VISA vs. MasterCard Financial Analysis

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Analysis Introduction: VISA vs. MasterCardVisa has the slogan “Everywhere You Want to be” which proves to be very true when going about your daily life making most purchases as easy as one swipe away. MasterCard on the other hand raves “There are some things money can’t buy. For everything else there’s MasterCard.” The Payment industry consists of all the organizations which store, process and transmit cardholder’s data (Debit card & Credit card). In this case study, we will be asking the age-old question “Would you invest your financial capital in either firm as a shareholder?”There are many different payment forms in the industry with the likes of American Express, Discover just to name a few. As some of the mentioned industry competitors have reached some status in the industry none could reach the popularity of visa and MasterCard. According to Wack, M. (2021).” Unlike Discover and American Express, however, Visa and MasterCard don’t issue their own cards. Instead, both Visa and MasterCard credit cards are available from a wide variety of banks, credit unions, and other lenders. Both Visa credit cards and MasterCard credit cards are widely accepted at most locations. Cards belonging to either of these networks also often come with additional perks, like travel benefits and purchase protection.” As an investor, those factors could play a key part in where the bulk of your investment could be utilized. Now we can begin to analyze both companies side by side to see which one makes the best choice for those investors looking for that long-term investment opportunity.
MasterCard: Financial Ratios AnalysisMasterCard works to connect and power an inclusive digital economy that benefits all its customers. Making transactions safe, smart, and accessible through the use of technology. Utilizing secure data networks and innovative solutions to help individuals, businesses, governments, and financial institutions realize their greatest potential. By connecting individuals, businesses, and organizations in more than 210 countries, MasterCard is a global player in the payment and credit card network.According to Rachel Stone, F. A. (2020).” After decades of nearly identical core business models, the two most dominant payments companies in the U.S. are starting to diverge. Visa Inc. and MasterCard Inc. have a duopoly in the U.S. payments marketplace. Analysts have called them the “crown jewels” of long-term payments and “rarefied air” among current investment opportunities. They are both accepted in virtually every country around the world and have seen consistent growth for years.” MasterCard is starting to blaze its trail and heavily invest in the B2B payments market. MasterCard has in the past few years heavily focused on acquiring and eventually operating automated clearing house “ACH” rails. Those acquisitions have solidified and assisted in the tackling of B2B payments. According to Rachel Stone, F. A. (2020).” In 2017, MasterCard closed its $1.15 billion acquisition of London-based VocaLink Holdings Ltd., which boasts software to run on real-time payments networks. In 2019, the card company agreed to acquire the majority of the corporate service businesses of European payments technology company Nets A/S for $3.19 billion. Once complete, MasterCard’s largest-ever deal will add instant payment services to its business lines and cement the card company’s real-time payments strategy.” This real-time payment strategy could be setting the company up for a bright future ahead.Analyzing the performance of MasterCard’s utilizing the ratios provided in Appendix 1. Starting with profitability, the increase in Return on Equity (ROE) demonstrates the company’s management in utilizing investments or available equity. The increase in Return on Assets (ROA) shows that the company yielded increased income on the investments at their disposal. The increase in ROA signifies the efficiency of MasterCard utilizing assets and working capital from 2017 to 2019. This increased the profit margin and general performance for that period. Operation Margin also shows an increasing trend in operational efficiency to include profit performance. The increased profits within the numbers imply significant gains in efficiency within MasterCard with signs of future growth potential. According to Gallo, A. (2017).” You likely won’t make an investment decision or operations decision based on just one of these numbers, or even both of them. They’re part of a larger dashboard of figures that help you understand the overall health of the business — and how you might influence it.”The increase in Debt to Equity percentage is showing the company’s usage of debt to finance assets. It demonstrates the company taking greater risks relating to volatility in earnings due to higher interest payments even if greater earnings outweigh the cost of debt which may lead to enhanced shareholder value. According to Contributor, C (2020).” Liabilities and equity represent the respective claims that creditors and owners have on a company’s assets. A debt-to-equity ratio increase means a reduction in the value of owners’ stake in a business as a proportion of its assets. If your small business has a high debt-to-equity ratio and you sell or liquidate the company, you would have to distribute a larger portion of the proceeds to creditors than if you had a low debt-to-equity ratio.”Finally, liquidity within the company looks to be in good shape. The only worrying factor is the decrease of the current ratios from 2017 to 2019. This might be a sign of inefficiency within the company or an excessive cash burn rate. The current ratio shows an inability to pay back debts in 2018 with a slight increase in 2019. The two liquidity ratios show a different picture which might explain MasterCard having difficulties converting assets to cash in a set time to pay off debts. According to DelVecchio, L. (2021). “The current ratio, also known as the working capital ratio, is similar to the quick ratio in many ways. A liquidity ratio is a simple calculation, the current ratio is used to determine your ability to pay off debt. The main difference is the inclusion of current assets or inventory totals in your calculation. If you do not carry inventory in your business, the quick ratio and the current ratio are identical.” This is the only part of MasterCard that worries me and it might affect the outcome of this particular analysis.
