Accounting and Financial Management Research Proposal

Pages: 9 (3140 words)  ·  Style: Harvard  ·  Bibliography Sources: 6  ·  File: .docx  ·  Level: College Senior  ·  Topic: Business

Accounting - FedEx and UPS

The two companies I will be analyzing are FedEx and UPS.

Formulae are attached as an Appendix. Financials are taken from MSN Moneycentral and reflect adjustments and reclassifications. Historical share price data pulled from Yahoo!

Metric

FedEx

Working Capital

Current Ratio

Quick Ratio b)

Metric

FedEx

ROE c)

Metric

FedEx

ROA

Net Margin

Asset Turn d)

Metric

FedEx

Price

P/E e)

Metric

FedEx

Receivables turn

Days' sales a/R f)

Metric

FedEx

Debt ratio

D/E ratio g) Both FedEx and UPS were liquid companies at the time. Both had current ratios over 1 and strong quick ratios as well. UPS had far more working capital than did FedEx. However, we can see that FedEx's liquidity improved over the year, while UPS' liquidity grew worse. Still, at the end of the year UPS's liquidity was nonetheless stronger than that of FedEx, despite the trends.

Buy full Download Microsoft Word File paper
for $19.77
A h) Both firms are comfortably profitable. UPS, however, is clearly the more profitable of the two. UPS earns greater returns on both equity and assets. UPS also enjoys greater margins. As a result, the market has rewarded UPS with a higher multiple. UPS has quickened its receivables turn, improving profitability in the face of declining margins. FedEx recorded improvements in all profitability metrics over the year, including returns. The company outperformed UPS with respect to receivables turn. Overall, though, both firms recorded strong profitability during this period.

Part II.

Research Proposal on Accounting and Financial Management Assignment

The performance of FedEx over this period is strong. In terms of the raw numbers, FedEx is a financially strong, liquid company. Almost all of their key metrics improved over the time period studied. With respect to working capital management, FedEx demonstrated good use of working capital. They were able to improve their accounts receivable turnover during this period, and build their stock of working capital. It could be argued that the working capital in 2005 was insufficient for an organization of its size, especially given the substantial amount of working capital at UPS. However, the gap between the working capital of two firms closed considerably in 2006.

UPS was also strong over this time frame. They had exception liquidity and strong profitability. In most measure, they outperformed FedEx. UPS made improvements to their weakest metric, the accounts receivable turnover. This in turn reduced their working capital. UPS did, however, improve their margins.

It appears that part of UPS' impressive liquidity figures can be traced to their slow rate of receivables turnover. To UPS' credit, they were able to recognize that they were not collecting their receivables quickly enough, and took steps to rectify that problem. As a result, they were able to bring their accounts receivables turnover down by 4.5 days over the course of a year. This in turn helped them to reduce their working capital, which was needlessly high in 2005.

Both companies are highly profitable. FedEx's return on equity improved slightly over the period. Despite this improvement, FedEx's ROE lagged that of UPS. The latter company was able to improve its ROE by two percentage points. Both firms also enjoy a strong return on assets. ROA is a significant measure in the industry because transportation firms such as these typically have high fixed costs. UPS was able to make better use of its assets over the two years. Both firms were able to improve their ROAs during this time period, however.

Of note are the respective margins of the two companies. The net margin for UPS offers them some flexibility, but for FedEx, their net margin seems tight. The industry is characterized by high fixed costs and intense competition, so for a company to operate so close to the line is risky. FedEx did improve net margins in 2006, marginally. The implications of this for FedEx vis-a-vis UPS is that FedEx needs to operate closer to capacity.

Because they have tighter margins, they need to earn profit on volume. This, in part, means an acute focus on capacity maximization. Conversely, UPS has some leeway built into their operations. They extract higher margins, which gives them more operational flexibility.

FedEx does appear to have success, however, in doing the volumes necessary to overcome the difference in margin. In terms of earnings per share, FedEx is the stronger of the two firms, although both have excellent EPS numbers. These high EPS numbers have resulted in relatively conservative valuations for both companies. FedEx has a P/E ratio both years between 18-19 times. UPS has a multiple just slightly higher. The high stock prices for each of these companies during the time period studies are a reflection then of high earnings, not just Wall Street enthusiasm.

Overall, FedEx improved almost all of its numbers in 2006, compared with 2005. They improved both profitability and liquidity. However, it is interesting to note that the market did not reward the company with a higher valuation. Instead, the valuation held almost even. One would normally expect a company that improves its performance significantly over the course of a year, as FedEx did in 2006, to receive a higher valuation from the market.

