Financial AccountingGROUP WORK

Financial Analysis of

FedEx Overview

FedEx provides access to a growing global marketplace through a network of supplychain, transportation, business and related information services. FedEx has aworldwide network of companies providing customers and businesses with thesame "absolutely, positively" zeal for service you've come to expect. Independently,each company offers flexible, specialized services that represent the broadest arrayof supply chain, transportation, business and related information services.

FedEx’s global transportation and information networks enable convenient,customizable solutions: FedEx Express provides time-definite shipping to more than220 countries and territories. FedEx Ground provides cost-effective, day-definitepackage delivery throughout the United States and Canada. FedEx Freight is aleading North American less-than-truckload freight company. FedEx Kinko’s is aleading provider of documentSolutions and business services, with a global retail network of nearly 1,500locations.

FedEx Finances

FedEx is ranked # 227 on the 2007 Forbes 2000 List. The share price for FedEx was$110.64 at NYSE as on 2nd Aug 07.

Stock Listing: FedEx Corporation's common stock is listed on the New York StockExchange under the ticker symbol FDX.Shareowners: As of July 10, 2006, there were 20,152 share-owners of record.Market Information: Following are high and low sale prices and cash dividendspaid, by quarter, for FedEx Corporation's common stock in 2006 and 2005.

First Quarter Second Quarter Third Quarter Fourth Quarter

FY 2006

High $91.43 $98.81 $108.83 $120.01

Low 79.55 76.81 95.79 106.00

Dividend 0.08 0.08 0.08 0.08

FY 2005

High $83.47 $96.63 $100.92 $101.87

Low 72.28 81.88 89.75 83.11

Dividend 0.07 0.07 0.07 0.07

Dividends: FedEx paid a cash dividend on July 1, 2006 ($0.09 per share). We expectto continue to pay regular quarterly cash dividends, though each quarterly dividendis subject to review and approval by our Board of Directors.

Independent Registered Public Accounting Firm: Ernst & Young LLP, Memphis,Tennessee.

Analysis of Financial Statements of FedEx for Financial Year 2006-07

1. Profitability Analysis

Profitability analysis generally show how successful a company is in terms ofgenerating returns or profits on the investment that it has made in the business.

Though Revenue growth compared to last year is 9.98%, the Gross profit of thecompany is increasing by 7.79% in 2006 as compared to 2005. This can beexplained as the rate of growth of Cost of goods sold is more than the growth rate ofrevenue. Thus, the gross profit margin reduces from 54% to 53% this year. Theincrease in overall expenses is mainly due to the increase in Fuel expense i.e40.5%increase over last year. This could be the issue of major concern for FedEx.

Operating income after depreciation (EBIT) is increasing by 23% over the lastyear as the depreciation as the percentage of total revenues has reduced (i.e. FromVertical analysis). This has also been contributed by the increase in interest incomeand other sources of income.

FedEx earning before tax increased 36% in 2006 primarily due to LTL revenuegrowth, as well as their ability to control costs in line with volume growth. Thisshows that company is managing their debts well, which has decreased by 34% overthe last year. The interest expenses of the company also are decreasing by 11%compared to last year affecting the same.

Increased LTL yield and productivity gains contributed to improved margins in2006 despite higher salaries and employee benefits, depreciation and fuel costs.Depreciation costs increased primarily due to investments in operating equipment,which in some cases replaced leased equipment. Maintenance and repairs decreaseddue to the presence of re-branding costs in 2005, as well as the recent increase inthe purchase of new fleet vehicles.

Conclusion

Looking at different profitability ratios, we can say that FedEx has improvedmarginally over the past year though there has been an absolute revenue and profitgrowth. FedEx is also planning to continue the consolidation among LTL carriersand sustain positive economic conditions to provide additional opportunities forFedEx to promote its regional service and other freight solutions, which promises acontinued growth of the organization as well as investor.

2. Liquidity Analysis

Total Assets have increased from $ 25673 million to $ 29154 million that is anincrease of 13.55%. Fixed assets have increased by 11.2% and current assets haveincreased by 22.7%.

