Fedex Analysis: Management, Lender, and Competitors Scenarios - Essay Example

UPS analysis Accounting, which involves collection, organization, summary, and analysis of financial information about an entity, is important to diversified stakeholders’ decisions. Examples of such stakeholders are an entity’s management that may use accounting information to evaluate its performance and initiate improvements, credit institutions that may use the information to evaluate an entity’s liquidity and leverage position, and stockholders and potential investors who may use the information to forecast returns. This paper offers analysis of UPS accounts with focus on management, lender, and competitors’ scenarios, and comparisons with its main competitor. Management Scenario Shareholders expressed their dissatisfaction, in the latest shareholders meeting, on effectiveness of management of the company’s resources. The shareholders are justified in their opinion because even though the company reported strong profitability ratios, its activity rations are very weak. Activity ratios such as days of sales receivables, days of sales in inventory, accounts receivables turnover, inventory turnover, and asset turnover ratio are too weak to warrant dissent opinion from shareholders. Ratios such as return on assets and profitability ratios are however high and should be appreciated. The company’s management of its resources is worse than that of its main competitor, FedEex, because its ratios are worse than ratios that FedEx posted on activity. In days sales receivables, for example, UPS reported values higher 300 days in its considered periods while FedEex reported 43.31 days. In order to improve the company’s situation, I can ensure implementation of effective marketing strategies for better turnover and introduce new policies for credit sales. Lender Scenario As a loans officer for a commercial lender, I would approve the company’s request for a loan. I would concur with the company’s position that its stock is undervalued because of the unjustified shareholders’ opinion on the company, which may be shared by potentials investors to have adverse effects on the company’s stock prices. In addition, the buyback may improve value of its stock. Taken as a short-term loan, it will reduce strength of the company’s current ratio and quick ratio because of increased value of current liabilities when current assets remain constant. If taken as a long-term loan then it will worsen the company’s debt ratio that is already weak, below 1.0. Debt to equity ratio, which is already weak, will worsen because while the load will increase the company’s debts, it has no effect on equity as it only transfers shares from shareholders to the company. The company should not change its capital structure because the current structure establishes its competitiveness in terms of profitability, which is its primary objective. This is because it has better profitability ratios. In addition, the current capital structure guarantees short-term stability while ploughing profits promise improvements in solvency ratios for long-term stability. Changing the capital structure by buying back shares also offers no remedy to the poor activity ratios that the company is experiencing. I would apply a fixed interest rate to the loan because the company posts consistent profitability ratios. This means consistency in their ability to pay and therefore uniform distribution of risk over the repayment period. Profitability/Investor Ratio Analysis Profitability analysis UPS reports high profitability ratios that are also consistent over time. Its gross profit margin has been constant at 100 percent and while this is an outstanding level of profitability, it promises future consistency. Consequently, long-term profitability, on gross profit, can be inferred on the company. Ability to generate gross profit is also commendable because it compares with the ratio for the company’s main competitor, FedEx, which reported 98.77 percent. Operating profit margin for UPS has been volatile over the past five years, but within a range of higher percentages. The lowest of its operating profit margin has been 65.45 percent and this undermines potential fears of the volatility. The ratios are further outstanding as they are far beyond average ratio of the key competitor that is at 3.73 percent. Difference in the ratio, from gross profit ratio, also means that UPS is efficient in managing its operational costs than FedEx is. Like operating profit margin that reports volatility over accounting periods, net profit margin has been volatile about a value of 60 percent which is however a significantly high value. This is also very high, compared to reported net profit margin by FedEx that is only 3.55 percent. Return on assets and return on equity are other profitability ratios into understanding the company’s performance. There is a significant level of volatility in the company’s Return on Assets ratio with 3.26 percent as the lowest value and 12.66 percent as the highest value. The ratio’s average is however significant and is higher than that of the main competitor. Return on equity reports the same trend and difference from corresponding ratio from FedEx. However, total assets turnover and fixed assets turnover rations are lower for UPS. Unlike FedEx that reports an average total asset turnover ratio of 1.39, the highest ratio for UPS is 0.19. The highest value of UPS’ fixed turnover ratio, over the five-year period, was 0.31, compared to FedEx’s 2.04. The analysis therefore reveals higher and sustainable profitability for UPS. The lower turnover ratios can be attributed to high asset base for the company than asset volume for its competitors such as FedEx. Consequently, investors should have confidence in UPS’s sustainable profitability. Investor ratio analysis UPS also offers better investor ratios. Though volatile, the company’s price to earnings ratio is significantly high, with a minimum ration of 19.06 over the past five accounting periods. The ratio has further reported an increasing trend over the past three years and that can be forecasted. In addition, the company’s price to earnings ratio is better that its competitor’s average, 17.07. Dividends payout ratio, though with a level of volatility, is high for UPS than for its competitor whose average value is 0.03. The lowest value for UPS’ ratio over the past five years is 0.13. The better offer is also evident in dividend yield. Earnings per common share is however lower for UPS, than FedEx, and shows a significant level of consistency in a decreasing trend. Conclusion UPS therefore reports good profitability, liquidity, and investor ratios that are well above its main competitor, FedEx. Even though its activity ratios and solvency ratios are weak, this should not be a concern because the company operates profitably and is able manage its long-term debts. The lower earnings per common share could therefore be the source of shareholders dissent opinion over management’s effectiveness. Though the low activity ratios justify shareholders’ opinion and the company can get a loan to repurchase its shares, increasing earnings per common share is a better alternative (Debarshi 65- 77). Works cited Debarshi, Bhattacharyya. Management accounting. New Delhi: Pearson Education India, 2011. Read More