Calculate The Average Life Expectancy ✓ Solved
Calculate The Average Life Average A
To calculate the average life, average age, and asset turnover ratios, we find that the average life of assets for FedEx is 9.3 years, and the average age is 8.7 years. The asset turnover ratio is 1.18, indicating that for every dollar of assets, FedEx generated $1.18 in sales during 2020. This suggests efficiency in utilizing assets to drive sales (Porter & Norton, 2018).
Additionally, the accounts receivable turnover ratio for FedEx is 7.2 times per year, translating to an average collection period of 50.7 days, which shows strong performance in collecting receivables. Compared to UPS, which has a turnover ratio of 7.22 times, FedEx demonstrates competitive efficiency in collections (CSIMarket, Inc, 2021). Increasing this ratio could further enhance FedEx’s operational efficiency and cash flow management.
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The analysis of financial ratios provides valuable insights into a company's operational efficiency and financial health. For the company FedEx, the average life of assets is 9.3 years, indicating that on average, FedEx's assets are used effectively over a significant period. The average age of these assets is 8.7 years, suggesting that the company regularly invests in its asset base, which reflects proactive asset management strategies.
The asset turnover ratio, computed at 1.18 for FedEx, reveals that the company generates $1.18 in sales for every dollar invested in assets. This ratio is critical as it highlights the effectiveness of asset utilization in generating revenue. A higher asset turnover ratio is generally favorable, indicating stronger asset efficiency (Porter & Norton, 2018).
Furthermore, the calculated accounts receivable turnover ratio stands at 7.2 times. This ratio provides insights into how quickly FedEx collects cash from sales, with an average collection period of 50.7 days. This performance illustrates that the company is capable of collecting receivables efficiently, contributing to cash flow stability (FedEx Corporation, 2020).
When comparing FedEx’s accounts receivable turnover ratio to that of its competitor UPS, which is slightly higher at 7.22 times, it shows that FedEx is relatively competitive in managing its collections. However, there is still room for improvement. FedEx could implement strategies to enhance this ratio further, potentially leading to an even quicker collection of receivables.
In terms of operational efficiency, the reported average life of assets of 9.3 years indicates that FedEx maintains a healthy turnover of assets. Companies aim for a balanced asset life to avoid underutilization or excess aging, which can affect profitability. The maintenance of an average asset age of 8.7 years suggests that FedEx is investing adequately in updating its assets, which directly correlates with operational advancements and customer service improvements.
The implications of these financial ratios extend beyond mere calculations. They inform strategic decisions in resource allocation, budgeting, and investment priorities. An asset turnover ratio of 1.18 signifies that for every dollar allocated towards asset acquisition, FedEx is generating substantial revenue, supporting the idea that the company effectively leverages its resources to maximize returns (CSIMarket, Inc, 2021).
Moreover, companies often analyze their ratios in the context of industry benchmarks to gauge performance. FedEx's ability to maintain a robust accounts receivable turnover ratio suggests that its credit policies are effectively set, allowing the company to manage its cash flow efficiently. This could prove beneficial in times of economic downturns when accessing liquidity becomes challenging.
In conclusion, the financial ratios calculated for FedEx—average life, average age, and asset turnover, as well as accounts receivable turnover—offer significant insights into the company's operational efficiency and profitability. These metrics reflect how effectively FedEx utilizes its assets and manages receivables in comparison to its competitors, particularly UPS. By focusing on enhancing its accounts receivable turnover, FedEx can potentially improve cash flow and overall financial performance.
References
- CSIMarket, Inc. (2021). Retrieved from CSIMarket.com
- FedEx Corporation. (2020). Retrieved from 2020 Annual Report: FedEx.com
- Porter, G., & Norton, C. (2018). Using financial accounting information: The alternative to debits and credits (10th ed.). Retrieved from [publisher]