Financial analysis is used to build long-term business plans, set financial policy, identify projects and companies to invest, and evaluate economic trends through the synthesis of financial data and numbers. Investors can be able to understand and determine strengths, profitability, liability, weaknesses, and potential earnings of the business in the future. Following the ratio analysis, it is evident that United Parcel Service (UPS) is a company that is worth investing in. First, UPS has a strong workforce that is dedicated to research and development and innovation to keep the company in tandem with industry requirements. Despite low liquidity and high leverage, which are associated with the company’s current diverse investment in firms in Slovakia and intensive investment in innovation and research and development to meet the environmental requirements with regards to carbon prints, UPS is a worthwhile investment (Kurylko, 2016).
Financial analysis is the evaluation processes of businesses and projects to its performance suitability. Through financial analysis, it is possible to determine whether a business is liquid, profitable, or solvent enough to be worth investing in (Byrd, Hickman, & McPherson, 2013). Some of the methods used to carry out financial analysis include vertical analysis, ratio analysis, and horizontal analysis. This paper presents the financial statement review, liquidity, financial leverage, asset management, profitability, and market value analysis of United Parcel Service (UPS) to determine if it is a worthwhile investment.
Analysis of the firm’s financial position based on existing financial data
This is a comprehensive assessment of the financial statement of the company in a quantitative form. Often, it is applied during the process of evaluating the performance of a company’s operation and the standing of finance by assessing parameters such as profitability, liquidity, efficiency, and solvency. (Subramanyam, 2014). The Benefits of this form of analysis includes the importance of analyzing the financial position of a particular entity and this aids other financial institutions in making decisions on lending and investment opportunities (Byrd et al., 2013). This form of analysis also helps in simplifying the understanding of the financial figures from the books of a company hence making the assessment process an easy one.
Liquidity ratio is the ratio of a business’ liquid assets to its liabilities. It is also known as a company’s financial health. The ratio measures the stability of businesses within a short span of time and its ability to cater to their short-term obligations concerning finance. The ratio of liquidity can either be less than one, equal to one, or greater than one. A liquidity ratio that is greater than one is an indication of fewer liabilities concerning assets. On the other hand, if the ratio is less than one, it is a sign of fewer assets compared to liabilities (Goel, 2016). Elsewhere, if the ratio is greater than 1, this may mean that a company is not maximizing its capital utilization (Sengupta & Hogue, 2014). Moreover, a company can opt to invest in noncapital projects, engage in service or product development and innovation, and improve Research and development (R&D) to increase their individual growth. However, it is important to note that current ratio varies based on the industry a company is operating in (Tennent, 2014).
Profitability ratios are used to assess the position of a company to generate profits. Therefore, they show how well a company utilizes its assets in profit generation and increment in shareholders’ value.
Gross profit margin provides a comparison between a business’ revenue and gross profit. According to Samonas (2015), the ratio measures earnings of a company while considering the cost required for a company to offer services and produce goods that meet the needs of its customers. Penman (2013) argues that companies are efficient in their core operations when they record a wider gross profit margin (Jarrow & Chatterjea, 2013). On the other hand, when the profit margin is low, it implies a company’s high cost of goods sold that are associated with wrong sales and promotions strategies, low sales, adverse purchasing policies, stiff market, and stiff competition in the market.
Operating Margin = ((Total Sales – Cost of Goods Sold – Operating Expenses) / Total Sales) x 100
UPS has a low operating margin meaning that the company’s high cost of goods sold that are associated with wrong sales and promotions strategies, low sales, adverse purchasing policies, stiff market, and stiff competition in the market.
Leverage ratios are also known as Debt/Equity ratio measures the long-term solvency of a business and the extent of company debt and ability to finance its operations and activities (Sengupta & Hogue, 2014). Bankers focus on leverage ratios to determine how businesses finance their assets either by investments or credit (Samonas, 2015). A high Debt/Equity ratio implies that business finances its operations majorly through credit and debts. According to Goel (2016), aggressive leverage practices of a company are associated with high levels of risk (Goel, 2016). Consequently, increased expenses in a company may result in volatile earnings.
This ratio is used to analyze how efficiently or effectively a business manages its assets to produce sales. Two types of asset management ratio to be discussed in this section for UPS include inventory fixed asset turnover and turnover ratio.
Market values ratio evaluates the current share price of the stock of a publicly owned company. Investors use these ratios to determine whether the shares of a company are overpriced or underpriced (Tennent, 2014). Market value ratios discussed in this section include book value per share and earnings per share.
• DuPont Equation
The DuPont system of calculating Return on Equity (ROE)
ROE shows the company’s ability to make profits from its investment. In other words, it shows the amount of profit per dollar of equity (Jarrow & Chatterjea, 2013).
Return on Equity = (Net Profit Margin) (Asset Turnover) (Equity Multiplier)
Net Profit Margin: Net Income / Revenue = 0.14Asset Turnover: Revenue / Assets = 1.7
Equity Multiplier: Assets / Shareholders’ Equity
The preferred ROE is normally 15-20%. However, UPS’s ROE is not good because it falls outside the required interval.
