ratio |
0.7720 |
0.7692 |
0.7637 |
|
Inventory to Sales Ratio |
NA |
NA |
NA |
|
Cash to Current Assets Ratio |
0.0544 |
0.0492 |
0.0383 |
|
Current Assets to Total Debt Ratio |
0.8324 |
0.8205 |
0.8225 |
|
Current Liabilities to Inventory Ratio |
NA |
NA |
NA |
|
Top compensation to sales |
NA |
NA |
NA |
2. Horizontal Analysis
3.Trend Analysis
Below mentioned is the horizontal analysis taking into consideration the financial figures for the last 2 years and the current year (Choy, 2018).
|
Particulars |
2 years Ago |
Last year |
Current year |
Change |
Change |
% change |
% change |
|
A |
B |
C |
C-B |
C-A |
(C-B)% |
(C-A)% |
|
|
a) Cash |
9,040 |
12,493 |
14,352 |
1,859 |
5,312 |
14.88% |
58.76% |
|
b) Total Current Assets |
235,854 |
253,970 |
263,830 |
9,860 |
27,976 |
3.88% |
11.86% |
|
c) Total Assets |
334,048 |
357,033 |
365,693 |
8,660 |
31,645 |
2.43% |
9.47% |
|
d) Total Current Liabilities |
219,001 |
238,087 |
244,691 |
6,604 |
25,690 |
2.77% |
11.73% |
|
e) Total Liabilities |
286,764 |
309,519 |
316,963 |
7,444 |
30,199 |
2.41% |
10.53% |
|
f) Retained Earnings |
27,045 |
29,766 |
30,700 |
934 |
3,655 |
3.14% |
13.51% |
|
g) Total Stockholders’ Equity |
47,284 |
47,514 |
48,730 |
1,216 |
1,446 |
2.56% |
3.06% |
|
h) Number of Shares O/S |
527.30 |
480.20 |
485.50 |
5.30 |
(41.80) |
1.10% |
-7.93% |
|
i) Net Sales/Revenues |
25,038 |
27,519 |
29,999 |
2,480 |
4,961 |
9.01% |
19.81% |
|
j) Cost of Goods Sold |
1,091 |
1,213 |
1,602 |
389 |
511 |
32.07% |
46.84% |
|
k) Gross Margin |
23,947 |
26,306 |
28,397 |
2,091 |
4,450 |
7.95% |
18.58% |
|
l) Operating Expenses |
17,532 |
20,017 |
21,745 |
1,728 |
4,213 |
8.63% |
24.03% |
|
m) Operating Margin |
6,415 |
6,289 |
6,652 |
363 |
237 |
5.77% |
3.69% |
|
n) Interest Expense |
534 |
805 |
1,160 |
355 |
626 |
44.10% |
117.23% |
|
o) Net Income |
4,050 |
3,751 |
1,982 |
(1,769) |
(2,068) |
-47.16% |
-51.06% |
|
p) Earnings Per Share |
7.15 |
6.96 |
3.52 |
(3.44) |
(3.63) |
-49.43% |
-50.77% |
|
q) Executive Compensation |
NA |
NA |
NA |
NA |
NA |
NA |
NA |
4.Vertical Analysis
Below mentioned in the balance sheet and the income statement of the company for the last 3 years.
|
Particulars |
2015 |
2016 |
2017 |
|
Shares Outstanding |
527.30 |
480.20 |
485.50 |
|
Net Sales Or Revenues |
25,038.00 |
27,519.00 |
29,999.00 |
|
Cost Of Goods Sold |
1,091.00 |
1,213.00 |
1,602.00 |
|
Gross Profit |
23,947.00 |
26,306.00 |
28,397.00 |
|
Research And Development Expense |
– |
– |
– |
|
Selling General And Admin Expense |
17,102.00 |
19,631.00 |
21,500.00 |
|
Income Before Depreciation Depletion Amortization |
6,845.00 |
6,675.00 |
6,897.00 |
|
Depreciation Depletion Amortization |
430.00 |
386.00 |
245.00 |
|
Non Operating Income |
– |
– |
– |
|
EBIT |
6,415.00 |
6,289.00 |
6,652.00 |
|
Interest Expense |
534.00 |
805.00 |
1,160.00 |
|
Pretax Income |
5,881.00 |
5,484.00 |
5,492.00 |
|
Provisionfor Income Taxes |
1,869.00 |
1,714.00 |
3,375.00 |
|
Minority Interest |
– |
– |
– |
|
Investment Gains Losses |
– |
– |
– |
|
Other Income |
– |
– |
– |
|
Income Before Extraordinaries And Disc Operations |
4,012.00 |
3,770.00 |
2,117.00 |
|
Extraordinary Items And Discontinued Operations |
38.00 |
(19.00) |
(135.00) |
|
Net Income |
4,050.00 |
3,751.00 |
1,982.00 |
|
Average Shares Used To Compute Diluted E P S |
548.00 |
509.80 |
488.60 |
|
Average Shares Used To Compute Basic E P S |
541.80 |
504.90 |
484.20 |
|
Income Before Non Recurring Items |
4,236.68 |
3,770.00 |
4,086.06 |
|
Income From Non Recurring Items |
(224.68) |
– |
(1,969.06) |
|
E P S Basic Net |
7.15 |
6.96 |
3.52 |
|
E P S Diluted Net |
7.07 |
6.89 |
3.49 |
|
E P S Diluted Before Non Recurring Items |