Conclusion:

Since it is a freight forwarding company, the increase in fixed assets means aninvestment in aircrafts & vehicles, which can further help in improving thecompetitiveness by improving the delivery schedules & times.

Increase in Current Assets corresponds to the increase in returns from financingactivities from $99 million to $142 million that is an increase of 48%.

Debt ratio has decreased from 42.13% to 38.34 % & Current asset ratio hasincreased from 1.11% to 1.18% & Acid test ratio has increased from 1.06% to 1.12%

Conclusion:

Since in case of Fed-ex, inventory is I the form of spares & fuels it means that all thereserves have been kept at the supplier end & not at the company end. Debt Ratiohas increased because there has been a substantial decrease in the long termliabilities, which means the company has been able to pay off there long term debts.

Equity & Capital Reserves have increased by 20%. Net increase in Cash & Cashequivalents from -$7 million to $898 million.

Conclusion:The reason for this is that there is a substantial amount of payments being receivedon account of accounts receivable. Moreover Creditor turnover days ratio hasdoubled which means the money is being returned to supplier in a longer time. Thuswe can utilize the same money for short term expenses, as this is interest freerevenue & the companies own revenue can be used to fund financing & investmentactivities. It also shows that the suppliers have great faith in the organisationsworking.

Working Capital has increased by 85% from $535 million to $991 million.

Conclusion:The increase in working capital shows that the company has increased its currentassets & decreased current liabilities. But an increase of such an huge amount doesnot signify anything substantial especially when you have excessive cash lying withyou as, excess cash may be good for individuals, but for companies they tend todepress return on capital employed (ROCE), as the returns you earn on investmentsare generally lower than on the business itself. So they can plan share buybacks toboost valuations by lowering the equity capital.

3. Company Funding Analysis

In 2006, Debt ratio improved to 38% from 42%. The interest expense in 2006decreased by 11.25% from 160m $ primarily to the reduction in the level ofoutstanding debt and capital leases as a result of scheduled payments, increasedinterest income due to higher cash balances and interest rates. In 2005 highborrowings were associated with acquisition of Kinko. Fed Ex business is CapitalIntensive. Their main areas of Capital Investment are:

- Aircraft- Vehicles- Technology- Package Handling Facilities- Sort Equipment

As we can see from the trend above, their Capital Expenditure as % of revenueshave been rising since 2004. Fed Ex is bullish on their growth. They have continued

investment in aircraft and sorting capacity associated with package growth, as wellas continued investments in China. In March 2006, they broke ground on a new$150 million Asia-Pacific hub in the southern China city of Guangzhou. This hub isplanned to be operational in 2009.

The debt as a percentage of Total Capitalization trend has been favorable. Itimplies they are able to add value to their business growth.

Although their return on capital employed improved by 2%, its Total Assetturnover ratio has decreased. The reason may be their expansion plans andacquisitions like Smart Post, Kinko, which are more strategic to cater to futurebusiness growth and have added to its Total Assets. Recently company hasundergone for following Financing Activities:

During 2006, $250 million of senior unsecured notes matured and were repaid.

A new $1.0 billion five-year revolving credit facility was executed in the first quarterof 2006, which replaced our prior revolving credit facilities to finance operationsand other cash flow needs.

Used capital and operating leases to finance a portion of their aircraft, facility,vehicles and equipment needs. In addition, they have a $1.0 billion shelf registrationstatement filed with the SEC to provide flexibility and efficiency when obtainingcertain financing. Under this shelf registration statement we may issue, in one ormore offerings, unsecured debt securities, common stock or a combination of suchinstruments. The entire $1.0 billion is available for future financings.

4. Investor Analysis

Return on Owner’s Equity

ROE = Profitability x Efficiency x LeverageReturn on equity refers to the return which the company earns on its equity; thecompany shows a nearly constant ROE cementing shareholders confidence.

