Financial analysis helps organizations to analyze their performances over the period of times. Thus it helps the management in identifying issues as well as areas that can be further enhanced so that the performance of the firm can be improved over the period of time. This report presents the financial analysis of UPS. In order to analyze the company’s performance techniques such as Net operating working capital, Operating capital, Net operating profit after taxes (NOPAT), Free cash flow (FCF), Market value added (MVA) and Economic Value Added (EVA) have been used.
Net operating working capital
Net operating working capital is calculated by subtracting the net operating current assets of the company with the net operating current liabilities (Besley, & Brigham, 2007). NOWC of UPS is calculated below:
NOWC of UPS is found to be increased in the year 2012 when compared with the year 2011. The NOWC has increased by almost 80%. The main reason or factor that has caused this ratio to increase is the change in cash on hand of the company. The cash of the company has increased by more than 140% during this time period thus making a significant change in the NOWC of UPS. So it can be revealed that the operating working capital position of UPS has improved in 2012 and it is a good sign for the company.
Operating capital of a company is calculated by subtracting the net operating working capital of the company with the net fixed assets (Besley, & Brigham, 2007). Operating capital of UPS is calculated below:
Operating capital of the company has increased by 428%. Both the factors have contributed in increasing operating capital; net operating working capital as well as the net fixed assets. The first factor has increased by almost 80% whereas the later one has decreased by more than 900% thus leading to a higher change in the operating capital. So it is a positive sign as the operating capital of UPS has improved.
Net operating profit after taxes (NOPAT)
Net operating profit after taxes is calculated by multiplying the earnings before the income and 1-tax rate. NOPAT of UPS is calculated below:
NOPAT of UPS has reduced by 72%. The main reason for this is the decrease in the EBIT of the company that has reduced by 78%. Thus it is highlighting the fact that the earnings of the company have not improved in 2012.
Free cash flow (FCF)
FCF of the company shows the cash that the company is able to make after expanding its assets and paying its expenses (McLaney, 2009). FCF of UPS is calculated below:
FCF has increased slightly by 6.6%. The most important component in FCF is the net cash from operations that has increased by 2% only.
Market Value Added
Market value shows the difference between the market value of equity and book value of equity (McLaney, 2009). MVA of UPS is calculated below:
MVA of the company has decreased by 99% and the main factor that has caused the change is the reduction in book value of equity of the firm that has decreased by 34%.
Economic Value Added
Economic Value Added shows the economic profit of the firm (McLaney, 2009). EVA of UPS is calculated below:
EVA of the company has increased by 41% even though the NOPAT of the company has decreased. However the reduction in return on capital is higher and thus it is able to influence EVA more.
Besley, S., & Brigham, E. (2007). Essentials of Managerial Finance, 14 edn. USA: Thomson Higher Education.
McLaney, E. (2009). Business Finance: Theory and Practice, Pearson Education: New Jersey.
UPS. (2012). Annual report. Available from http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTc1NjkyfENoaWxkSUQ9LTF8VHlwZT0z&t=1 [Accessed 4 April 2013]