Financial Ratio Analysis Of United Parcel Serviceba 620 Managerial F ✓ Solved
Financial Ratio Analysis of United Parcel Service BA 620 – Managerial Finance Group Project (Part III) Group J With Dr. Sunny Onyiri Campbellsville University Praneeth Kolar 574526 John Milton Thota 581459 Thirupathireddy Badikela 581190 Sandeep Bathoju 578592 Venkat Gogu 574345 The report of financial analysis of United Parcel Services (UPS Company) as compared to the industry average The primary Standard Industrial Classification (SIC) code: 4215 Industry: Courier services except by air Financial ratios analysis table Financial ratio Industry averages Company’s ratios Current ratio 1..19 Debt ratio 0..99 Gross profit margin 12.9% 22.6% Times interest earned .63 Accounts receivable turnover Inventory turnover Return on Sales 6.1% 3% Asset Turnover Return on Assets 4.8% 2.2 Financial Leverage 0..29 Return on Equity 10.7% 67.8% Source: United Parcel Service, Inc. financial benchmarking. (n.d.).
The report of financial analysis Introduction The comparison between the company's financial position to that of the industry is an essential measurement of the competitiveness and ranking of the company within the industry. When the company's financial ratios are in good condition as compared to the average of the industry, then the performance of the industry is said to be higher, unlike when the financial performance is poor compared to the industry average. This report provides a comprehensive financial analysis of United Parcel Services (UPS) Company. Comparison of the profitability of the company to that of the industry Based on the gross margin comparison, the company that is 22.6 as compared to 12.9 of the industry's average explains that the company gross profit generated by the company is better than that of its peers because it is higher compared to that of peers.
Although the company gross margin is high as compared to its peers, the efficiency in which it turns the sales into profit is lowers as compared to the average of the industry, which requires appropriate measures such as reducing the cost of sales to ensure that the profit increases for the overall profit level as compared to that of its competitors. Returns on sales for the company is 3% compared to the industry average of 6.1%. Comparison of company’s liquidity to that of industry In terms of liquidity ratios, the company’s performance is worse than its competitors in the industry. The current ratio for the company is 1.19 that is lower than the industry average that is 1.48. with a lower current ratio, the company may find it challenging to meet short-term obligations, putting itself in complex financial performance and giving the industry competitors competitive advantage.
It is measured in terms of how the relationship between the assets owned by the company and the liability and the lower ratio indicates that the liability of the company is higher than its assets which makes it hard for the company to pay its short-term obligation hence having in financial difficulties as compared to its competitors that have a higher current ratio. Comparison of company’s solvency position to that of the industry The solvency ratio is a financial analysis tool that measures how best the company's cash flow can be used to cover the company's long-term debt. Solvency position is measured in terms of the debt ratio, debt-to-equity ratio and interest coverage ratio. In terms of the debt ratio, the higher the ratio, the poor the position of the company's performance because the company's total liability will be higher than its assets, making it hard for the company to cater for the most needed expenses.
The debt ratio for the company is 0.99 as compared to 0.52 of the industry’s average (Trucking and courier services, except air: Industry financial ratios benchmarking, n.d.). Therefore, it indicates that the company’s liabilities are higher than its current assets compared to the ratio of the competitors, making it hard for the company to pay for its short-term expenses. Debt to equity ratio is a financial analysis used to evaluate the company's leverage position that measures the company's financial part by dividing the company's total liability to the shareholder’s equity. The lower the debt-equity ratio, the higher the financial position and the higher ratio, the worse. The debt-equity ratio for the company is 92.29 as compared to the average industry ratio of 0.87 that indicates that the company owners’ equity is lower as compared to the total liability of the company hence putting the company in a difficult financial position as compared to the competitors with a lower debt-equity ratio because they can easily cover for their liabilities by the use of its shareholder's equity.
The interest coverage ratio evaluates how easily the company can pay its interest on the outstanding debts used for its business operation. On interest coverage ratio, the company has a lower rate compared to the industry average where the company has 3.63 as compared to 15 of the industry position. Therefore, the company has a lower interest coverage rate, indicating that it has difficulty paying its interest on the outstanding debts compared to most of its competitors in the industry, hence putting itself in a worse financial position than that of its competitors. Comparison of the company’s efficiency to that of the industry average Financial efficiency describes how best the company converts the resources into profitability for the company's benefit in terms of financial position.
It includes ratios such as return on assets, equity, asset turnover days and return on sales. In terms of return on assets, the company is in a worse financial position than competitors in the industry because it is 2.2% compared to 4.8% of the industry. This means that the company rate of converting assets into profits is lower than that of its competitors. The return on equity for the company is in a better position than the competitors compared to the peers in the industry because it's 68.7% compared to the industry rate of 10.7%. It indicates that the company converts the equity ratio into profits easier as compared to its competitors.
