Balance sheets and income statements for United Parcel Service, Inc., (UPS) follow. Refer to these financial statements to answer the following requirements.

REQUIRED:

a. Compute ROA and disaggregate it into profit margin (PM) and asset turnover (AT) for 2017 and 2016. Comment on the drivers of the ROA. Assume a 35% tax rate for this period.

b. Compute any expense to sales (ETS) ratios that you think might help explain UPS's profitability.

c. Compute return on equity (ROE) for 2017 and 2016.

d. Comment on the difference between ROE and ROA. What does this relation suggest about UPS's use of debt?

Transcribed Image Text:

UNITED PARCEL SERVICE, INC. income Statement Years Ended December 31 (S millions) 2017 2016 2015 Revenue.... $65,872 S60,906 $58,363 Operating expenses: Compensation and benefits... Repairs and maintenance. Depreciation and amortization. Purchased transportation. 34,588 34,770 31,028 ... 1,538 1,600 2,282 10,989 2,690 1,155 5,039 1,400 2,084 8,043 2,482 1,022 4,636 2,224 9,129 2,118 .... Fuel.... Other occupancy Other expenses 1,037 .... 4,623 Total operating expenses. 58,343 55,439 50,695 Operating profit.... Other income and (expense): Investment income and other.. Interest expense.... Total other income and (expense). 7,529 5,467 7,668 72 50 15 (453) (381) (341) (381) (331) (326) Income before income taxes 7,342 7,148 2,238 5,136 1,705 Income tax expense. 2,498 Net income... $ 4,910 $ 3,431 $ 4,844