Life is getting more convenient in the 21st century. Today, we can pay almost all kinds of bills just by pushing a few buttons. The credit should go to modern payment systems. PayPoint is one of the UK's leading branded payment collection network used, primarily, for the cash payment of bills and services and prepayments for mobile telephones and energy meters. As an industry that is both close to daily life of all citizens and directly connected with operating of money, a sound financial system plays a critical role in the prospect of such companies. Financial statement analysis provides a good measure. Internally, financial statement analysis is used by accountants, financial controllers and treasurers to evaluate and diagnose the day-to-day running of the business and to spot any inefficiency or errors that have negative effect on profitability. Externally, information users such as investors, auditors, government utilize financial statement analysis to gain a better understanding of the business, so that decisions are fairly made. Financial statement analysis is a powerful tool for both management and investors. This report aims to have a better understanding of the operations of PayPoint through various analyses, so that we can evaluate the performance of PayPoint and compare it with its major competitor. Finally, conclusions are made with suggestions regarding future operation.
Industry Background
Payments are an essential part of daily life, which underpin all forms of economic activity, and affect everyone - as individuals and businesses. People make a variety of payments every day with the expectation that these payments are secure and reliable. Most consumers are unaware of what happens behind the scenes, but, by their very nature, payment systems require a high degree of co-operation by numerous different stakeholders for a payment system to function. The UK payment industry environment can be broadly categorised into five payment types:
Cash
Banknotes and coins
Bulk electronic payments
Direct Debits
Bacs Direct Credits
Standing orders
Phone and online banking
Payments
Faster Payments
Standing orders
High-value payments
CHAPS Sterling
Card-based instruments
Debit cards
Pre-paid cards
Contactless cards
Credit cards
Charge cards
Paper-based instruments
Cheques and paper credits
The market for payment systems is fairly a growing one. The use of automated services has increased over recent years, with the total number of direct debit, direct credit and standing order payments increasing by 12.6% between 2000 and 2002. Between January 2000 and December 2002 monthly transactions for debit debits and direct credits have increased by 27% and 21.8% respectively. Final customers are now choosing to use direct debits for utility bill and insurance premium payments, with 455 million and 423 million payments per annum in 2001. The main growth in direct credits has been the movement towards automated wage transfers, accounting for approximately half of all payments. Within recent years growth has been attributed to remote banking, with 43 million payments in 2001. In the UK, Payzone is the major competitor of PayPoint in terms of size. PayPoint achieved big success not only in the UK, but also in Romania. (An OFT market study of clearing systems and review of plastic card networks, Office of Fair Trading, May 2003; Payment systems in the United Kingdom, 2003)
Company's Information
PayPoint is a leading branded payment collection network used, primarily, for the cash payment of bills and services and prepayments for mobile telephones and energy meters. PayPoint commenced trading in 1996 and initially collected payments through its network of Retail Agents for its founder Client investors, who included British Gas, BT, BBC TV Licensing, London Electricity (now part of EdF) and four water companies. Since then, PayPoint has successfully added to its founder Client base, grown its Retail Agency network, developed new services and now has many new Clients. In November 2006 and February 2007 PayPoint acquired internet payment service providers Metacharge and SECPay, respectively. These ventures were merged and rebranded as PayPoint.net, providing a secure debit and credit card payment system for web-merchants, in July 2008. (PayPoint official website)
Ratio interpretations
Liquidity ratios
Days' Sales in Receivables & Inventory
In PayPoint's annual reports, receivables are a main component of current assets, which is in accordance with the industrial customs. Inventory is relatively less significant as it consists of SIM cards, e-vouchers, and such less valuable items.
PayPoint's Days' sales in receivables appears to rise since 2006, considering the increase in sales, this does not mean a bad thing. Plus with the financial crisis, clients were inclined to use up credit period, which drove up days' sales in receivables. Nevertheless, PayPoint put efforts into receivable management which was reflected in the falling in 2009. PayPoint should pay attention to more efficient use of short-term fund when receivable turnover rises as well as cash.
Days' sales in inventory has been kept at a comfortable level, which was determined by the nature of this industry and the fact that inventory of PayPoint were less valuable items such as SIM cards, e-vouchers.
Accounts Receivable Turnover & Inventory Turnover, Accounts Receivables Turnover in Days & Inventory Turnover in Days and Operating Cycle
From the graph above, accounts receivable seems to present a rising pattern which should get the management's attention. Even though PayPoint does not have a short-term liquidity problem now, a better receivable policy could enhance it. Inventory turnover is kept at a healthy level with a trend of rising. Since inventory is not a significant item in PayPoint's balance sheet, current inventory policy is sufficient. The operating cycle again reflects a trend of current asset turnover days increasing, in connection with the increase in bad debts; it calls for a better current asset management.