On asset turnover days, the company takes 263 days compared to the average industry of 283, which indicates that the company takes few days to convert assets into profit hence giving it a competitive advantage over the competitors in the industry. In return on sales, the company has 3% compared to the sector's average of 6.1. the differences indicate that the company the rate of converting the total sales into profit for the company is lower than most of its peers in the industry hence giving the company difficulty in managing its finance for the daily operations. Conclusion The company operates in a worse position than its peers in the industry in terms of liquidity ratios because most of its liquidity ratios are poor financially.
A lower current ratio indicates that the company may find it challenging to meet short-term obligations, hence putting itself in complex financial performance, giving the competitors within the industry a competitive advantage. The debt ratio for the company is 0.99 as compared to 0.52 of the industry’s average. Therefore, it indicates that the company’s liabilities are higher than its current assets compared to the ratio of the competitors, making it hard for the company to pay for its short-term expenses. The company has a lower interest coverage rate, indicating that it has difficulty paying its interest on the outstanding debts compared to most of its competitors in the industry, hence putting itself in a worse financial position than that of its competitors.
The company’s liabilities are higher than its current assets compared to the ratio of the competitors, making it hard for the company to pay for its short-term expenses. References Trucking and courier services, except air: Industry financial ratios benchmarking. (n.d.). Financial Analysis Software | Financial Analysis | Financial Statements | Current Ratio | Financial Ratio | ReadyRatios.com. United Parcel Service, Inc. financial benchmarking. (n.d.). Financial Analysis Software | Financial Analysis | Financial Statements | Current Ratio | Financial Ratio | ReadyRatios.com.
Financial Ratio Analysis of United Parcel Service BA 620 – Managerial Finance Group Project (Part II) Group J With Dr. Sunny Onyiri Campbellsville University Praneeth Kolar 574526 John Milton Thota 581459 Thirupathireddy Badikela 581190 Sandeep Bathoju 578592 Venkat Gogu 574345 Financial Ratio Analysis of UPS Company United Parcel Services (UPS) Company Ratio Formula Debt ratio Total Liabilities/Total Assets 54564/57,857= 0.,979/50,016= 0.939 Gross profit margin Revenue-COG/Revenue (74,094-66,296)/74,094= 0.,861-64,837)/ 71,861= 0.098 Free cash flow Operating cash flow - capital expenditure 7,,380) = 14,,,283) = 741 Times interest earned EBIT/Interest Expenses 7,798/ (653) = -11.,024/ (605) = -11.61 Accounts receivable turnover Total Turnover/ Avg Receivables Inventory turnover COGS/Avg Inventory 66,296/ 64,837/ B.
Prepare a DuPont Analysis of ROE for two years, including computations of United Parcel Services (UPS) Company Ratio Formula Return on Sales Operating Profit/Net Sales 7,798 / 74,094= 10.52% 7,024 /71,861 = 9.8% Asset Turnover Sales/Assets 74,094/57,857= 1.,861/50,016= 1.44 Return on Assets Net income/Average Assets 4,440/ 57,857= 0.077= 7.7% 4,791/ 50,016= 0.096=9.6% Financial Leverage Debt/Equity 54564/ 3,283= 16.,979/ 3,037= 15.47 Return on Equity net income/ shareholders' equity 4,440/3,283= 1.,791/3,037= 1.58 DuPont Return on sales*Asset turnover*Financial leverage 0.1052*1.28*16.62= 2..098*1.44* 15.47= 2.18 Report Introduction Financial management and planning are critical to the existence of any organization; a company's financial performance must be assessed on a regular basis in order to ensure that it is in good shape.
Companies' financial strength and weaknesses are determined by using ratios, and policies to improve financial efficiency are developed in response to this information. This type of ratio can also be used by stakeholders to measure the financial performance of an organization and to analyze the effectiveness of the management team in charge of the business's financial operations. This report gives an evaluation of United Parcel Services' financial ratio analysis, which is based on financial ratios (UPS). Also discussed is whether the profitability, efficiency, liquidity, and solvency of the company are increasing or degrading over the period under review. Finally, the report will make recommendations to the organization on how to improve the ratios that are showing signs of trouble.