7.41 |
6.93 |
7.79 |
|
Preferred Dividends Acc Pd |
– |
– |
– |
|
Dividends Common |
– |
– |
– |
|
Dividend Per Share Common |
1.50 |
1.60 |
1.60 |
|
Particulars |
2015 |
2016 |
2017 |
|
Shares Outstanding |
527.30 |
480.20 |
485.50 |
|
Cash |
9,040.00 |
12,493.00 |
14,352.00 |
|
Marketable Securities |
– |
– |
– |
|
Receivables |
225,910.00 |
240,434.00 |
248,507.00 |
|
Inventory |
904.00 |
1,043.00 |
971.00 |
|
Raw Materials |
– |
– |
– |
|
Work In Progress |
– |
– |
– |
|
Finished Goods |
– |
– |
– |
|
Notes Receivable |
– |
– |
– |
|
Other Current Assets |
– |
– |
– |
|
Total Current Assets |
235,854.00 |
253,970.00 |
263,830.00 |
|
Property Plant And Equipment |
– |
7,487.00 |
8,264.00 |
|
Accumulated Depreciation |
– |
3,812.00 |
4,231.00 |
|
Net Property Plant And Equipment |
3,584.00 |
3,675.00 |
4,033.00 |
|
Investment And Advances |
63,680.00 |
66,449.00 |
66,639.00 |
|
Other Non Current Assets |
– |
– |
– |
|
Deferred Charges |
– |
– |
– |
|
Intangibles |
14,480.00 |
14,519.00 |
14,533.00 |
|
Deposits And Other Assets |
16,450.00 |
18,420.00 |
16,658.00 |
|
Total Assets |
334,048.00 |
357,033.00 |
365,693.00 |
|
Notes Payable |
981.00 |
992.00 |
576.00 |
|
Accounts Payable |
217,721.00 |
236,768.00 |
243,702.00 |
|
Current Portion Of Long Term Debt |
– |
– |
– |
|
Current Portion Of Capital Leases |
– |
– |
– |
|
Accrued Expenses |
299.00 |
327.00 |
413.00 |
|
Income Taxes Payable |
– |
– |
– |
|
Other Current Liabilities |
– |
– |
– |
|
Total Current Liabilities |
219,001.00 |
238,087.00 |
244,691.00 |
|
Mortgages |
– |
– |
– |
|
Deferred Charges Taxes Income |
– |
– |
– |
|
Convertible Debt |
– |
– |
– |
|
Long Term Debt |
58,134.00 |
59,468.00 |
59,705.00 |
|
Non Current Capital Leases |
– |
– |
– |
|
Other Long Term Liabilities |
9,629.00 |
11,964.00 |
12,567.00 |
|
Total Liabilities |
286,764.00 |
309,519.00 |
316,963.00 |
|
Minority Interest |
– |
– |
– |
|
Preferred Stock |
– |
– |
– |
|
Common Stock Net |
6.00 |
7.00 |
7.00 |
|
Capital Surplus |
29,655.00 |
31,157.00 |
31,656.00 |
|
Retained Earnings |
27,045.00 |
29,766.00 |
30,700.00 |
|
Treasury Stock |
(8,806.00) |
(12,467.00) |
(12,707.00) |
|
Other Liabilities |
(616.00) |
(949.00) |
(926.00) |
|
Shareholders Equity |
47,284.00 |
47,514.00 |
48,730.00 |
|
Total Liabilities And Shareholders Equity |
334,048.00 |
357,033.00 |
365,693.00 |
5.Financial Statement Analysis
From the above analsysis, it can be seen that the company is enjoying near to average current ratio. The ideal ratio is 2 whereas the company is having 1. The quick ratio is more than 1 and hence it can be said to be fine. The cash ratio of the bank is just 5% out of the total current assets and it shows that the company is not holding idle cash and is holding enough to meet the immediate requirements. The accounts receivable turnover is fairly low and thus the receivables needs to be collected in order to bring back the ratio under control (Zhou, 2018). The company is having a lower accounts payable turnover which is good indication for the company and shows that it is meeting its 3rd parties payables on time. Besides this, the company is enjoying a healthy fixed assets turnover ratio which shows that the fixed assets are being effectively utilised. The basic earning per share has been dereasing despite the decrease in the no. of shares and the major reason behind this that the income has decreased over the last couple of years. The current liability ratio is ranging from 75% – 77% which shows that the major portion of the liability is the short term liability. It can be said that the long term solvency of the company is better than the short term position.
