FedEx as With Many Firms, FedEx Corporation Research Proposal

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¶ … FedEx

As with many firms, FedEx Corporation struggled during fiscal 2008 and these struggles have continued into the just-concluded fiscal 2009. Because the company's clientele spans the length and breadth of the world economy, and the U.S. economy in particular, it is considered to be an economic bellwether firm. Thus, its struggles are for the most part in line with those of the broader economy. The firm does have its own specific issues, however. FedEx is highly dependent, for example, on the cost of jet fuel. Although they have attempted to offset some of the fluctuations in the price of jet fuel with fuel surcharges, these costs still affect the volume of business. The high degree of perishability with respect to the capacity of FedEx's aircraft makes cost management in the face of declining volumes a critical short-term business issue for the firm. However, there are also long-term business issues that have been raised by the company's recent troubles. The air freight business is, in essence, a luxury. As such, it is subject to considerable downward volume pressure in the face of consistently high costs. FedEx was able to build its business in an era when fuel prices, although by no means stable, were at levels at which they could offer their service at an affordable price. As we move past peak oil, the ongoing ability of FedEx to offer their core service at affordable prices is a major challenge for the business. To offset this risk, they have undertaken a diversification strategy, moving into ancillary businesses such as LTL (less-than-truckload) freight, customs services, ground shipping and office services.

Background

FedEx company's financials over the past couple of years have, predictably, worsened. The company still performs well by most measures. They are still profitable, and they are liquid. Their debt situation is perfectly reasonable for their line of business and has in fact improved over the past year. A ratio analysis reveals areas of short-term weakness, but raises no alarm bells with respect to the organization's ability to continue successfully in the future.

Yet the future of FedEx depends on the company's ability to adapt to new economic circumstances. This is not an easy task. The leadership of the company remains the same. Company founder Fred Smith is still the Chairman and CEO. Most of the firm's leadership is comprised of long-serving staffers. By most accounts, FedEx is a conservative company. They also, however, have a reputation as a grounded company. Their comments with respect to their economic expectations are highly regarded on Wall Street for their honesty. FedEx are straight-shooters and therefore must understand that for the first time since the company was founded, there is a genuine shift in the economic landscape.

This is not the first time that FedEx has faced volatile oil prices. The oil crisis of the early 1970s occurred shortly after the company began. At that time, however, the novelty of the idea and the lack of competition helped to get the company through. Today, competition exists not only in the form of rivals such as UPS, DHL and TNT, but also in the form of electronic communications and extensive ground shipping networks, which have been bolstered by the rapid proliferation of JIT and other similar inventory systems.

Problem Statement

The problem for FedEx is to determine the best course of action for the company's future. The company's financial data hold the key to making this determination. If it is reasonable to assume that the company will need to restructure itself in some ways to accommodate for the shift in the macroeconomic environment, then the financials will help to determine the extent of this need. They will also determine just how capable the company is of executing such a transition. Lastly, the financials will help set goals and guidelines -- they will provide clues to as what precisely such a transition should achieve, and benchmarks against which the transition would be measured. These are the problems that will be solved through this financial analysis.

Purpose

The purpose of this dissertation is to use the techniques of financial statement analysis to determine the future direction of FedEx. These techniques systematically break down the financial statements to determine the company's accounting policies, the degree to which management is bound by these policies, the recent changes that the company has made in its accounting policies, the quality of the firm's disclosure, and to identify red flags (Palepu, no date).

The ultimate purpose of these five steps is to undo the impacts of distortions on financial statements. These distortions arise from the accrual accounting system and the accounting guidelines that are set forth by governing bodies such as the Financial Accounting Standards Board. These distortions create a difference between the company as reflected on the financial statements and the reality of the company's operations. Thus, after these steps have been undertaken, the result will be a more clear understanding of FedEx's actual operations.

Once this has been established, these operating results can be properly evaluated. The goal of this evaluation will be to gain a sense of the track that the company has been on for the past few years and to make an assessment with respect to the future prospects of FedEx. One of the most important purposes of this dissertation will be to determine the extent to which the company's recent financial performance is a function of the global economic downturn and the extent to which it is the product of managerial decision-making.

Importance of the Study to Leadership

FedEx Corporation is at an important juncture in its existence. For the first time, there is cause for concern with regards to the viability of the firm's business model over the long run. The cost of jet fuel, the firm's largest and most volatile cost input, is putting pressure on the company's ability to compete profitably. It is now in the hands of FedEx leadership to demonstrate that they are capable of adapting their business model for the coming years and decades.

The firm faces a wide range of competitors, both direct and indirect. Even within the context of direct competitors, there are a number of different operating structures. The number one competitor, UPS, is more reliant on ground transportation than is FedEx. Other major competitors such as DHL, USPS and Purolator (in Canada) are operated by government-run postal services and thus have certain advantages, in particular with respect to pricing. These challenges mean that FedEx management will need to show even stronger leadership in the future than they have in the past.

This in-depth form of financial statement analysis reveals much about a company's leadership. By determining whether or not the company's financial statements reflect its business reality, it is possible to understand fully the capabilities of the current management team. It is also possible then to assess that team's ability to move the company forward in this trying environment.

Nature of the Study

This dissertation will consist of a complete financial statement analysis of FedEx Corporation. The focus will be placed on the firm's three major financial statements -- the Income Statement, the Balance Sheet and the Statement of Cash Flows. These statements will be analyzed for the past three years. There are many ways to analyze accounting statements, and each technique will be utilized. A ratio analysis can reveal how the company has performed in relation to both prior years and to its competitors. The former is critical because it can reveal two different things. It can reveal broad trends in the company's performance, with respect to liquidity, leverage, margins and other key metrics. It can also reveal shifts in accounting policy, as certain ratios may have changed substantially year-over-year. The latter is also important because it helps to put the company's operations in context. In the case of FedEx, it should be noted that some major competitors are government-owned and therefore may not have easily-accessible financial statements for comparability. Many remaining competitors operate substantially different business models. Despite these caveats, there is value in understand how effective the FedEx model is vis-a-vis the models utilized by firms in the same broad industry.

The ratio analysis will be complemented by a number of other techniques. A common-size analysis can reveal trends in the company's figures. Another important technique is to analyze the notes in the financial statements. These notes encapsulate much of the changes the company has made with respect to their accounting policies. In particular, year-over-year differences are often subject to disclosure, allowing for the financial analysis to account for the impacts of these changes. With these different techniques and an understanding of the firm's industry and different businesses, it will be possible to achieve the goals of the financial statement analysis.

Research Questions/Hypothesis

The purpose of this dissertation is to understand the financial situation facing FedEx. One of the key questions to be answered is whether or not the company's recent performance can be explained entirely as an outcome of… [END OF PREVIEW]

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FedEx as With Many Firms, FedEx Corporation.  (2009, July 13).  Retrieved December 13, 2019, from https://www.essaytown.com/subjects/paper/fedex-firms-corporation/9493

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"FedEx as With Many Firms, FedEx Corporation."  Essaytown.com.  July 13, 2009.  Accessed December 13, 2019.
https://www.essaytown.com/subjects/paper/fedex-firms-corporation/9493.