Dr. William Cheng
June 14, 2013
The company I choose to research is American Express CO., AXP, A.E. American Express strives to make it easier for consumers and businesses to purchase the things that they need for goods and services. Their vision is to make their brand the most respected card in the world. They have been able to accomplish this by allowing $888 billion in annual purchase volume, having 102.4 million cards in circulation, achieved $31.6 billion in annual revenue, and operate in over 130 countries. They operate with the following principles:
* Offer superior value to customers-by ...view middle of the document...
E. name. Again, every transaction that is processed through this program, A.E. gets a percentage of the charge.
Vulnerability of American Express
Like most credit card companies, the financial crash in 2008 did affected A.E, but not nearly as bad as competitors. One of the main reasons for this is because they are more stable financially. Half of A.E. card holders are small business owners and while they decreased their spending through this crisis, their risk level never increased. Once these small businesses felt comfortable spending again, the amount of purchases increased. This is significant because A.E. receives a certain percentage from every purchased through A.E. card. It is estimated that over 200 billion is charged through these small business owners (American Express website, 2013).
President Obama signed the Credit Card Responsibility and Disclosure Act. This law affects some of the following: age of card holders, restrictions on rate increases, what fees can be charged, more disclosure rules(Prater, 2009). Even though this law does affect A.E., most of these items will not affect the way they do business. A.E. already has a credit score rule that excludes low credit score consumers. Most of those under the age in the law are already excluded due to the credit score anyways. Credit card companies would usually be affected by the type of fees that they can charge, but A.E. doesn’t make much money from fees. Due to their restricted wealthier demographics, these fees are not a big source of income for A.E. The biggest source of income for A.E. comes through the discount revenues. This is a small fee for merchants as well as card holders on every purchase.
American Express Strength
Over the past five years A.E. debt to income ratio has been decreasing. The debt to income ratio has decreased by 38% since 2008 financial crisis (MorningStar, 2013). This shows that A.E. has kept their debt low as their income has increased. This has allowed the company to increase capital and use to strengthen the company, rather than pay off incurred debt.
Another ratio that is tied to the ability to pay off debt is the acid or quick ratio. The industry average for the credit card companies is 2.24, while A.E. is at .44(CSIMarket, 2013). Most times this low ration means a company cannot generate enough income to pay their liabilities, but for A.E. it is so low because the debts are paid off very quickly. A.E. has developed rules and regulations on how quick card holder’s debt is paid in full. As a result this number is low and speaks to how quickly they pay off their liabilities.
Since the acid ratio is extremely low it is good to look at their revenue and working capital for A.E. The working capital ratio is low and matches pretty closely to the acid ratio. A.E. has such a quick turn around on turning to cash this ratio would be expected to be low. The working capital for A.E. is 2.15 while the industry is at 24.7. ...