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I have chosen 2 companies in the same industry and calculated their net working capital to compare the financially efficiency operation of both companies. The reason why I choose the company in the same industry is different industries will have different benchmarks for its net working capital as different sectors have different aspects to measure their performance. For instance, we cannot compare Nike. Inc.’s net working capital with PepsiCo, Inc. as Nike in focusing on sport brand apparel while PepsiCo, Inc. is focusing on food industry. Therefore, we must choose the companies in the same industry in order to do comparison.
The companies that I have chosen are United Parcel Service, Inc. (UPS) and FedEx Corporation. Both companies are leading delivery services companies in America and providing services like post-delivery, global freight forwarding, third party logistics for business and so on. The data above is obtained from published annual reports of two companies in 2018 and 2010. Firstly, let’s look at the FedEx, Corporation. The net working capital of FedEx, Corporation in 2018 is $ 3,714 million while the net working capital in 2010 is $ 2,639 million. Thus, as the net working capital gained in both years is positive, we can know that FedEx, Corporation’s liquidity is good, and the company generated enough from current assets to cover its current obligations and even able to invest in its future growth to expand its business. Thus, we can notice that FedEx, Corporation had grown up so much from 2010 to 2018 as FedEx, Corporation has transformed its business to better align with global demand with an efficient business operation. For instance, FedEx, Corporation helps Asia Pacific businesses connect to global opportunities faster with 14 new Asia-Pacific origin markets for FedEx International First® to the U.S. and Canada, making it one of the leading companies in courier delivery industry. Although the net working capital in 2018 had only increased $ 1,075 million compared with 2010, but the total current assets and current liabilities had almost doubled in 2018. At here, we can notice the current liabilities of FedEx, Corporation had doubled in 2018, $ 9,627 million compared to 2010, $ 4,645 million as the eCommerce business such as Amazon, Taobao is growing at an unexpected rate all over the world for the past decade. Therefore, the demand of courier delivery is increasing year by year and FedEx needs to expand its business to meet the high demand of delivery services in the current market. As a result, the company’s current liabilities will increase as well. However, FedEx’s net working capital didn’t decline; on the contrary, it shows an increase in 2018 because of its efficient inventory management process. For instance, the customers must pay before the using the services provided by FedEx. Therefore, FedEx can maintain its current assets as well as net working capital. It ensures FedEx always able to pay off its current obligations without any delay and can more focus on improving its operating model to generate more profit.
Secondly, we will discuss about the second company which is United Parcel Service, Inc. (UPS), one of the main competitors to FedEx, Corporation. The net working capital of United Parcel Service, Inc. in 2010 is $ 5,667 million and the net working capital in 2018 is $ 2,123 million. Same as FedEx, Corporation, United Parcel Service, Inc.’s net working capital is positive which means its liquidity is good, can meet its current obligations and can invest in other operational needs as well.
Although the net working capital of United Parcel Service, Inc. for year 2018 is positive, but it had dropped drastically which a decline of $ 3,544 million in 2018 compared to 2010. The current assets only increased $ 4,641 million while the current liabilities have increased $ 8,185 million. It may cause by the dropping in efficiency of United Parcel Service, Inc.’s business operating model. The company may face liquidity issues and there may be a risk of unable to cover its current obligations in the next decade if they do not take quick actions to improve this situation. However, this situation may cause by the ambition of United Parcel Service, Inc. to modernize its infrastructure such as automated sorting facilities to have a better compete for e-commerce business. To achieve this ambition, United Parcel Service, Inc. needs more sources of financing. Thus, causing the current liabilities of United Parcel Service, Inc. in 2018 has increased drastically which is $ 14,087 million, almost triple of 2010’s current liabilities which is $ 5,902 million and leads to a decline in the net working capital.
Overall, both companies’ net working capital is considered good as both companies’ net working capital are positive. It gives an idea of the companies’ liquidity are good and the companies have enough money to cover its current obligations while invest in its growth. However, we can notice that FedEx, Corporation is slowly taking over the leading position of United Parcel Service, Inc. from 2010 to 2018. In 2010, FedEx, Corporation’s net working capital is $ 2,639 million while United Parcel Service, Inc.’s net working capital is $ 5,667 million, double of FedEx, Corporation’s. At that time, United Parcel Service, Inc.’s had a more efficient business operating model and more capital to invest in its future growth than FedEx, Corporation. However, in 2018, FedEx, Corporation’s net working capital has increased to $ 3,714 million while United Parcel Service, Inc. has fell to $ 2,123 million. It shows that United Parcel Service, Inc. cannot handle the fast-paced growth efficiently causing a drop-in net working capital. In contrast to United Parcel Service, Inc., FedEx, Corporation can keep up with the flow of growth and maintain its networking capital. For instance, United Parcel Service, Inc. has problem with labor strife while FedEx, Corporation with no unionized workforce in its ground network, does not have this kind of problem and allows it to focus on other aspects to improve its business. Therefore, FedEx, Corporation has a more competitive advantage with the ability to invest in its operational activities. It will have a better position to take advantage of new business opportunities compared to United Parcel Service, Inc. who shown a decline in net working capital. Hence, at this moment, I would say FedEx, Corporation is a more well-managed company with a higher potential growth compared to United Parcel Service, Inc. by using this liquidity metric.