Working Capital, Current Ratio, Acid Test
Working capital management can be quite tricky. Too much working capital means higher cost of capital which erodes corporate profits. Too little means that the company is overtrading and that the risks that the company might go insolvent are increasing. From the graph, it's difficult to tell whether PayPoint has an appropriate level of working capital since the working capital fluctuates significantly over the years. This phenomenon might indicate that PayPoint is not managing working capital efficiently enough and that it is still trying to search for a best-fit working capital pattern. Since current asset keeps increasing, and current liability decreases in 2009, PayPoint should work on how to use short-term funds to earn the opportunity cost.
Current ratio = current asset / current liability, acid test = (current asset - inventory - prepayments) / current liability. Current ratio and acid test are well above one, which means PayPoint has surplus cash and other liquid assets. Even though PayPoint is in a business where cash flows fast and frequently, it should consider make better use of the surplus liquid asset. And current ratio does not deviate from acid test very much, which implies that cash and receivables are significant in current assets comparing to inventory and prepayments, and that cash and receivables should carry most weight when management is considering utilizing unoccupied current assets. Cash is sufficient; however receivables and inventory contribute to short-term debt-paying ability. A relatively lower level of cash might not jeopardize the ability, and surplus cash should be invested to maximize efficiency. Like what this report addressed above, PayPoint far from has to worry about liquidity problem, of course we cannot rule out the possibility that accidental needs for liquidity might occur, PayPoint should adopt a less conservative policy to manage current assets. Also, in the annual report of 2009, credit period is 16 days comparing to 20 days in 2008. On the premise of paying creditors promptly and maintaining a healthy relationship with the suppliers, PayPoint should take advantage of credit period to allow more cash reserve.
Sales to Working Capital
Sales to working capital = Net sale / Accounts receivables + Inventory - Accounts payables, it's obvious that it is important to keep this ratio at a relatively high level. For instance, when more receivables contribute to sales, it would cast doubt on the short-term solvency of the company. Instead, a higher sale to working capital implies sales are paid by cash which is liquid. According to the annual report, the drop in 2009 is due to an increase in sales, an increase in total current assets and a decrease in total current liability. However, even though the ratio drops in 2009, there is a boost in cash. So if the effect of the cash boost is eliminated throughout the five years, a trend of increasing from 2007 as below:
Negative values are due to the fact that cash is a significant component of current assets for PayPoint. After eliminating the effect of cash, we can see that PayPoint is actually doing a good job generating liquid sales.
Long-term debt-paying ability
Times Interest Earned and Fixed Charge Coverage
PayPoint has no interest portion of rentals, according to the formula in FinSAS; times interest earned is the same as fixed charge coverage.
2009
2008
2007
2006
2005
Times Interest Earned
1018.706
525.2069
355.6267
1357.467
24.78466
PayPoint generates more than enough profit to cover its interests, short-term interests to be precise since PayPoint does not have long-term debt.
Debt Ratio, Debt/Equity, Debt to Tangible Net Worth and Cash Flow/Total Debt
2009
2008
2007
2006
2005
Debt Ratio
0.452031
0.516187
0.502232
0.451563
0.670574
Debt/Equity
0.824922
1.066913
1.008966
0.823362
2.035587
Debt to Tangible Net Worth
1.603424
2.724674
2.107673
0.823362
2.035587
Debt ratio: To a general business, a reasonable debt ratio should in the range of 40%-60%. It might appear that PayPoint operates on a conservative basis and it might appear that current debt ratio level is safe. However, the composition of debt is mainly, if not all, short-term. To meet such short-term obligation, there must be sufficient short-term assets. Thus, excluding long-term assets would show a higher debt ratio. Even when PayPoint has sufficient current-assets, management should consider using long-term funds to finance long-term growth, diversifying risks of short-term insolvency.
Debt/Equity: Even though Debt/equity seems pretty high, debt is almost all short-term liabilities. When we consider a modified debt/equity ratio, it would be obvious that PayPoint is not using long-term debt to finance its growth. A better capital structure could be built by introducing some long-term finance.
Debt to tangible net worth: This ratio proves the above analysis. Tangible net worth is net tangible assets, according to the formula in FinSAS. Focusing too much on short-term investment could drag the company into overtrading.
