Financial Project Thesis

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Financial Project

FedEx (NYSE: FDX) is a healthy company, despite recent challenges relating to steep revenue declines and sharp increases in key inputs such as fuel and transportation costs . The company has maintained a strong balance sheet as the result of debt restructuring in the past year. The main cause for concern with FedEx is that the firm's revenues are declining faster than the firm's cost structure. This means that despite the debt restructuring that has improved FedEx's liquidity ratios (see Appendix 2), the company's Z-score has decreased (see Appendix 3).

However, there is reason to be optimistic about the financial future of FedEx. The company's weakness is mainly the result of a weak economy, which is viewed to be highly correlated to FedEx financial performance. The firm has responded to this challenge with new austerity measures that it hopes will offset revenue declines in the short-term and improve performance in the long-term (see Appendix 4).

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Looking forward, FedEx is likely to see either financial stability or slight decline in 2010. The company is still in a declining revenue environment, as the global economy is still struggling. A rebound in the global economy may not come until well into 2010 or even beyond. Not only will this be reflected in a weak income statement, but it will begin to show on the balance sheet as well. The financial restructuring of 2009 allowed FedEx to improve its liquidity by shifting some of its debt from short-term to long-term. However, its ability to do this year after year is minimal -- eventually the uptick in liabilities will arrive in the form of current liabilities. Thus, FedEx is likely to see its financial position deteriorate further in fiscal 2010. The Z-score, however, is likely to improve as the stock has already begun to rebound, well above the levels found at the end of the last fiscal year.

Appendix 1: Horizontal and Vertical Analysis

Horizontal Income Statement

2009

2008

2007

97%

23%

63%

63%

72%

31%

53%

63%

97%

Thesis on Financial Project Assignment

21%

63%

48%

74%

5%

56%

5%

55%

5%

56%

Horizontal Balance Sheet

2009

2008

98%

76%

95%

84%

98%

96%

94%

95%

Vertical Income Statement

2009

2008

2007

38.78%

37.42%

39.02%

12.77%

12.21%

11.30%

6.84%

6.43%

6.65%

5.56%

5.13%

4.95%

10.74%

11.62%

9.73%

5.35%

5.45%

5.54%

3.39%

2.32%

0.00%

14.46%

13.95%

13.50%

97.90%

94.53%

90.70%

2.10%

5.47%

9.30%

-0.24%

-0.26%

-0.39%

0.07%

0.12%

0.24%

-0.03%

-0.01%

-0.02%

-0.20%

-0.16%

-0.17%

1.91%

5.31%

9.13%

1.63%

2.35%

3.40%

0.28%

2.96%

5.72%

Vertical Balance Sheet

2009

2008

29.35%

28.26%

55.34%

52.58%

15.31%

19.16%

18.66%

20.94%

7.96%

5.88%

17.18%

16.51%

43.80%

43.33%

56.20%

56.67%

The horizontal analysis for FedEx reveals the firm's difficult year in fiscal 2009. While the company saw a revenue increase of 8% in 2008, it gave back most of those revenue gains in fiscal 2009, finishing the year just barely ahead of its level of 2008. With respect to costs, however, FedEx was unable to exhibit a strong degree of cost control. Costs escalated in 2008 -- while the company was able to hold wages (its biggest cost driver) down, fuel and transport costs increased significantly faster than revenues for the year. Unfortunately for FedEx, they were unable to scale these costs back significantly in fiscal 2009. While fuel costs were dramatically lower, they had risen so high that even at the end of fiscal 2009 they remained well above 2007 levels. The result was stress on the bottom line -- profit in 2008 was just 56% of profit in 2007 and in 2009 the profit was only 5% of the 2007 level.

Despite these problems, there is little evidence of difficulty in FedEx's balance sheet. The company saw its current assets reduced slightly in 2009 over 2008 levels, but reduced its current liabilities by more. Long-term debt, however, increased substantially in 2009, indicating that the company had taken on more debt, but had merely restructured that its debt in order to weather the economic storm. Further evidence of this is found in the decrease in the value of shareholder's equity, indicating that an increase in debt financing helped to cover off the decline in revenues and profits.