Data Analysis and Discussion The information gathered from United Parcel Services (UPS Company) income statement and balance sheet was studied in order to determine the company's profitability, efficiency, liquidity, and solvency. On the income statement, it can be seen that some profits have been earned. When comparing the balance sheet from 2018 to 2019, the total liabilities are less than the total assets, indicating that there are no significant difficulties with the company's solvency. Company's profitability, efficiency, liquidity, and solvency Profitability This is a measure of a company's overall success in the industry, according to Forbes. It is possible to estimate the profitability of a corporation by utilizing the profitability ratio.
The profitability ratio examines how much profit is produced in relation to sales, net assets, and net worth, among other things. Approximately 74,094 million dollars in revenue was generated by United Parcel Services (UPS) in 2019, while 71,861 million dollars was generated in 2018. In 2018, the company's gross profit margin was 9.8 percent, and it will be 10.5 percent in 2019. In 2018, the total assets of the company were 57,857, and in 2019, they were 50,016. Considering revenue vs gross profit and total assets for the year 2018, UPS was a profitable company (Coulon, 2020).
Efficiency The inventories and receivables of a firm are used to judge whether or not a company is a worthwhile investment or not. Keeping inventory levels low will help the company remain efficient because it signifies that the inventory is in line with the company's revenues. Both in 2018 and 2019, there is no information available on the UPS company's inventory. Because of a lack of this information, it is difficult to assess the effectiveness of the company. Liquidity: Defining liquidity as the ability to meet short-term financial obligations is a difficult task.
The liquidity ratio measures the company's capacity to meet its debt repayment obligations. When comparing a company's liquid assets, which are assets that can be converted into cash, this is calculated. Unilever's short-term debt stood at 15,413 million dollars in 2019, up to 14,087 million dollars in 2018. Due to the fact that short debt amounts are less than revenue, the company has the ability to satisfy its short-term debt obligations, indicating that its liquidity levels are adequate. This also demonstrates an improvement in the company's liquidity (Coulon, 2020).
Solvency: The ability of a corporation to make long-term debt payments, including interest, is referred to as its solvency. The long-term debt of the UPS company was 54,574 dollars in 2019, compared to 46979 dollars in 2018. Taking into consideration that net worth equals assets minus liabilities. In 2018, the company's net worth was 3,021 dollars, and in 2019, it was 3,283 dollars. Because the long-term debt levels are smaller than the company's net value, the ability of the company to satisfy its long-term debt obligations suggests that the company is economically solvent.
The company's solvency is also improving, as can be seen in the financial statements (Coulon, 2020). Financial Performance An activity ratio is calculated in order to measure the financial success of a company as well as the use of the assets that the organization possesses. The Activity ratio can be used to determine the rate at which a company's asset and liabilities accounts are converted into sales revenue. As a result, the activity ratio is a method of evaluating the financial performance of a company or organization (Simon, 2018). A ratio of inventory turnover, receivable turnover, and total asset turnover is used to determine how much activity is occurring in inventory, accounts receivable, and accounts payable, respectively.
Furthermore, activity ratios can be used to determine the efficiency of a corporation in several areas such as expenditures and inventory management. It is possible to evaluate the efficiency with which a corporation manages its entire assets by examining these ratios. Conclusion This study has offered an examination of the financial ratios of United Parcel Services, which has been evaluated (UPS). The goal was to establish whether the company's profitability, efficiency, liquidity, and solvency were improving or deteriorating, and to make recommendations for improvement. When comparing the financial results of 2018 and 2019, it appears that the company's profitability, efficiency, liquidity, and solvency are all improving.
References Coulon, Y. (2020). Key liquidity and solvency ratios. Rational Investing with Ratios, 47-62. doi:10.1007/_3 Coulon, Y. (2020). Profitability and performance ratios. Rational Investing with Ratios, 85-104. doi:10.1007/_5 Simon, G. (2018).
Part V liquidity and leverage, 23 the leverage ratio. Gleeson on the International Regulation of Banking. doi:10.1093/law/.003.0023
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Introduction
Financial ratio analysis is a vital tool in evaluating the performance and stability of a company within its industry. This report provides a comprehensive analysis of United Parcel Service (UPS) based on various financial ratios, comparing its performance with the industry averages. By using key financial ratios, we can assess the profitability, liquidity, solvency, and efficiency of UPS.
The key ratios analyzed include the current ratio, debt ratio, gross profit margin, times interest earned, accounts receivable turnover, inventory turnover, return on sales, return on assets, asset turnover, financial leverage, and return on equity. The focus of this report is to identify the strengths and weaknesses of UPS relative to its industry peers and make recommendations based on the findings (Coulon, 2020; Simon, 2018).
Profitability Comparison
Gross Profit Margin: UPS has a gross profit margin of 22.6%, significantly higher than the industry average of 12.9% (ReadyRatios, n.d.). This indicates that UPS is effectively managing its cost of goods sold and generating a higher profit per dollar of sales compared to its peers.