Profitability
Net Profit Margin, Total Asset Turnover and Return on Assets
Net Profit Margin: It is average 11% which is a fair and normal mark-up. PayPoint does not charge its customer too much for services rendered. It is a good strategy in competition. In order to achieve a higher net profit margin, PayPoint should make efforts to cut costs and overheads, especially by adopting modern electronic technology.
Total Asset Turnover and Return on Assets: These two ratios show a falling trend. While this is usually a wake up call for the management that company assets are utilized less effectively and less efficiently, in this case it might because of more fierce competition with Payzone, Post Office, etc and of the fact that the increase in assets outruns the increase in sales. A tighter credit control policy and an appropriate developing speed are advisable.
Operating Income Margin, Operating Asset Turnover, Return on Operating Assets and Sales to Fixed Assets
2009
2008
2007
2006
2005
Operating Income Margin
0.1487
0.137642
0.160453
0.160968
0.083826
Operating Asset Turnover
2.984284
3.29249
2.85812
2.619503
Return on Operating Assets
0.443763
0.453184
0.458593
0.421656
Sales to Fixed Assets
15.32714
17.00016
15.14784
17.75857
Operating Income Margin: PayPoint maintains a quite satisfactory operating income margin.
Operating Asset Turnover and Return on Operating Assets: Comparing with net total asset turnover and return on assets, it shows that PayPoint is doing a good job utilizing its assets. Nonetheless, a diversification of investment in long-term asset is advisable.
Sales to Fixed Assets: It is amazing that so little fixed assets generates about 16 times of sales. On the other hand, more investment in fixed assets could be more profitable.
Return on Investment and Return on Total Equity
2009
2008
2007
2006
Return on Investment
0.428341
0.463591
0.537186
0.791832
Return on Total Equity
0.430269
0.46643
0.541381
0.803469
Return on Investment and Return on Total Equity: Although there is a descending pattern throughout these years, PayPoint's return for investors (no long-term debt) is quite an envy of other companies. Regardless, management should try to stop the descending and to keep such performance lasting.
Investor Analysis
Year-end Market Price, Earnings per Share and P/E Ratio
2009
2008
2007
2006
2005
Year-end Market Price
4.79
5.45
7.13
6.67
2.43
Earnings per Share
0.353
0.308
0.273
0.247
0.087
PayPoint achieved increasing profits which led to the increase in earnings, and PayPoint did not issue new shares. The rationale is straight-forward that earnings per share increases over the years. Market price reached peak in 2007, and fell in both 2008 and 2009, with which on some level the financial crisis might have to do. P/E ratio keeps falling and it even accelerates in 2008. This is in line with the falling of return on total equity. PayPoint should pay attention to the lost of investor confidence.
Percentage of Earnings Retained, Dividend Payout and Dividend Yield
As the nature of Percentage of earnings retained and dividend payout, they present an opposite pattern. The pattern indicates that PayPoint maintains a fixed rate of dividend payout which is a conservative or medium approach. In this economy, it is wise to adopt such approach to avoid sharp drop of share price. Since share price is falling and dividend is increasing, dividend yield increases. This is a good sign as such stock attracts investors prefer steady dividend income, thus long-term investment.
Cash Flow Ratios
Cash Ratio
Cash ratio = (cash + marketable securities) / current liability, currently the ratio is 73% which offers a buffer for current liabilities.
Cash Flow/Total Debt
2009
2008
2007
2006
2005
Cash Flow/Total Debt
0.648579
0.559834
0.691813
0.602762
0.644779
Cash Flow/Total Debt: Since the composition of debt is mostly short-term, sufficient cash to meet such obligation is critical. Cash covers approximately 62% of total debt, plus other current assets, it would not be a problem for PayPoint to meet short-term obligation. This ratio is similar with the one above for current liability is a significant part of total debt. However, management should be careful trading at this speed.
Operating Cash Flow/Cash Dividends
2009
2008
2007
2006
2005
Oper. Cash Flow/Cash Dividends
2.94475
3.041487
3.441324
2.601854
5.001728
This ratio shows that PayPoint has sufficient cash to cover dividends paid which is a reflection of good cash position.