From the trend analysis, it can be said that the cash position of the comoany has improved a lot by 59% over last 2 years out of the total assets increase of 9.47%. The current assets has increased by 11.86% over the last 2 years, whereas the current liabilities ha sincreased by 11.73%, which shows that the short term liquidity position has been fairly constant (Visinescu, et al., 2017). The retained earnings increased by a meagre 3.14% in te last year and 13.51% in the last 2 years, which shows that profitability has dropped down. The number of shares outstanding also decreased by 7.93% in the last 2 years. With respect to the income statement, the sales has increased by 19.81% due to which there is an increase in the gross margin by 18.58%. The operating expenses and the interest expenses have increased drastically over the last 2 years by 24% and 117% resulting in the drop of net income by 47% as compared to the alst year and 51% as compared to 2 years ago. Therefore, in the same way, the earning per share has also declined (Vieira, et al., 2017).
Vertical analysis of balance sheets and income statements over the last three years
In the vertical analysis of the income statement and balance sheet, it can be seen that the gross profit has increased marginally but due to the sharp increase in the operating expenses and the interest expenses has resulted in the lower net income fro the company in the last 2 years. The operating effectiveness has declined. Furthermore, there has been a considerable rise in the current liabilities over this 2 year period, with negligible increase in the equity and the long term liabilities.
6.Short term credit decision
Based on the above analysis, it can be said that the hsort term credit position of the company Capital one is not promising as it current ratio is just over 1 and and the cash ratio out of it is just 5%, which shows that the short term liquidity is not strong enough to meet the current liabilities obligation which is increasing year on year (Dumay & Baard, 2017). The accruals ratio seems to be good above 1 whereas the other indicators based on the cash flow from operating activities like the cash flow yield, the cash flow to sales ratio, the cash flow to assets ratio and current cash debt coverage ratio, all seems to be on the lower side. This is mainly on account of huge competitive pressure and thus, it can be concluded that the working capital ratio is fine but the company is struggling with the cash, efficiency and liquidity ratios.
7.Long term credit decision
The above analysis indicates that the company is currently having the debt equity ratio of >6 times which is unhealthy and above the industry average. But in terms of coverage of the interest expenses, it has decreased from 12 times in 2015 to 5 times in 2017 which is again a cause of worry but still the long term loan can be given basis this (Dichev, 2017). Furthermore, the cash interest coverage indicating how many times CFO will be able to meet the interest expenses is also healthy at 16 times. The interest to total debg ratio is extremely low showing it is being paid on time. Thus, long term loan can be sactioned to the company basis this.
8.Investment decision
The company is currentluy facing heavy competition from all its competitors but is still enjoying the edge in the credit card and consumer banking division of the business. With the expansion in mind, the financial services company is surely having a good investment prospect and an opportunitiy for growth (Gerlach, et al., 2018). As of risk, it doesn’t have any threat of new entrant except for policy changes by US government of technological advancement being used by other peers. The company has also been in the process of heavy marketing and introducing incentives for customers with the aim of having a larger market share thus, it can be said that the company is a good prospect from investment perspective which will grow in the long term (Goldmann, 2016).
Financial statement analysis of the company’s performance
9. Employment Decision
In terms of becoming a CFO of the company, it is a good prospect as the company is doing well as compared to the competitors in the market (Jefferson, 2017). The operating policies has being fierce and the company has been involvedin a number of advertising and marketing campaigns over the past few months, it is expected that the revenue as well as the profitability would rise in the long run and thus, apart from the government policy changes which may affect all the companies, no drastic changes are expected. Therefore, position of CFO of this firm can be opted over others (Heminway, 2017).
10.Consulting Decision
As a consultant to the CEO of the company, my idea and strategy would have been to reach out to the core market consumers and focusing on the consumer segment and business segment of the market as the company is already doing well in the credit card division (Oberoi, 2018). The same can be done by increasing the no. of offers, initiatives and offering allied benefits to them which will not only increase the customer base but also increase the profitability and revenue. For this, operating budgets should include a fair share of marketing and adevertisement expenditure (Marques, 2018).
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