Return on Sales: However, when it comes to the return on sales, UPS stands at 3%, which is lower than the industry average of 6.1%. This discrepancy suggests that despite a strong gross profit margin, UPS may have higher operating expenses relative to sales, which could impact overall profitability (Trucking and Courier Services, n.d.).
Liquidity Position
Current Ratio: The current ratio of UPS is 1.19, which is below the industry average of 1.48. This lower ratio suggests that UPS might struggle to cover its short-term liabilities with its short-term assets, posing a potential risk to its liquidity position (Coulon, 2020). A healthy current ratio generally falls between 1.2 and 2, indicating that UPS may need to improve its working capital management.
Solvency Position
Debt Ratio: UPS has a debt ratio of 0.99, which is significantly higher than the industry average of 0.52. This implies that UPS is highly leveraged, with a significant portion of its assets financed through debt. The high debt ratio raises concerns about the company's financial stability and its ability to meet long-term obligations (Coulon, 2020).
Times Interest Earned: The interest coverage ratio (times interest earned) for UPS is 3.63, well below the industry’s average of 15. This ratio indicates that UPS may have difficulty meeting its interest obligations, and the lower value raises red flags regarding financial strength (Trucking and Courier Services, n.d.).
Efficiency Comparison
Return on Assets: The return on assets (ROA) for UPS is 2.2%, which is less favorable than the industry average of 4.8%. This indicates that the company is less efficient in utilizing its assets to generate profit compared to its competitors (Coulon, 2020).
Asset Turnover: On the contrary, UPS's asset turnover ratio shows that it can turn its assets into sales quicker than the industry average by taking only 263 days compared to the industry's 283 days. This reflects positively on UPS's efficiency in managing its assets despite the lower ROA (Simon, 2018).
Financial Leverage
Return on Equity: UPS exhibits a high return on equity (ROE) of 67.8%, compared to the industry average of 10.7%. This impressive ratio indicates that UPS is successfully utilizing its equity to generate significant returns (Trucking and Courier Services, n.d.). Nonetheless, this could also reflect high leveraging, as high debt levels can inflate the ROE figure.
Recommendations
1. Improving Operating Efficiency: While UPS has a strong gross profit margin, it must work on reducing operating expenses to improve its return on sales. Identifying areas for cost reductions, such as streamlining operations and investing in technology for better supply chain management, could aid in this endeavor.
2. Enhancing Liquidity: The current ratio of UPS indicates potential liquidity issues. It's recommended that UPS analyze its liabilities and strive to maintain a more conservative capital structure to ensure better liquidity. This might involve restructuring short-term debt or improving receivables collection, thereby enhancing available working capital.
3. Debt Management Strategy: Given the high debt ratio of UPS, a strategy to manage and reduce debt obligations is paramount. Increasing equity financing or retaining more earnings could lower debt levels, which would enhance financial stability and flexibility in operations (Coulon, 2020).
Conclusion
Overall, the financial ratio analysis of UPS shows a mixed picture. It performs well in profitability in terms of gross margins and return on equity, but it exhibits weaknesses in liquidity, solvency, and operational efficiency compared to the industry averages. To enhance its competitive position, UPS must address these weaknesses through targeted action plans focusing on improving operational efficiency, managing debt, and maintaining healthier liquidity ratios.
By addressing these challenges and leveraging its strengths effectively, UPS can position itself for sustainable growth and enhanced financial performance in the competitive logistics industry.
References
1. Coulon, Y. (2020). Key liquidity and solvency ratios. Rational Investing with Ratios, 47-62. doi:10.1007/_3.
2. Coulon, Y. (2020). Profitability and performance ratios. Rational Investing with Ratios, 85-104. doi:10.1007/_5.
3. ReadyRatios. (n.d.). Financial Analysis Software and Financial Ratios. Retrieved from https://www.readyratios.com.
4. Simon, G. (2018). Part V liquidity and leverage, 23. In Gleeson on the International Regulation of Banking. doi:10.1093/law/.003.0023.
5. Trucking and Courier Services, Except Air: Industry Financial Ratios Benchmarking. (n.d.). Retrieved from https://www.industrybenchmarking.com.
6. Investopedia. (2023). Understanding Financial Ratios. Retrieved from https://www.investopedia.com/terms/f/financial-ratios.asp.
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10. Tennent, T. (2019). Metrics and Analysis: Driving Financial Performance. Journal of Business Strategy, 40(2), 54-62. doi:10.1108/JBS-05-2018-0053.