Horizontal Analysis
INCOME STATEMENT
2009
2008
2007
2006
2005
Net Sales
251.93%
238.22%
176.37%
134.71%
100.00%
Less: Cost of Goods Sold
261.68%
253.69%
181.09%
136.00%
100.00%
Gross Profit
230.34%
204.00%
165.93%
131.88%
100.00%
Less: Operating Expenses
150.54%
135.03%
102.67%
85.15%
100.00%
Operating Income
446.90%
391.16%
337.60%
258.69%
100.00%
Less: Interest Expense
10.03%
17.11%
22.12%
4.42%
100.00%
Other Income (Expenses)
136.07%
134.69%
156.88%
112.17%
100.00%
Income before Taxes
429.15%
377.08%
329.86%
252.35%
100.00%
Less:Taxes Related to Operations
488.40%
425.46%
354.81%
155.30%
100.00%
N.I. before Min. Ern.
406.70%
358.76%
320.42%
289.11%
100.00%
N.I. before Nonrecurring Items
406.70%
358.76%
320.42%
289.11%
100.00%
Net Income (Loss)
406.70%
358.76%
320.42%
289.11%
100.00%
BALANCE SHEET
2009
2008
2007
2006
2005
ASSETS
Current Assets:
Cash
140.06%
106.85%
93.73%
112.89%
100.00%
Gross Receivables
273.09%
310.38%
223.61%
121.21%
100.00%
Net Trade Receivables
255.72%
280.50%
205.66%
119.69%
100.00%
Inventories
256.99%
264.83%
349.79%
237.08%
100.00%
Total Current Assets
179.47%
161.03%
131.18%
119.59%
100.00%
Long-Term Assets:
Net Tangible (Fixed) Assets (other than construction in progress)
350.03%
284.04%
256.53%
192.64%
100.00%
Total Long-Term Assets
1027.55%
979.64%
746.42%
218.28%
100.00%
Total Assets
276.93%
255.11%
201.88%
130.93%
100.00%
LIABILITIES AND EQUITY
Current Liabilities:
Accounts Payable
108.39%
109.79%
87.09%
49.64%
100.00%
Total Current Liabilities
187.74%
197.34%
151.44%
87.88%
100.00%
Long-Term Liabilities:
Long-term Debt
0.00%
0.00%
0.00%
0.00%
100.00%
Total Long-term Liabilities
92.36%
110.96%
130.23%
114.29%
100.00%
Total Liabilities
186.68%
196.37%
151.20%
88.17%
100.00%
Shareholders' Equity:
Preferred Equity
#N/A
#N/A
#N/A
#N/A
#N/A
Common Equity-incl. Ret. Ern.
460.65%
374.67%
305.05%
217.98%
100.00%
Total Equity
460.65%
374.67%
305.05%
217.98%
100.00%
Total Liabilities and Equity
276.93%
255.11%
201.88%
130.93%
100.00%
Income Statement
Sales: Sales presents a healthy increase. Attention should be given to what sales consists of. If the proportion of receivables grows in total sales, PayPoint may take on more short-term liquidity risks. To see whether that is the case, we will later have a look into balance sheet.
Costs and overhead: In PayPoint's income statement, there are four main costs and overhead, costs of goods sold, operating expenses, interest expense and tax. Costs of goods sold mainly consists of terminals and retailer EPoS systems (since PayPoint has quite small a non-current asset pool, its depreciation for the year of 2009 was only about 13% of costs of goods sold), costs of goods sold generally moves normally in line with sales. The control of operating expenses is what PayPoint should be proud of. It is a competitive edge for the long run.
Profits: Profits keep increasing over the years, nonetheless as stated in the ratio analysis PayPoint should pay attention to the possibility of overtrading.
Balance Sheet
Special attention should be given to cash and receivables. From the annual reports and horizontal analysis, receivables are major push of sales, and cash, comparing to receivables, does not increase at the same pace. Management should consider whether to take measures to control receivables and set the development on a slower speed. Current liabilities increase while long-term liabilities stay the same or even drop in 2009. Taking weighted average cost of capital into account, management should research on the feasibility of taking on more long-term funds to improve capital structure. Comparing to total assets, total equity achieved much faster increase. Despite problems that might exist, PayPoint indeed creates shareholder value.
Vertical Analysis
INCOME STATEMENT
2009
2008
2007
2006
2005
Net Sales
100.00%
100.00%
100.00%
100.00%
100.00%
Less: Cost of Goods Sold
71.54%
73.34%
70.71%
69.53%
68.87%
Gross Profit
28.46%
26.66%
29.29%
30.47%
31.13%
Other Operating Revenue
0.00%
0.00%
0.00%
0.00%
0.00%
Less: Operating Expenses
13.59%
12.89%
13.24%
14.38%
22.75%
Operating Income
14.87%
13.76%
16.05%
16.10%
8.38%
Less: Interest Expense
0.02%
0.03%
0.05%
0.01%
0.38%
Other Income (Expenses)
0.57%
0.59%
0.94%
0.88%
1.05%
Income before Taxes
15.42%
14.33%
16.93%
16.96%
9.05%
Less:Taxes Related to Operations
4.82%
4.44%
5.00%
2.87%
2.49%
N.I. before Min. Ern.
