Written Assignment #2
Financial Statements of AT&T and Verizon
May 4, 2015
Financial ratios are used to identify the financial statement’s performance of a certain company. However, not any one can use the financial ratios; they are only used by bankers, shareholders, creditors, and accountants. Financial ratios make it easy for accountants to evaluate the financial statement and how it is presented. According to the results of the of the financial statement’s performance, creditors and bankers can evaluate and choose to retract financing and potential shareholders can adjust AT&T or Verizon levels of commitment. To judge the profitability, efficiency, solvency, and liquidity of AT&T and Verizon, accountants use financial rations as an important tool that judges these. In this assignment there are comparison between AT&T and Verizon’s financial positions and performances based on liquidity, profitability, and solvency Ratios.
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Financial statement users evaluate a company’s ability to meet its obligations according to the liquidity ratios. It evaluates the ability of a company to converts the current assets to cash in order to pay its obligations. Each ratio has its equation. The current ratio is calculated by dividing current assets by current liabilities. According to Thomson Reuters, a general rule of thumb is to have a current ratio of 2. The quick ratio, or acid test, helps determine a company’s ability to pay obligations that are due immediately[i] .moreover, some companies has cash ratio, which accountants add cash to short-term divided by current liabilities.
The liquidity ratio of AT&T potential weaknesses in the company. The current ratio of AT&T gives an indication to the ability of the company to meet its debt obligations. The current ratio of AT&T is deteriorated from 2012 to 2013. In 2012, the current ratio was 0.71; however it changed, the current ratio of AT&T is 0.66 on December 2013, which shows that it does not have enough total current assets to cover its total current liabilities which are lower than the industry average of 1.27. Moreover, there is more than one type of liquidity ratio, the quick ratio of AT&T deteriorated from 0.55 in 2012 to 0.46 in 2013. In 2012, the quick ratio measures AT&T’s ability to meet its obligations with liquid assets, but subtracts inventory from the current assets. Consistently, AT&T may need to cover its current debts because it has low liquidity ratios. The quick ratio of AT&T is the same as the current ratio, which shows that AT&T does not hold inventory. Liquidity ratio is calculated by adding the cash to the short-term investments. The liquidity ratio of Verizon changes between 2012 and 2013. Verizon INC. has changed its low current ratio of 0.71 in 2012 to 0.61 in 2013. The current ratio helps accountants to decide whether the company is able to meet its obligations or not. Quick Ratio improved from 2012 to 2013 of 0.76. The cash ratio of Version improved from 2012 to 2013 too. The industry and the quick ratio of Verizon are less than the current ration. However, AT&T has better financial position only because Verizon is losing money for storing products in inventory.
AT&T is more liquid than Verizon. AT&T betters Verizon in all of the ratios except receivables turnover. Receivable turnover of AT&T is 10.07 while Verizon is 9.46. AT&T with good liquidity because it have a current ratio close to two. This shows that it has enough resources. Moreover, when the value of the quick ratio is usually close to 1, this considered also a good liquidity. However, Verizon with a higher debt equity ratio reduced its chance from being more liquid.
Solvencyratios are normally used to: Analyze the capital structure of the company, Evaluate the ability of the company to pay interest on long term borrowings, Evaluate the ability of the company to repay principal amount of the long term loans (debentures, bonds, medium and long term loans etc.). , and evaluatewhether the internal equities (stockholders’ funds) and external equities (creditors’ funds) are in right proportion.[ii] There are six types of financial ratios used to measure the solvency of a company. These include current, quick, current debt to inventory and to net worth ratio, and total liabilities to net worth ratio. According to Bizfilings.com, solvency ratios are designed to help companies measure the degree of financial risk that they face. "Financial risk," in this context, means the extent to which a company has debt obligations that must be met, regardless of its cash flow. By looking at these ratios, accountants can assess the company’s level of debt and decide whether its level is appropriate for their company[iii]
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As discussed early about the current ratio of version Inc. , the fact that there is an increase in the current ratio shows also that the company is improving on shareholder’s wealth because the debt to equity has increased .which was 1.57 in 2012 and changed to 2.41 in 2013.so the debt to equity deteriorated from 2012 to 2013. In the other hand, AT&T’s debt to equity also deteriorated from 2012 by 0.76 to 0.82 in 2013. So this shows that the debt to equity has increased in both companies. However, the lower the number or the ratio the better the company is performing and financing better for its operation. The second type of solvency ratios , is the debt to capital ratio, which is a ratio calculated as total debt divided by total debt plus shareholders' equity[iv] AT&T and Verizon give their customers an idea of the financial structure if their companies through the debt to capital. The debt to capital ratio of AT&T deteriorated from 0.43 in 2012 to 0.45 in 2013. The debt to capital ratio depends on the debt maturing within one