The vertical analysis shows evidence of some of FedEx's driving factors of the past few years. Fuel costs surged in early 2008, which split the 2008 and 2009 fiscal years. This surge is therefore reflected in the increased percentage of fuel costs relative to revenues in 2008 and 2009. Overall, expenses became a gradually higher percentage of revenues over the three years, again indicating that the company was unable to contain costs in response to the slowdown in revenues. The decline in operating income relative to revenues was steep -- from 9.3% in 2007 to 2.1% in 2009. This decline is further reflected in the decline in net income over the same period.

The vertical balance sheet confirms what was found on the horizontal balance sheet. The liabilities of FedEx were restructured -- the current assets were reduced and the long-term debt was increased. This restructuring ultimately had little effect on the shareholders' equity, as this was only reduced from 56.67% to 56.20%. The dollar value reduction from the horizontal analysis reflected a reduction in the size of the company, but not a significant reduction in the percentage of the firm was owned by the shareholders.

Appendix 2: Ratio Analysis

Ratio analysis uses the company's published financial statements to help determine the financial health of the firm, by measuring a number of key ratios (Loth, 2010). The ratios best used to determine FedEx's financial health begin with the liquidity and solvency ratios. These ratios shed light on the company's short- and long-term financial health from a leverage point-of-view. Therefore, the current ratio, quick ratio, debt ratio and times interest earned were all considered. Financial health can also be predicted on the basis of trends in the company's operations. Therefore, key operating variables must be considered. The most relevant margin for a service company is the operating margin, and the net margin is most useful for shareholders. Efficiency ratios are valuable because they indicate how well management is using the firm's resources. In this case, a key efficiency ratio is the return on assets, given that FedEx is an asset-oriented company. Receivables turnover is another measure of managerial effectiveness.

Ratio Analysis

Current Ratio

current assets/current liabilities

1.57

1.35

Quick Ratio

Cash+receivables / current liabilities

1.26

1.10

X Interest Earned

EBITDA / Interest Exp

8.79

21.17

24.09

Debt Ratio

Liabilities / Assets

43.80%

43.33%

Operating Margin

Operating Income / Revenue

2.10%

5.47%

9.30%

Net Margin

Net Income / Revenue

0.28%

2.96%

5.72%

ROA

Net Income / Total Assets

0.40%

4.39%

Receivable Turn

Revenue / Receivables

10.47

8.71

These ratios support the theory that FedEx struggled through 2009, but remains a solid, stable company. The shift in the structure of the firm's liabilities has strengthened its liquidity in the past year, without dramatically compromising the company's debt ratio. What this tells us is that while the firm was unable to contain costs in the face of declining revenues, it was able to shrink the size of the company overall, in line with the decline in revenues.

The margins, as identified in the horizontal analysis, have suffered greatly in the past couple of years. FedEx's cost structure has not declined in line with revenues. This hints that the company may not be able to maintain its liquidity over the long run if these trends continue. The liquidity was improved through debt restructuring, but a firm cannot restructure debt forever. FedEx needs to address the sharp decline in profitability in order to continue to be a firm in solid financial standing.

One positive indicator is that the company has been able to turn over its receivables faster. It is important to collect on bills more quickly in a declining revenue environment. This decreases the risk of default, and gives the company the opportunity to earn returns on that money, particularly if it chooses to simultaneously stretch its payables.

Appendix 3: Analysis of Creditworthiness

Several tests have been devised in order to test creditworthiness. One of these is the Altman Z score. This score is comprised of five ratios, each given a specific weighting. Over time, the results of the Altman Z test have demonstrated that the higher the number, the less likely a firm is to default on its debt. Using the Altman Z-score calculator found at http://www.creditguru.com/CalcAltZ.shtml, the Z score for 2009 for FedEx was 3.42. For 2008, the Z-score was 4.09.

Both of these scores are considered to be strong. Companies that score above 3 are considered, on the basis of their financials, to be "safe" (CreditGuru.com, 2010). FedEx falls comfortably in this category for both of these years. That said, the one-year drop in the Z-score is considerable and noteworthy. There are a number of factors that could have affected the Z-score in such a way. The first is the sharp decline in net income year-over-year. Creditworthiness… [END OF PREVIEW] . . . READ MORE

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