Analysis of the firm’s financial outlook based on projected financial data
In business, financial statements are critical because they are used to keep track of business finances. There are different financial statements which play different roles in business. The financial statements include cash flow statements, balance sheets, income statements, and statement of owners’ equity.
Pro forma Statements for UPS Provide the following for your case firm for a forecast period of three years:
A financial statement review
From the 2017/2018 UPS financial report, it is evident that in the last three financial years, the revenue of the company increased. In 2016, the worth of revenue collected by the company was $60,906 million. There worth of the revenue reduced in 2017 to $65,872 million. Unlike in 2017, the revenue increased in 2018 to $71,861. Besides revenue increments, there were other constant increments that the company recorded. For instance, the cost of goods by the company was worth $48,592 million in 2016, $51,102 million in 2017, and $58,731 in 2018. After deductions of expenses and the addition of some incomes, the company still had an increase in profit before tax for the three year period. In 2016, the profit before tax that UPS recorded was $5,163, which increased to $7,155 in 2017 and further to $6,285 in 2018.
Pro Forma financial statements Forecast for 2019 and 2021
UPS’s total investments, total current assets, and net property plant and equipment are expected to increase in the next three financial years. However, total current liabilities are expected to remain constant.
|Balance Sheet as of:|
|Cash And Equivalents||4,858.75||5,174.57||5,795.52|
|Short Term Investments (Marketable securities)||931.50||992.05||1,111.09|
|Trading Assets Securities (investments)|
|Total Cash & ST Investments||5,790.25||6,166.62||6,906.61|
|Accounts Receivable $ not yet received (A/R, net)||10,570.80||11,257.90||12,608.85|
|Other Receivables (Current income tax receivable)||1,081.00||1,151.27||1,289.42|
|Other Current Assets||714.15||760.57||851.84|
|Total Current Assets||18,640.35||19,851.97||22,234.21|
|Gross Property, Plant & Equipment (fixed assets aka. Non-current)||61,674.1||69,938.12||79,795.43|
|Accumulated Depreciation (non-cash expense does not affect cash flow)||(30,703.2)||(33,773.5)||(37,150.9)|
|Net Property, Plant & Equipment||30,970.90||36,164.60||42,644.56|
|Goodwill (intangible if it pays more for something)|
|Other Intangibles, net (footnotes)|
|Deferred Tax Assets, LT (footnotes)|
|Other Long-Term Assets (footnotes)|
|Accrued Exp. (expense match against revenue even though not yet paid (see footnotes)|
|Short-term Borrowings (commercial paper IOU 90 days or less|
|Curr. Port. of LT Debt (10 years: 9 years from now will be current debt)|
|Curr. Port. Of Cap. Leases|
|Unearned Revenue, Current|
|Other Current Liabilities|
|Total Current Liabilities||5,188.00||5,188.00||5,188.00|
|Long-Term Debt (issued bonds)|
|Unearned Revenue, Non-Current|
|Pension & Other Post-Retire. Benefits|
|Def. Tax Liability, Non-Curr.|
|Other Non-Current Liabilities (longer than 1-yr)|
|Common Stock A&B combined (what issued for)||9.0||9.0||9.0|
|Retained Earnings (earnings taken in over the life of firm)|
|Deferred compensation obligations|
|Less: Treasury Stock 1 share 2018 & 217 (purchased buyback stock)||(36.80)||(39.19)||(43.90)|
|Comprehensive Inc. and Other (losing $ in currency conversion)|
|Total Common Equity (for controlling interests)|
|Minority Interest (noncontrolling interest)|
|Total (Shareholders’ )Equity|
|Total Liabilities And Equity|
|Total Shares Out. on Filing Date||860.00||860.00||860.00|
|Total Shares Out. on Balance Sheet Date|
|Tangible Book Value|
|Tangible Book Value/Share|
|Debt Equiv. of Unfunded Proj. Benefit Obligation|
|Debt Equivalent Oper. Leases|
|Total Minority Interest|
Income statement projection for 2019 to 2012
|Net Operating Working Capital (NOWC) (fcf step 2)||13,452||34,516||30,944|
|Net Operating Capital (fcf step 3)||75,126||104,454||110,740|
|Net Investement in Operating Capital = (total net op cap this yr) – (total net op cap last yr) (fcf step 4)||18,515||29,328||6,286|
|Cash Flow and Performance|
|NOPAT (fcf step 1)||47,575.75||51,368.74||58,317.63|
|Free Cash Flow (FCF0)||29,060.30||22,041.13||52,031.79|
|Return on Investment Capital (ROIC)||63%||49%||53%|
Income statement projection for 2019 to 2021
|For the Fiscal Period Ending||15.0%||6.5%||12.00%|
|Revenue||$ 82,640||$ 88,012||$ 98,573|
|Total Revenue||$ 82,640||$ 88,012||$ 98,573|
|Cost Of Goods Sold (Comp& benefits, repairs&maint., purchaed transp., fuel, & other occupancy)||$ 14,049||$ 14,082||$ 14,786|
