Company Ratio Analysis Term Paper

Excerpt from Term Paper :

Finance

Assessment of the Financial Performance of UPS and FedEx

The Companies

UPS

FedEx

Selected Financial Data

Ratio Analysis

Short-Term Solvency

Long-Term Solvency

Asset Management

Profitability

Market value

For any investor assessing potential investments there will be an evaluation of the potential investment, looking at the financial performance using vertical and horizontal analysis. Further context may be given to any analysis by looking at firms in a boarder context for example, examining two firms together, especially where they are close comparators. This report will look at two major logistics firm; UPS and FedEx. The paper will start by looking at the background of the two firm, present selected but pertinent financial data and then undertake a financial analysis using ratio analysis. The analysis will then be used to assess each company's performance.

2.

The Companies

UPS

UPS is the world's largest shipment firm; the company's full name is United Parcels Service (Yahoo Finance, 2014). The firm which focuses on the delivery of packages, transport provision, logistics and associated financial services, ships approximately 15 million packages every day in a global basis, to more than 6 million customers (Yahoo Finance, 2014). In United States the firm has between 46% and 50% of the total domestic market (Diffen, 2014).

Globally the company operates in more than 220 countries, including supply chain management and freight services, with a fleet that consists of approximately 101,000 road vehicles to carry packages, as well as more than 31,000 containers and establishment of his own airline (UPS, 2014; Yahoo Finance, 2014).

The firm was founded in 1907, and grew modestly at first, but in recent years the firm has pursued an aggressive growth strategy backed by significant acquisitions. For example, in 1995 SonicAir was acquired, in 1999 the firm acquired Challenge Air, Mail Boxes Etc., Inc. were acquired in 2001 and Menlo Worldwide Forwarding was acquired in 2004 (UPS, 2014). Recently expansion plans were thwarted when the proposed $6.8 million acquisition of TNT was blocked by the European Commission on the grounds it would be bad for competition (Handy Shipping Guide, 2013).

2.2

FedEx

FedEx is the world's second largest shipment firm and operates in the same markets as UPS as a direct competitor. The firm, which was formerly known as Federal Express, adopted the shorter version of the name in 2000 (FedEx, 2014). The firm deals with more than 10 million shipments everyday across more than 200 countries and 370 different service centers (FedEx, 2014). The services are supported with a fleet of more than 90,000 road vehicles, as well as the firms own air carrier (FedEx, 2014). In the U.S. The firm has approximately 49% of the market share (Diffen, 2014).

Founded in 1973, the firm is younger than UPS, but has adopted a similar strategy in terms of growth, with expansion agency critic is by a strategy of acquisition. For example, the international logistics firm Tower Group International was acquired in 2000, in the same year as duty information company WorldTariff was acquired. In 2004 Kinko Parcel Direct were acquired (FedEx, 2014).

3.

Selected Financial Data

UPS and FedEx are major players in the logistics and shipments industry. A compare financial results, which should be noted that the financial year is not exactly aligned, the UPS financial accounting it tends in December, where as the FedEx account elections in May. The following financial analysis uses the most recent accounts published by both companies. All figures, except the 'per share' figures, are shown in U.S. $ millions and taken from the relevant annual reports.

The examination of their financial results indicates that UPS is the larger of the two firms, with a higher turnover. Both UPS and FedEx have been showing growth, which is slow down in most recent financial year. Both organizations have also been showing an increased level of gross profit, but the difference may be seen when looking at the net profit (after tax). Both companies appear to have it is proportional increase in the operating costs, as well as one of costs for UPS. In both cases the most recent financial year are shown a decrease in the net profit, but the decrease is most significant for UPS. This decreasing profit also impacts on the earnings per share. UPS appear to have been undertaking a share repurchase scheme which helps mitigate some of the decline in net profits, but still results in a significant decrease between December 2011 and December 2012. FedEx also has a significant decrease, but it is proportionately less than UPS, additionally, FedEx does not have any change in a number of outstanding shares.

When examining financial data it may also be argued to figures that are important to shareholders may be the total level of debt the total level of equity. In both companies there has been increasing level of debt, but this has been rising more rapidly in UPS, indicating a higher degree of leveraged taking place. Higher leverage which may equate high risk, but it may also result in higher returns at a future date as the money is invested and creates returns (Mintzberg et al., 2011). Possibly a cause for concern for shareholders is the decrease in equity at UPS which accompany the increase in debt.

The increasing debt at FedEx is more constrained; shareholders are likely to be happier as the overall level of equity is increasing.