Return on capital employed

ROCE takes all the assets employed in the business including borrowing andmeasures the return the company made on the same. If a company has a low ROCE,it is using its resources inefficiently, even if it is profit margin is high. In case ofFedEx the ROCE is 17.66% (attributable to increased earnings and rise in profitmargin and asset turnover ratios )which is good sign for the investor as it indicatesbetter use of resources and assures investors a better returns on their investments(the figure is increased by 12% over the last year).

Return on total assets

Significance increase in debt availed has resulted in decrease in ROTA. This can beattributed to increase in total liabilities by 3% over 2005.

Earnings per share

Growth in EPS figures indicates that net income of the company has increased. Thiswill increase confidence of current and potential investor in company.

Interest Cover

FedEx has higher level of interest cover ratio and the figure has increased over lastyear, this indicates that long term debts are covered well and it is less risky thatinterest payments will not be met.

Dividend Yield

The consistency in the dividend yield indicates that there is no change in dividendpolicy of the company. The low dividend yield in case of FedEx may persuade thecurrent share holders to dispose off the shares. This may deter the prospectiveinvestors from investing in FedEx.

Dividend Cover= EPS/DPS

In case of FedEx, dividend cover is 18, this shows the proportion of available profitswhich can be distributed to shareholders and how easily the company can pay thedividends. This high figure will attract the prospective investors. However it willalso depend on the dividend payout ratio and the dividend policy of the company. Inother words company is willing to pay $1 as DPS for every $18 EPS.

5. Price Earnings

Price Earnings Ratios comparison of DHL and FEDEX

FEDEX (Data in Dollars) 2006 2005

Net Income (in millions) 568 448 27%

Basic Earnings Per share 5.94 4.81 23%

Diluted Earnings per share 5.83 4.72 24%

Number of common Shares (in millions) 306 302 1%

Market Value 108.62 103.39 5%

Price Earnings Ratio 18.63 21.90-

15%

DHL (Data in Euro) 2006 2005

Net Income (in millions) 2282 2448

Basic Earnings Per share 1.6 1.99

Diluted Earnings per share 1.6 1.99

Number of common Shares (in millions) 1202.3 1193.9

Market Value 22.84 20.48

Price Earning Ratio 14.28 10.29

(As on May 31st 2006, the Euro value was 0.77 as compared to 1 US dollar)

(As on May 31st 2005, the Euro value was 0.80 as compared to 1 US dollar)

DHL (Data in Dollars) 2006 2005

Net Income (in millions) 2963.64 3060.00 -3%

Basic Earnings Per share 2.08 2.49-

16%

Diluted Earnings per share 2.08 2.49-

16%

Number of common Shares (in millions) 1202.30 1193.90 1%

Market Value 29.19 25.60 14%

Price Earning Ratio 14.05 10.29 37%

Reasons for DHL's EPS and Net income Dipping

NPAT reduced by 1.4% from 2005 to 2006

Earnings per share has dropped due to financial costs and minorities

Total cost of capital has increased by 42.4% from 2005 to 2006

Operating income declined by 23.5%

Conclusion

With FedEx we can see a 15% drop as against DHL's 37 % increase in the P/E ratio despite DHL'sEarning per share declining.

This indicates that investors expect higher earnings growth in the future of DHL than that of FedEx.

The reason for which the price earning ratio has dropped in the case of FedEx is that Diluted Earningsper share has increased by a 25 % whereas in the case of Market value, it has increased by only 5 %.