10.60%
9.89%
11.93%
14.09%
6.57%
N.I. before Nonrecurring Items
10.60%
9.89%
11.93%
14.09%
6.57%
Net Income (Loss)
10.60%
9.89%
11.93%
14.09%
6.57%
BALANCE SHEET
2009
2008
2007
2006
2005
ASSETS
Current Assets:
Cash
32.67%
27.05%
29.99%
55.69%
64.59%
Marketable Securities
0.00%
0.00%
0.00%
0.00%
0.00%
Gross Receivables
22.43%
27.67%
25.19%
21.05%
22.74%
Less: Allowance for Bad Debts
1.43%
2.66%
2.02%
0.26%
0.00%
Net Trade Receivables
21.00%
25.01%
23.17%
20.79%
22.74%
Inventories
1.09%
1.22%
2.04%
2.13%
1.17%
Prepaid Expenses
1.02%
1.17%
1.62%
1.01%
0.00%
Other Current Assets
1.58%
1.42%
0.70%
1.23%
0.00%
Total Current Assets
57.36%
55.87%
57.51%
80.84%
88.51%
Long-Term Assets:
Net Tangible (Fixed) Assets (other than construction in progress)
14.53%
12.80%
14.60%
16.91%
11.49%
Intangible Assets
26.61%
29.44%
25.95%
0.00%
0.00%
Investments
0.50%
0.37%
0.00%
0.00%
0.00%
Other Nonoperating Assets
1.01%
1.53%
1.94%
2.25%
0.00%
Total Long-Term Assets
42.64%
44.13%
42.49%
19.16%
11.49%
Total Assets
100.00%
100.00%
100.00%
100.00%
100.00%
LIABILITIES AND EQUITY
Current Liabilities:
Accounts Payable
25.95%
28.54%
28.61%
25.14%
66.31%
Short Term Loans
0.00%
0.00%
0.00%
0.00%
0.00%
Current Maturity of L.t. Debt
0.00%
0.00%
0.00%
0.00%
0.00%
Other Current Liabilities
19.00%
22.76%
21.13%
19.36%
0.00%
Total Current Liabilities
44.95%
51.29%
49.74%
44.50%
66.31%
Long-Term Liabilities:
Long-term Debt
0.00%
0.00%
0.00%
0.00%
0.75%
Reserves
0.00%
0.00%
0.00%
0.00%
0.00%
Deferred Liabilities
0.25%
0.33%
0.48%
0.65%
0.00%
Total Long-term Liabilities
0.25%
0.33%
0.48%
0.65%
0.75%
Total Liabilities
45.20%
51.62%
50.22%
45.16%
67.06%
Shareholders' Equity:
Common Equity-incl. Ret. Ern.
54.80%
48.38%
49.78%
54.84%
32.94%
Total Equity
54.80%
48.38%
49.78%
54.84%
32.94%
Total Liabilities and Equity
100.00%
100.00%
100.00%
100.00%
100.00%
Income Statement
Costs of goods sold are well controlled at 72% of net sales. Because of the fact that PayPoint is not in production industry and costs of goods sold are not as susceptible as production. And sales are increasing over years, so maintaining such level would be enough to generate profits. Also, profits increase over years and stand on a level of 11%.
Balance Sheet
The proportion of cash is enhanced comparing to receivables, implying that management is trying to improve short-term liquidity. However, continuous efforts are needed. An increase in non-current asset does not match any long-term funds. Management should consider adjust capital structure.
Competitor Comparison
In the UK, Payzone is the main competitor of PayPoint, along with Post Office Ltd, etc. We take the annual reports of both companies in 2009 to make comparison.