Table 1; Financial Data

UPS

FedEx

Financial Year Ending

Dec-10

Dec-11

Dec-12

May-11

May-12

May-13

Revenue

49,545

53,105

54,127

39,304

42,680

44,287

Gross profit

38,802

40,541

41,455

27,500

29,409

30,360

Net Profit (after tax)

3,488

3,804

1,452

2,032

1,561

Earning per share (basic)

3.51

3.88

0.84

4.57

6.44

4.95

Shares outstanding (millions)

Total debt

25,618

27,666

34,210

12,165

15,176

16,169

Total equity

7,979

7,035

4,653

15,220

14,727

17,398

As of 19 February 2014, the closing share price for UPS was $95.18, and the 52 weeks the share price has ranged between $81.51 and $105.37, with dividends providing a 2.61% yield (Yahoo Finance, 2014). The FedEx share price is higher closing at $131.35, with a range of $90.61 to $144.39 over the last 12 months, with a dividend yield of 0.44% (Yahoo Finance, 2014).

4.

Ratio Analysis

Ratio analyses may be used to examine the performance of a firm, to assess patterns as well as for benchmarking. The following sections present a range of ratios assessing different aspects of the firms performance

4.1

Short-Term Solvency

For any firm to realize its potential there has to be sufficient solvency to meet that potential. These ratios indicate the firms' ability to meet its short-term obligations and relate to short-term financial management issues.

Table 2; Current Ratio

UPS

FedEx

Financial Year Ending

Dec-10

Dec-11

Dec-12

May-11

May-12

May-13

Current assets

11,569

12,284

15,591

8,285

9,056

11,274

Current liabilities

5,902

6,514

8,390

7,283

9,802

16,169

Current ratio

1.96

1.88

1.86

1.14

0.92

0.70

Table 3; Cash Ratio

UPS

FedEx

Financial Year Ending

Dec-10

Dec-11

Dec-12

May-11

May-12

May-13

Cash

3,370

3,034

7,327

2,328

2,843

4,917

Current liabilities

5,902

6,514

8,390

7,283

9,802

16,169

Cash ratio

0.57

0.47

0.87

0.32

0.29

0.30

Table 4; Interval Ratio

UPS

FedEx

Financial Year Ending

Dec-10

Dec-11

Dec-12

May-11

May-12

May-13

Current assets

11,569

12,284

15,591

8,285

9,056

11,274

Operating costs

32,928

34,461

40,112

25,122

26,223

27,809

Daily operating costs

90.2137

94.4137

68.8274

71.84384

76.18904

Interval measure

Table 5; Net Working Capital to Assets

UPS

FedEx

Financial Year Ending

Dec-10

Dec-11

Dec-12

May-11

May-12

May-13

Net working capital

5,667

5,770

7,201

1,002

-746

-4,895

Total assets

33,597

34,701

38,863

27,385

29,903

33,567

Ratio

0.17

0.17

0.19

0.04

-0.02

-0.15

4.2

Long-Term Solvency

The long-term solvency look at issues associated with the capital stricture and the way it capital is used and managed.

Table 6; Total Debt Ratio

UPS

FedEx

Financial Year Ending

Dec-10

Dec-11

Dec-12

May-11

May-12

May-13

Total assets

33,597

34,701

38,863

27,385

29,903

33,567

Total equity

7,979

7,035

4,653

15,220

14,727

17,398

Ratio

0.76

0.80

0.88

0.44

0.51

0.48

Table 7; Debt to Equity Ratio

UPS

FedEx

Financial Year Ending

Dec-10

Dec-11

Dec-12

May-11

May-12

May-13

Total debt

25,618

27,666

34,210

12,165

15,176

16,169

Total equity

7,979

7,035

4,653

15,220

14,727

17,398

debt to equity ratio

3.21

3.93

7.35

0.80

1.03

0.93

Table 8; Debt to equity multiplier

UPS

FedEx

Financial Year Ending

Dec-10

Dec-11

Dec-12

May-11

May-12

May-13

Total assets

33597

34701

38863

27385

29903

33567

Total equity

7,979

7,035

4,653

15,220

14,727

17,398

Ratio

4.21

4.93

8.35

1.80

2.03

1.93

Table 9; Interest Coverage Ratio

UPS

FedEx

Financial Year Ending

Dec-10

Dec-11

Dec-12

May-11

May-12

May-13

EBIT

5,874

6,080

1,343

2,378

3,186

2,551

Interest

86

52

82

Interest coverage

16.59

17.47

3.42

27.65

61.27

31.11

4.3

Asset Management

Firms create profits by using their assets; efficient asset management is likely to result in better returns compared to poor management.

Table 10; Accounts receivable turnover

UPS

FedEx

Financial Year Ending

Dec-10

Dec-11

Dec-12

May-11

May-12

May-13

Sales

49,545

53,105

54,127

39,304

42,680

44,287

Accounts receivables

6,117

6,246

6,111

4,581

4,704

5,044

Accounts receivable…

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