|Selling General & Admin Exp.||–||–||–|
|R & D Exp.||–||–||–|
|Depreciation & Amort.||2,538.05||2,703.02||3,027.39|
|Other Operating Expense/(Income)||6,284.75||6,693.26||7,496.45|
|Other Operating Exp., Total||8822.8||9396.3||10523.8|
|Interest and Invest. Income||1668.7||1777.1||1990.4|
|Net Interest Exp.||972.9||1036.1||1160.5|
|Currency Exchange Gain (Loss)||(21.9)||(23.3)||(26.1)|
|Other Non-Operating Inc. (Exp.)|
|EBT Excl. Unusual Items||7,227.8||7697.6||8,621|
|Impairment of Goodwill||–||–|
|Gain (Loss) On Sale Of Invest.||–||–|
|Other Unusual Items||(278.8)||–||–|
|EBT Incl. Unusual Items (Income before Income Taxes)||6,949.0||7,697.6||8,621.3|
|Income Tax Expense||1,417.73||1,570.46||1,758.91|
|Earnings from Cont. Ops.||5,531.2||6,127.1||6,862.3|
|Earnings of Discontinued Ops.||–||–||–|
|Extraord. Item & Account. Change||–||–||–|
|Net Income to Company||5,531.2||6,127.1||6,862.3|
|Minority Int. in Earnings||–||–||–|
|Pref. Dividends and Other Adj.|
|NI to Common Incl Extra Items|
|NI to Common Excl. Extra Items|
|Per Share Items||861,365||856,365||851,365|
|Basic EPS||$ 6.42||$ 7.15||$ 8.06|
|Basic EPS Excl. Extra Items|
|Weighted Avg. Basic Shares Out.|
|Stock Price ? UPS info|
|Diluted EPS Excl. Extra Items|
|Weighted Avg. Diluted Shares Out.|
|Normalized Basic EPS|
|Normalized Diluted EPS|
|Dividends per share %?|
|Dividends per Share?||3.8||4.04||4.4|
|Payout Ratio % (dividend/NI)|
|EBIT||$ 59,768.52||$ 64,533.60||$ 73,263.36|
|Effective Tax Rate %||20.4%||20.4%||20.4%|
Security value estimated using the Dividend Growth Model and P/E estimates
Since 2014, it is evident that UPS’s dividend per share has been increasing. In 2014, the value of dividend per share was $2.68, which increased to $2.92, $3.12, $3.32, and $3.64 in 2015, 2016, 2017, and 2018 respectively. Therefore, a forecast shows that the dividend per share is expected to grow in the new three financial years, that is; $3.8, 4.04, and $4.4 in 2019, 2020, and 2021 respectively.
Analysis of the firm’s market capitalization
UPS has a high cash coverage, which insinuates that despite high levels of debt, it utilizes its borrowed finance effectively to generate cash. This is what is expected from large companies like UPS. As a result, investors tend to gravitate to its stocks because of their liquidity and stability. However, before buying UPS, factors like valuation should be considered.
Capital expenditure is currently high in the automobile industry given the need to produce energy efficient engines and electric cars to curb the rate of carbon dioxide emission in the atmosphere. UPSs also recorded low profitability given that it is currently involved in extensive investments. The preferred ROE is normally 15-20% but UPS’s ROE is not good because it is over 70%, which falls outside the required interval. Finally, the Economic value added of UPS is positive, which insinuates that the company is a worthwhile investment. Therefore, it is advisable for investors to invest in UPS because when its investments on the production of energy efficient engines and electric cars are complete there will be enormous returns. In addition, the company’s dividend policy to pay 25% of profit to investors is a guarantee that the investors will receive returns based on profit.
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Jarrow, R. A., & Chatterjea, A. (2013). Introduction to derivative securities, financial markets, and risk management. s.l.: W w Norton.
Marinšek, D., Pahor, M., Mramor, D., & Luštrik, R. (2016). Do European Firms Behave as if they Converge toward a Target Capital Structure? Journal of International Financial Management & Accounting, 27(2), 97–125. https://doi-org.proxy-library.ashford.edu/10.1111/jifm.12046
Samonas, M. (2015). Financial forecasting, analysis, and modeling: a framework for long-term forecasting. http://www.books24x7.com/marc.asp?bookid=80781.
Sengupta, R., & Hogue, E. W. (2014). The Effect of Risk and Organizational Structures on Bank Capital Ratios. Economic Review (01612387), 5–22. Retrieved from http://library.ashford.edu/EzProxy.aspx?url=http://search.ebscohost.com.proxy-library.ashford.edu/login.aspx?direct=true&AuthType=ip,cpid&custid=s8856897&db=a9h&AN=100950557&site=ehost-live
Tennent, J. (2014). The Economist Guide to Financial Management: Principles and practice. New York, PublicAffairs. http://public.eblib.com/choice/publicfullrecord.aspx?p=1381916.Wahlen, J. M., Baginski, S. P., & Bradshaw, M. T. (2018). Financial reporting, financial statement analysis, and valuation: A strategic perspective.
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