VISA: Financial Ratios AnalysisPayment cards (both credit and debit) have become so common that few people can envisage their lives without them. However, the industry is still in its infancy. The origins of credit cards can be traced back to a misplaced wallet and a restaurant bill. The Diner Club Card is the product of this incident. It wasn’t the first-time people had bought things on credit, but it was the first time they had used a credit card. The payment method grew in popularity when financial institutions needed a system to securely charge and track transactions, resulting in a transaction processing machine. This case study aims to analyze the various financial ratios of the two companies, MasterCard and Visa. It evaluates the probability of stakeholders investing in any of the two companies.From 2018 to 2019, both companies demonstrated an overall decrease in ratio performance based on profitability ratios. Also, both companies reported a steady and consistent trend in the operating margin from the year 2016 to 2019. However, a significant difference was noted in the Gross profit. MasterCard presented a drastic increase from 2016 to 2018, while Visa saw a much sturdier drop in gross margin. On the other hand, MasterCard increased met profit in relation to Visa from 2016 to 2019, thus showing a robust performance and financial health. Therefore, a stakeholder may choose to invest in MasterCard due to the increased net profit it has reported over time. Also, it shows the probability of performing better and fetching more earnings in relation to Visa (Bazek, 2016).In addition, the liquidity ratios portrayed that Visa tends to present an increased stable liquidity ratio. A portion of the reported profitability resulted from the additional debt to equity ratio it had accrued over this period. On the other hand, MasterCard reported a sharp drop in its cash for this period, while Visa did not see much of a drop-off. Thus, a stakeholder could prefer investing his capital in Visa since it seems to pay for its short-term obligations and bills. The money invested will be of great significance to the company to utilize in profit-making.A precise examination of each corporation’s Return on Equity (ROE) and Return on Assets (ROA) reports was undertaken to reflect the exact status of both Credit Cards corporations’ health. MasterCard’s data reveals a healthier standing in both their ROE and ROA, according to the statistics indicated in those reports (Fernando, 2020). They were conscious of the fact that reports—Return on Equity (ROE) and Return on Assets (ROA)—calculate and determine the ability of both firms to generate profits from their investments. The extensive examination of both ratios -ROE and ROA- to find the most significant differences between the companies and provide a more substantial picture of their performance. Although, according to McClure, investors analyze the ROE more frequently than the ROA (2020), the ROE demonstrates to stakeholders how well the corporation’s management team uses investors’ money. In other words, the ROE ratio enables the company’s management to determine whether the rate is appropriate when compared to the company’s value (McClure, 2020).Meanwhile, MasterCard’s return on equity (ROE) grew from 2016 to 2019, indicating the company’s ability to make a profit without requiring considerable cash (Hargrave, 2020). From 2016 to 2019, Visa’s ROE showed declining ratios, as shown in the accompanying graph. According to the data analysis, MasterCard’s management team effectively used shareholders’ capital, whereas Visa’s data showed a less favorable financial prognosis; as Fernando has pointed out, a higher ROE suggests a more lucrative firm (2020). As a result, MasterCard will attract additional investors since it demonstrates how the capital of stakeholders is successfully utilized to generate more profits. According to the data, MasterCard had more robust ROA ratios than Visa from 2016 to 2019. MasterCard’s ROA ratios were much higher, which is a forecast that leads to the belief that MasterCard’s business can convert the money it invests into net income. Furthermore, a more excellent ROA ratio suggests that the company generated more capital while spending fewer investments. MasterCard has a lower Return on Assets Ratio, according to the study of the data.
