Corporate Finance

Executive Summary

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).

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Corporate Finance

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

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.

Asset management

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 value

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

Balance sheet

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 
  Total Receivables              11,651.80           12,409.17               13,898.27 
Other Current Assets714.15760.57851.84
  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 
Long-term Investments   
Goodwill (intangible if it pays more for something)    
Other Intangibles, net (footnotes)   
Deferred Tax Assets, LT (footnotes)   
Other Long-Term Assets (footnotes)   
Total Assets   
Accounts Payable                5,188.00             5,188.00                 5,188.00 
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)   
Capital Leases   
Unearned Revenue, Non-Current   
Pension & Other Post-Retire. Benefits   
Def. Tax Liability, Non-Curr.   
Other Non-Current Liabilities (longer than 1-yr)   
Total Liabilities   
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   
Supplemental Items                3,302.40             3,467.52                 3,641.24 
Total Shares Out. on Filing Date                  860.00               860.00                     860.00 
Total Shares Out. on Balance Sheet Date   
Book Value/Share   
Tangible Book Value   
Tangible Book Value/Share   
Total Debt   
Net Debt   
Debt Equiv. of Unfunded Proj. Benefit Obligation   
Debt Equivalent Oper. Leases   
Total Minority Interest   
Inventory Method   

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   
Tax Rate20.4%20.4%20.4%
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

Income Statement
For the Fiscal Period Ending15.0%6.5%12.00%
Revenue$         82,640 $         88,012 $               98,573 
Other Revenue   
  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 
  Gross Profit        68,591.3         73,929.9               83,787.2 
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., Total8822.89396.310523.8
  Operating Income6276.76684.77486.8
Interest Expense(696)(741)(830)
Interest and Invest. Income1668.71777.11990.4
  Net Interest Exp.972.91036.11160.5
Currency Exchange Gain (Loss)(21.9)(23.3)(26.1)
Other Non-Operating Inc. (Exp.)   
  EBT Excl. Unusual Items          7,227.8 7697.68,621 
Restructuring Charges                     –                             –   
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
  Net Income          5,531.2           6,127.1                 6,862.3 
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.   
                                    32.20                       42.52                       34.43 
Stock Price ? UPS info   
Diluted EPS   
Diluted EPS Excl. Extra Items   
Weighted Avg. Diluted Shares Out.   
Normalized Basic EPS   
Normalized Diluted EPS   
Dividends per share %?   
Dividends per Share?
Payout Ratio % (dividend/NI)   
EBIT Growth995.1%8.0%13.5%
Supplemental Items   
EBITDA      11,282.65       12,016.02             13,457.94 
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.


Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance [Electronic version]. Retrieved from 

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.

Samonas, M. (2015). Financial forecasting, analysis, and modeling: a framework for long-term forecasting.

Sengupta, R., & Hogue, E. W. (2014). The Effect of Risk and Organizational Structures on Bank Capital Ratios. Economic Review (01612387), 5–22. Retrieved from,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., J. M., Baginski, S. P., & Bradshaw, M. T. (2018). Financial reporting, financial statement analysis, and valuation: A strategic perspective.

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