# Ratio Analysis of United Parcel Service

## Introduction

Ratio analysis is the most popular and effective method of financial statement analysis. It involves the computation of various ratios using data from financial statements and interpretation of the calculated ratios for taking rational decisions. The present paper analyses the key financial features of United Parcel Service (UPS) of the United States of America using the latest financial statements. The paper covers only important ratios incorporating the short term as well as long term financial soundness.

## Current Ratio

Current ratio is used to ascertain the liquidity of the firm. It is used to analyze the trends and to compare the short term financial matters of the firm. It is also used to predict the bankruptcy of the firm. It provides information about firm’s ability to meet the short term obligation and used by investors to extend short term credit to the firm. Shareholders prefer lower current ratio because it reduces the working capital of the firm. It can be mathematically expressed as:

Current Ratio = 1.13

The ratio indicates that the current assets are higher than the current liabilities. The figure reveals that the firm is in good in its operations and has a good shorter financial position. But, it is found that there has been a decreasing tendency showed by current ratios for the past few years.

Debt – equity Ratio

It measures the relationship between long term debt and equity. If the debt is less, outsiders will feel that they are more secured. Capital structure with less debt considered as favorable to the firm and also it reduces the bankruptcy.

Debt Equity Ratio = 1.15

It indicates that the firm is taking more debt from outsiders. If the debt increases the earning per share to the equity share holders will decrease.

## Net Profit Ratio

It is calculated to analyze the earning capacity of the business which is the outcome of the utilization of resources in the business. If the performance of the resources well and it indicates the profitability ratio is highest relates the sales to net profit after operational and non operational expenses.

Net Profit Ratio = 0.050

It represents that the profitability of the firm is very low because of there is no tremendous changes in the sales turnover in the year.

## Return on Equity

It is assessing whether the shareholders investment in the firm generates a reasonable return or not. If the return on equity higher, then the investors is ready to invest more and if there is no expected return then they are finding the reason for poor performance of funds. It is a better measurement for determining the profitability of the firm.

Return on Equity = 0.442

It indicates that return on equity to the shareholders. It shows a less figure because the profitability of the firm is decreased.

## Receivable Turnover

It explains the relationship between credit sales and debtors. The liquidity position of the firm depends on the speed of collection of amounts from debtors. It represents number of times receivables are converted in to cash.

Receivable Turnover = 0.080

It represents the how many times debtors are converted in to cash in a year. If the debtors are quickly converted into cash it reveals the liquidity of the firm and the firm can pay-off its short term obligations. It decreases the working capital of the firm.

## Price earnings ratio

It reflected the investor’s expectation about growth in the earnings of the share and reasonableness of the market price of the share. It can be vary industry to industry depends on the perception of the shareholders or investors.

Price earnings ratio = 16.86

It indicates that earning of shareholders per share by investing in the company. The price earnings per share depend on the market price of the share and earnings per share. If the market price of the share increases the price earnings per share also increases.

### Cash flows from operating activities

 Particulars 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Net Income 883 2934 2399 3182 2898 3333 3870 4202 382 3003 Depr & Amort 1139 1173 1396 1464 1549 1543 1644 1748 1745 1814 Deferred Taxes 575 (81) 638 162 317 289 477 279 (249) 187 Other (374) (1284) (533) 819 (118) 166 (198) (640) (755) 3422 Cashfrom Operations 2223 2742 3900 5627 4646 5331 5793 5589 1123 8426

The cash flow of the firm represents the outflow of cash from the business and inflow of cash to the business. It mainly includes net income, and other expenses relating to the operations of the business. But, it does not include depreciation and amortization, and deferred taxes. The net income of the firm shows a positive trend except in 2007.

Depreciation and amortization expenses of the company show an upward trend year after year. There is a fluctuation in the deferred taxes in the entire life of the firm and also we can see the tremendous increase in the cash flow operations. During the last year the cash from operation was very low because there was a negative figure in the Deferred Taxes and other incomes. From the inception stage it shows a positive trend in the cash from operations till 2006.

Conclusion

The overall position of the company s found satisfactory and the company has the support of a substantial group of investors from across different parts of the world.

## References

1. Bernstein, A. Leopold and John J. Wild (1999) Analysis of financial statements, 5th Edition
2. “United Parcel Service”, Inc, Business Week, Retrieved 17th July, 2009 from http://investing.businessweek.com/research/stocks/financials/financials.asp?ric=UPS
3. Hooke, C. Jeffrey (1998) Security analysis on Wall Street: a comprehensive guide to today’s valuation methods. John Wiley and Sons

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