Indeed, market valuation reflected the performance of UPS over the 2006-year. While UPS did improve its receivables turnover, it did not improve too many of its other metrics. The company's liquidity situation worsened, as did its margin. So while UPS earned a greater return on equity and a greater return on assets, the company's stock was given a lower valuation by Wall Street. This is roughly in accordance with the firm's performance. It accurately reflects the situation at UPS, which is that the company remained strong, but had a year in which many key performance metrics worsened.

The P/E of UPS therefore slipped closer to that of FedEx. We can see similar movement of other metrics. For example, the disparity between the working capital of the two companies shrunk considerably over the year, as did the margins and liquidity ratios. As a result of the two companies becoming closer on many key metrics, Wall Street began to value the companies more similarly than it had the year previous.

While many other metrics of these two companies grew more similar, one did not. The capital structure of the two firms seemed to reverse. Both companies have, approximately, 50/50 debt and equity in their capital structure. In 2005, FedEx had a debt ratio of 53%, and this was reduced to 49.2% in 2006. This is consistent with the company's improved financial performance in 2006. Earnings increased significantly for FedEx in 2006. Given the company's dividend policy (a 2 cent increase per share per year, every year), 2006 contributed significant retained earnings. This tilts the capital structure in favor of equity. As a result of their strong earnings in 2006, FedEx was able to reduce its debt load.

UPS, however, had a different experience. In 2005, UPS had a debt ratio of 51.7%. This increased in 2006 to 53.4%. Recall that many of the key metrics for UPS deteriorated in 2006. Earnings were still strong, but other performance measures were weaker. As a result, UPS contributed less to retained earnings than its rival, and had to take on more debt. As a result, UPS shifted its capital structure towards debt in 2006, moving in the opposite direction.

Indeed, the balance of all these metrics is that FedEx made significant improvements in 2006 while UPS was somewhat stagnant. Both firms were successful, however. Indeed, on many measure UPS was the superior performer. That said, with respect to trends, UPS appears to be on a downward trend while FedEx appears to be on an upward trend.

Part III.

In addition to the financial factors discussed above, there are many non-financial factors that must be taken into consideration. While both of these firms are in the courier business and are direct competitors, they each have different strengths. These strengths should be taken into account when evaluating performance, since they impact certain areas of the income statement and balance sheet.

FedEx, having built its business on overnight, has a higher fixed cost structure. UPS began as a ground operator. This means that it has fewer airplanes and more trucks than FedEx. It also derives the bulk of its business on the ground side, whereas overnight remains the bread-and-butter for FedEx. This has many implications. FedEx, for example, will have a higher fixed cost structure than UPS, a function of operating airplanes. Therefore, FedEx capacity is more "fixed" than is UPS capacity. If business slows, UPS can pull trucks from service; with airplanes that luxury does not exist, they simply fly half-empty. As a result, FedEx is forced into a lower-margin, higher-volume model. This is doubly so when we consider that FedEx must steal market share from the stronger competitor (UPS) in ground. This accounts for the lower margins that FedEx operates with. The success of this strategy can be measured in market share points and EPS. So the competitive environment is a major factor that should be considered. These two firms… [END OF PREVIEW] . . . READ MORE

Two Ordering Options:

?
Which Option Should I Choose?
1.  Buy full paper (9 pages)Download Microsoft Word File

Download the perfectly formatted MS Word file!

- or -

2.  Write a NEW paper for me!✍🏻

We'll follow your exact instructions!
Chat with the writer 24/7.

Financial Management Differentiating Between the Different Users Essay


Management Accounting This Memorandum Serves Essay


Financial Management: Weaknesses of Ratio Analysis Essay


Financial Management Is an Important Managerial Function Term Paper


Accounting for That Quite Likely M Ay Research Paper


View 200+ other related papers  >>

How to Cite "Accounting and Financial Management" Research Proposal in a Bibliography:

APA Style

Accounting and Financial Management.  (2009, March 11).  Retrieved September 19, 2020, from https://www.essaytown.com/subjects/paper/accounting-financial-management/1361467

MLA Format

"Accounting and Financial Management."  11 March 2009.  Web.  19 September 2020. <https://www.essaytown.com/subjects/paper/accounting-financial-management/1361467>.

Chicago Style

"Accounting and Financial Management."  Essaytown.com.  March 11, 2009.  Accessed September 19, 2020.
https://www.essaytown.com/subjects/paper/accounting-financial-management/1361467.