PayPoint
Payzone
-
-
-
LIQUIDITY
2008
2008
-
-
-
Days' Sales in Receivables
48.79226
29.05245
* Accounts Receivable Turnover
7.480694
12.56348
* A/R Turnover in Days
48.79226
29.05245
Days' Sales in Inventory
2.932368
6.922698
* Inventory Turnover
124.4728
52.72511
* Inventory Turnover in Days
2.932368
6.922698
* Operating Cycle
51.72463
35.97515
Working Capital
4691
-43911
Current Ratio
1.089232
0.82062
Acid Test
1.014932
0.57607
Cash Ratio
0.52742
0.246821
* Sales to Working Capital
45.22383
-24.6145
Cash Flow/Cur. Mat. of Debt & NP
-
-
-
LONG-TERM DEBT-PAYING ABILITY
2008
2008
-
-
-
Times Interest Earned
525.2069
Fixed Charge Coverage
525.2069
Debt Ratio
0.516187
0.947522
Debt/Equity
1.066913
18.05577
Debt to Tangible Net Worth
2.724674
-2.00412
Cash Flow/Total Debt
0.559834
-
-
-
PROFITABILITY
2008
2008
-
-
-
Net Profit Margin
0.098895
* Total Asset Turnover
2.069869
1.87171
* Return on Assets
0.204699
Operating Income Margin
0.137642
* Operating Asset Turnover
3.014451
3.960982
* Return on Operating Assets
0.414914
* Sales to Fixed Assets
16.17699
15.01346
* Return on Investment
0.421077
* Return on Total Equity
0.423095
* Return on Common Equity
0.423095
Gross Profit Margin
0.266582
0.083792
-
-
-
INVESTOR ANALYSIS
2008
2008
-
-
-
Degree of Financial Leverage
1.001908
Earnings per Share
0.308
-0.67
Price/Earnings Ratio
17.69481
-0.71642
Percentage of Earnings Retained
0.535844
Dividend Payout
0.50974
0
Dividend Yield
0.028807
0
Book Value per Share
0.011359
Materiality of Options
Oper. Cash Flow per Share
0.000435
Oper. Cash Flow/Cash Dividends
3.041487
Year-end Market Price
5.45
0.48
=
=
=
Payzone made a bigger loss in2008 than it did in 2007. However, directors of Payzone claimed sufficient evidence to show going concern.
Liquidity
From the chart, Payzone appears to have better receivables management which proves the prior point that PayPoint should enhance receivable management. However, PayPoint has fewer inventories, so compared to Payzone; PayPoint has less risks of inventory storing. It appears that Payzone has greater liquidity problem for it has negative working capital and its cash ratio is well below safety.
Long-term Debt-paying Ability
Since PayPoint does not have long-term liability, it is not geared though taking up long-term funds could improve PayPoint's capital structure. Payzone, on the other hand, is heavily geared. Its debt ratio is around 90% which is a very dangerous level. The fact that Payzone has been making losses aggravates the situation.
Profitability
It is obvious that PayPoint is doing better in creating investors' wealth. Payzone has been making losses, thus the negative return on investment, suggesting that it is eroding investors' funds.
Investor Analysis
Payzone's disappointing performance was reflected by market perception. Its share price shrunk to 48p, not to mention the negative P/E ratio.
Payzone's book value is much higher than PayPoint that Payzone is a bigger company in this industry. PayPoint, however, has a better performance. The credit should go to the management for their more conservative strategy. Payzone shows sign of expanding too quickly. It has businesses in six countries while PayPoint just entered Romanian market.
Conclusion
After a detailed financial statement analysis and comparison with PayPoint's major competitor, its advantages and weaknesses become apparent. Nevertheless, the purpose of financial statement is not to try to predict the future nor to simply crunch numbers, but to seek for weaknesses between the lines so that improvements can be made. With that in mind, I have concluded several points regarding the analysis
PayPoint seems to have sufficient cash. While storing cash can guarantee to meet its short-term obligations, PayPoint should have part of the most liquid assets invested.
PayPoint seems to adopt a conservative strategy. It appears to be more competitive after compared with its competitor, Payzone, which suffers from its rapid growth. Since Payzone's performance is declining, it might be a good time for PayPoint to become more aggressive to take market share.
PayPoint does not raise long-term fund. Even though it has abundant cash reserve, it would be unpractical to invest current assets into long-term projects when needed. PayPoint should start to take market share by opening more terminals which requires long-term investment. This would also diversify some of PayPoint's short-term risks.
PayPoint has a relatively high share price which indicates that its cost of equity should be high. In that case, taking on leverage would enhance profitability.
PayPoint has a significant receivables account. Although it has tightened up its credit period granted to customers, the probability of bad debts presents a major risk. PayPoint should enhance its receivable management using methods such as negotiating with customers for sooner paying.
Running a business is no walk in the park. It requires wisdom and courage of many people. With the help of financial statement analysis, the work is made more focused, if not easier.