Annexure

Financial Particulars (in million $) YEAR2006 2005

Revenues A 32294 29363Cost of Goods Sold B 15159 13467

Gross Profit C=A-B 17135 15896

Selling, Gen. & Administrative Expense (inc Salaries) D 12571 11963

Operating Income (EBIDTA) E=C-D 4564 3933

Depreciation F 1550 1462Amortization (Assumed) 0 0

Operating Income after Depreciation (EBIT) G=E-F 3014 2471

Interest Income H 38 21Other Income (Net) I -11 -19Net Income from other sources J=H+I 27 2

Total Operating Income Including Other income (EBIT) K=G+J 3041 2473

Interest expenses L 142 160

Income Before Tax (EBT) M=K-L 2899 2131

Tax Expenses N 1093 864

Net Income(Profit After Tax) O=M-N 1806 1449

Dividends Paid P 101Dividend Per Share ($) Q 0.33 0.29Equity Capital and Reserves R 11511 9588

Current Assets S 6464 5269Cash and Equivalents T 1937 1039Receivables (Debtors) U 3516 3297Inventories(Spare parts, supplies and fuel, less allowances of$150 and $142) V 308 250Deferred Income Taxes 539 510Others 164 173

Net Fixed Assets (after Depreciation) W 22690 20404

Total Assets X=S+W 29154 25673

Current Liabilities Y 5473 4734Short Term Debt Z 850 369Payable (Creditors) AA 1908 1739Others 2715 2626

Long Term Liabilities BB 5706 6082Long term Debt CC 1592 2427Others 4114 3655

Total Liabilities DD=Y+BB 11179 10816

RATIO ANALYSISFormula 2006 2005

Profitability Ratios

Gross Profit (C/A)*100 53.06% 54.14%

Cost of Sales to Sales (B/A)*100 46.94% 45.86%

Operating Expenses to Sales (D/A)*100 38.93% 40.74%

Operating Profit to Sales (E/A)*100 14.13% 13.39%

Taxation to Sales (N/A)*100 3.38% 2.94%

Profit Before Tax to Sales (M/A)*100 8.98% 7.26%

PAT to Sales (O/A)*100 5.59% 4.93%

Gearing Ratios

Debt Ratio (TA/TL) (DD/X)*100 38.34% 42.13%

Equity Ratio (CapitalReserves/TA) (R/X)*100 39.48% 37.35%

Debt Equity Ratio (TL/CapitalReserves) (DD/R)*100 97.12% 112.81%

Investment Ratios

ROCE (PBIT/CapitalReserves+LTL) (K/(R+BB))*100 17.66% 15.78%

Liquidity Ratios

Current Assets Ratio S:Y 1.18 1.11

Acid Test Ratio (S-V):Y 1.12 1.06

Efficiency Ratios

Total Assets turnover (A/X) 1.11 1.14

Sales on Net Assets (A/(X-DD)) 1.80 1.98

Creditors Turnover days Ratio (Z/A)*365 10 5

Debtors Turnover days Ratio (U/A)*365 40 41

Stock Turnover days (V/A)*365 4 4

VERTICALANALYSIS

YEAR

2006% of

Revenue 2005% of

Revenue

HorizontalAnalysisvalues

Revenues A 32294 100 29363 100 9.98Cost of GoodsSold B 15159 46.94 13467 45.86 12.56

Gross Profit C=A-B 17135 53.05 15896 54.14 7.79

Selling, Gen. &AdministrativeExpense (incSalaries) D 12571 38.92 11963 40.74 5.08

OperatingIncome(EBIDTA) E=C-D 4564 14.13 3933 13.39 16.04

Depreciation F 1550 4.8 1462 4.98 6.02Amortization(Assumed) 0 0 0 0.00

OperatingIncome afterDepreciation(EBIT) G=E-F 3014 9.33 2471 8.42 21.97

InterestIncome H 38 0.11 21 0.07 80.95Other Income(Net) I -11 -0.03 -19 -0.06 -42.11Net Incomefrom othersources J=H+I 27 0.08 2 0.01 1250.00

TotalOperatingIncomeIncludingOther income(EBIT) K=G+J 3041 9.41 2473 8.42 22.97

Interestexpenses L 142 0.44 160 0.54 -11.25

IncomeBefore Tax(EBT)

M=K-L 2899 8.97 2131 7.26 36.04

Tax Expenses N 1093 3.38 864 2.94 26.50

NetIncome(ProfitAfter Tax)

O=M-N 1806 5.5923701 1449 4.93 24.64

References

www.fedex.comwww.investopedia.com