Financial Ratio Analysis

This paper is an analysis of FedEx and UPS Liquidity position computed from the
organization’s financials in the years 2016 and 2017. Liquidity analysis is essential to an
organization’s survival because it evaluates an organization’s ability to meets its financial
obligations in the short term and long ter. Liquidity position also affects operations when
assessed in terms of working capital. This paper focuses on the organization’s activity ratios,
debt ratios and profitability ratios. The ration performance from the organization is then used to
determine the organizations weaknesses and recommendations have been provided for the
organization’s weaknesses.
Activity Ratios
Activity ratios determine how well an organization manages its assets to generate revenues. The
ratios considered here are inventory turnover ratio, total asset turnover ratio, and accounts
receivable turnover ratio
Financial Ratio 2016 2017

FedEx UPS FedEx UPS
Asset Turnover Ratio 1.2 1.5 1.3 1.4
Inventory turnover 34.86 – 43.6 –
Accounts receivable turnover 7.5 6.5 8.1 7.39
UPS does not use inventory in their activities and as such do not have an inventory turnover
ratio. However, both organizations seem to have reduce the efficiency with which they collect
their receivables. The organizations also registered an increase in the way in which they apply
their assets to generate revenues.
Debt ratios
The debt ratios considered are
Financial Ratio 2016 2017

FedEx UPS FedEx UPS
Interest coverage 9.8 14.35 10.5 16.62
Total Debt/ Equity 1.0 39.69 0.9 24.29
Long-term debt/ Equity 1 30.6 0.9 20.28
The above debt rations show that both organizations were in a comfortable position to meet its
interest payments. UPS showed a significantly better interest coverage ratio. Ideally, a company
should look to have better interest coverage ratio; this indicates that the company is generating
enough profits to cater for its interest costs. UPS on the other hand has a significantly higher debt
to equity ratio which in effect shows that the organization has significantly higher portion of debt

than equity. FedEx had an ideal total debt to equity ratio which means that the organization is
less risky. The long-term debt to equity ratio also shows that FedEx is generally the less risky
firm.
Profitability ratios
Financial Ratio 2016 2017

FedEx UPS FedEx UPS
Return On Asset 1.0% 8.7% 1.2% 11.45%
Return On Equity 12.6% 238.03% 20.1% 698.93%
Net Profit Margin 3.6% 5.5% 4.9% 7.39%
The profitability ratios considered here are the Return on Asset (ROA), Return on Equity (ROE)
and Net Profit Margin. The return on assets shows that UPS is generating better returns from its
assets in both years than FedEx.
The ROE analysis shows that UPS management are doing an exemplary job to in utilizing
investment financing to generate revenues. From an investor perspective, UPS is a more
profitable venture than FedEx.
The net profit margin shows the portion of net profit in relation to the revenues. Both
organizations are definitely profitable but UPS seems to have a better Net Profit margin than
FedEx. Both profit margins seem low, which could indicate that there are high administrative
expenses. For example, in 2017, FedEx reported a Net Profit Margin of 4.9 % meaning that only
4.9 % of its revenues ended up in profits. This challenge has been discussed in the below section
on weaknesses.

Weaknesses

Both organizations demonstrate a reduced efficiency for collecting receivables. This can
be interpreted to mean that both organizations are giving too long credit periods or that their
collection methods are not efficient enough. The implication is that the organization can faces a
risk of facing operational risk where its unable to meet obligations due to cashflow issues. This
issue can be corrected by having better collection methods, such as reducing the credit period for
receivables. Both organizations can additionally give discount to debtors who pay within a short
time.
High expenses
Both organizations seem to be netting only a small percentage of their revenues. In 2017
FedEx made 4.9% profit from revenues while UPS made 7.4% from revenues. As such there is
need to relook at both organizations business model to identify areas where it could improve.
Ideally, organizations should be looking to make at least 20% net profit margin. One way that
both organizations can achieve this is by increasing revenues. This may require investment in
form of advertising to drive up sales. Secondly, both organizations can increase the prices of
their services. Such a move would require great research into the effects of such a move. For

example, increasing the prices might result in a lower demand for their services. Customers
could also shift to a rival business, which would be counterproductive. Another way that the
businesses can net more is to reduce expenses. This could be the easiest way to achieve a larger
margin. Both organizations can renegotiate with suppliers to find cheaper prices of materials that
they use.
Finally, FedEx needs to embrace the use of debt. UPS appears to be the more profitable
company, and also has better asset management. UPS seems to have embraced the use of debt
and this has impacted its profitability even though it has slightly increased the risk.