Financial Analysis and Ratio Analysis

1713 Words May 1st, 2014 7 Pages
Section III: Financial Analysis—Ratio Analysis

Profitability Ratios
When evaluating the company’s profitability, we pay attention to the following ratios which are commonly analyzed: Net Profit Margin, Accounts Receivables Turnover, Return on Assets and Return on Equity. From the tables and figures, all the ratios have increased over the past five years except for 2012. This means UPS is overall a healthy company and does a good job at generating profits.

Net Profit Margin Ratio

It measures how much net profit a company can earn from every dollar of sales. As shown in Table 1, net profit margin for UPS keeps consistent for each year. The profit fell in 2012 for several reasons, mostly due to the prohibition decision issued by the
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Quick Ratio

It is also called as the acid test ratio, this measures immediate liquidation ability of a company. The quick ratio of a healthy company should be 1 or higher. It is more reliable than the Current ration because inventory, prepaid expenses, and other less liquid current assets are excluded from the calculation. The quick ratio for UPS has remained relatively consistent over the past five years with no more than a 0.41 change and the high is at 1.65 with a low of 1.24. It shows that UPS has a very strong ability to meet its short-term obligation.

Operating Cash Flow (OCF) to Current Liabilities Ratio

This ratio measures a company’s liquidity in short period to see how well a company can cover current liabilities by operational cash flows. Operating cash flow ratios vary radically, depending on the industry. In order to judge whether a company's OCF is out of line, an auditor should look at comparable ratios for the company's industry peers (John R. Mills, Jeanne H. Yamamura,1998). As calculated in Table 7, the OCF to current liabilities ratio has increased from 0.85 in 2009 to 1.02 in 2013. It means UPS is profitable and is making enough money to pay off its debt.

Long-term Liquidity Risk Ratios
When evaluating the short-term liquidity there are several important ratios to consider and we focus on these three

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