year, long term debt but by excluding maturing within one year, which comes to the total debt. And the total capital of stock holder’s equity attributable to AT&T. AT&T Inc. has competitors, but its main one is Verison, which its ratio deteriorated from 0.61 to .071. The higher the debt to capital ratio, the more debt the company has compared to its equity [v]the debt to capital ratio gives a chance to investors if the company uses debt financing or equity financing. Moreover, according to investopedia.com, a ratio used to determine how easily a company can pay interest on outstanding debt. [vi] Interest coverage ratio has improved in AT&T Inc. from 4.03 in 2012 to 8.05 in 2014.the net income attributable to AT&T has increased from 7,264 to 18,249, so the result in the income before tax and interest (EBIT) has increased too. On the other hand, Verizon has also increased from4.85 to 11.98. According to investopedia .com, when a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses[vii].the interest coverage ratio of Verizon Inc. has improved from 2012 to 2013 but then deteriorated significantly from 2013 to 2014.[viii]
A company that is more solvent should be able to pay its long term for the next few years. According to the calculations of the long term debt and the average earnings for each company, investors would’ve give the edge to AT&T for solvency because when they divide the long term debt by the average earnings of each company, AT&T would be 4.92 and Verizon would be 7.47. so AT&T can pay interest on outstanding debt easily .AT&T is more solvent that Verizon , it has more free cash flow but a much lower times interest earned ratio.
According to extention.iestate.com, Profitability is the primary goal of all business ventures. Without profitability the business will not survive in the long run. So measuring current and past profitability and projecting future profitability is very important. Profitability is measured by income and expenses so investors can determine if they have net income or net loss. There are many examples of profitability; some examples are return on assets, return on equity and profit margin. Among any ratios, profitability is the most important ratios overall.
The profitability ratio has many types; one of the types is the net margin. The net margin of Verizon is 9.54 between 2012 and 2013. Net margin is a percentage of the company’s revenue remaining from expenses deducted from the company’s total revenue. On the other hand, the net margin of AT&T is much higher, which is 14.17. Another financial ratio is the asset turns over. Investors calculate the asset turn over by the higher the ratio, the better it is. The asset turnover of AT&T and Verizon are similar and there is no much difference, AT&T is 0.47 and Verizon is 0.48. The third ratio in profitability is a probability in terms of earrings and dividends, AT&T in 2013 has earnings per share is 1.31 and dividend is 0.45, but in 2012, the earnings per share is 1.45 and dividend is 0.50. There is another profitability ratio as total assets of tat which is increased from 1.46%in 2012 to 2.67 in 2013. However, Verizon has decreased from 1.4% in2012 to 0.39%in 2013.
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Profitability ratio manages the operation of a company and can tell if the company has net income of net loss. AT&T has higher profitability radios than Verizon. The net profit margin ratios tell the level of the profit of a company after any costs and expenses. So when the profitability ratios of AT&T are higher than the industry’s average and Verizon , that means that AT&T has high level of earnings than that of Verizon. The return on equity ratio too measures and tells how much AT&T generates the money they own. Moreover, returns on assets ratios tell that AT&T is more efficient than Verizon.
Ratios are very useful for investors to understand the each company’s performance, liquidity, solvency, and profitability. These ratios were used to compare and contrast Verizon’s performance and AT&T performance. Some of the important ratios that were discoed are current ratio, quick ratio debt to assets, and debt to equity, interest coverage, and net profit margin. To understand how each company is more solvent, profitable, or liquid, investors have always to look to ratios analysis. AT&T and Verizon have world wide recognition. By looking at the ratio of each company, investors have been able to compare and contrast the financial health of AT&T and Verizon, they have been able to compare and contrast the ratios to future possibilities based on the previous year’s performances. However, Ratios are not only used by investors but also many levels of an organization's management[ix].
[i] According to Thomson Reuters, a general rule of thumb is to have a current ratio of 2. The quick ratio, or acid test, helps determine a company’s ability to pay obligations that are due immediately
[ii] Solvencyratios are normally used to: Analyze the capital structure of the company, Evaluate the ability of the company to pay interest on long term borrowings, Evaluate the ability of the company to repay principal amount of the long term loans (debentures, bonds, medium and long term loans etc.). , and Evaluatewhether the internal equities (stockholders’ funds) and external equities (creditors’ funds) are in right proportion
[iv] A solvency ratio calculated as total debt divided by total debt plus shareholders' equity.
[v] The higher the debt-to-capital ratio, the more debt the company has compared to its equity
[vi] A ratio used to determine how easily a company can pay interest on outstanding debt.
[vii] When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses
[viii] Stock analysis.net
[ix] Ratios are not only used by investors but also many levels of an organization's management.