Conclusion
References:Wack, M. (2021). Visa vs. MasterCard: Which card is better for your wallet? Bankrate. Retrieved September 19, 2021, from https://www.bankrate.com/finance/credit-cards/visa-vs-mastercard-which-card-is-better-for-your-wallet/.About Mastercard: Who we are: Who we serve. About Mastercard | Who We Are | Who We Serve. (2021). Retrieved September 20, 2021, from https://www.mastercard.us/en-us/vision/who-we-are.html.Rachel Stone, F. A. (2020). Visa, MasterCard Bet Big On Different Growth Strategies. Accelerating Progress. Retrieved September 20, 2021, from https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/visa-mastercard-bet-big-on-different-growth-strategies-56797573.Gallo, A. (2017). A refresher on return on assets and return on equity. Harvard Business Review. Retrieved September 27, 2021, from https://hbr.org/2016/04/a-refresher-on-return-on-assets-and-return-on-equity.Contributor, C. (2020). What are the disadvantages of a high debt-to-equity ratio? Small Business – Chron.com. Retrieved September 27, 2021, from https://smallbusiness.chron.com/disadvantages-high-debttoequity-ratio-56239.html.DelVecchio, L. (2021). The most useful Accounting ratios and formulas. PLANERGY Software. Retrieved September 27, 2021, from https://planergy.com/blog/accounting-ratios/.Bazek, I. (2016). Should I buy or sell MasterCard (MA) stock? Three pros, three cons. Investor Place. Retrieved on 11/20/2020 from https://investorplace.com/2016/03/buy-or-sell-mastercardma-stock-pros-cons/
Fernando, J. (2020). Return on Equity: ROE. Investopedia. Retrieved on 11/15/2020 from https://www.investopedia.com/terms/r/returnonequity.asp
Hargrave, M. (2020). Return on Assets: ROA. Investopedia. Retrieved on 11/15/2020 from https://www.investopedia.com/terms/r/returnonassets.asp
McClure, B. (2020). How ROA and ROE give a clear picture of corporate health. Investopedia. Retrieved on 11/15/2020 from https://www.investopedia.com/investing/roa-and-roe-giveclear-picture-corporate-health/
Appendix 1:MasterCardPROFITABILITY 2017 2018 2019GROSS MARGIN 78.50% 78.50% 79.05%OPERATION MARGIN 53.96% 56.01% 57.43%NETPROFIT MARGIN 31.33% 39.19% 48.08%LIQUIDITYCURRENT RATIO 1.57 1.39 1.42CASH RATIO 0.67 0.72 0.75LEVERAGEDEBT TO EQUITY 2.88 3.59 3.94OPERATION RETURNSROE 71.22% 108.14% 137.20%ROA 18.36% 23.57% 27.77%
Appendix 2:
VISAPROFITABILILTY 2017 2018 2019Gross Margin 82.31% 81.29% 81.87%
Operation Margin 66.25% 65.80% 67.03%
Net profit Margin 36.49% 49.98% 52.57%
LIQUIDITYCurrent Ratio 1.90 1.61 1.56
Cash Ratio 0.99 0.99 0.72
LEVERAGEDebt to Equity 1.08 1.04 1.11
OPERATION RETURNROE 20.45% 30.29% 34.83%
ROA 9.85% 14.88% 16.65%
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