Thesis on "Financial Analysis the Company I Have Chosen"

Thesis 10 pages (2865 words) Sources: 5

[EXCERPT] . . . .

Financial Analysis

The company I have chosen for my financial analysis is telecommunications giant Verizon (NYSE: VZ). The competitor I have chosen is at&T (NYSE: T). Both of these firms compete in the landline and wireless telecommunications industries. They each have broad, national customer bases including consumers and both small and large businesses. They are engaged in intensive competition in both industries. Both face similar challenges with respect to their regulatory, economic and technological environments. This paper will analyze both of these firms in the context of their financial ratios and trends, before coming to a conclusion about investing in Verizon.

Liquidity

The liquidity analysis indicates the degree of short-term financial solvency in the firm. The key ratios are the current ratio, the quick ratio, the cash ratio and times interest earned. The current ratio indicates the firm's ability to meet its current liabilities through conversion of all its current assets; the quick ratio includes just cash and receivables and the cash ratio includes just cash. For Verizon, the current ratio for 2008 was 1.0. This is the strongest current ratio in the past five years. In prior years, Verizon's current ratio was significantly weaker, ranging from 0.69 to 0.84. at&T by contrast has a current ratio of 0.53. This figure is significantly poorer than that of Verizon and is in line with at&T's recent performance.

The quick ratio for Verizon in 2008 was 0.84. The represented an improvement over figures from previous years, largely attributable to a substantial increase in cash. Cash improved from $3.3 billion in 2

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007 to $10.2 billion in 2008. at&T's quick ratio in 2008 was 0.42, which is in line with that firm's performance in previous years.

The cash ratio for Verizon in 2008 was 0.39, representing substantial improvement over 0.13 the previous year, and improvement over each of the previous four years total. at&T's cash ratio is 0.04, roughly in line with its performance in recent years.

Times interest earned reflects the firm's ability to meet its interest obligations. In the statements presented on MSN Moneycentral, neither firm reported an interest expense -- this was included in the broader category of operating expenses. Without a specific interest expense, it is impossible to analyze the times interest earned.

All told, Verizon has healthy liquidity ratios, in particular in comparison to those of at&T. At no point in the past five years did at&T have any ratio better than the comparable ratio from Verizon. Whereas at&T has some alarming short-term liquidity issues, particularly with respect to very low cash ratios, Verizon's figures are fairly strong, given the high amount of capital investment required in its industry.

Profitability

Profitability ratios are indicative of the firm's overall financial performance. These figures are important to investors (the firm's owners) and they also can provide an indication of managerial efficiency. When profitability ratios decline, that is often a symptom of greater problems at the firm.

Return on equity measures the net profit that the company earns for its shareholders -- that is to say from its equity base. Verizon's current ROE is 12.9%, with a five-year average ROE of 13.7%. These figures are slightly above the industry average. at&T has a return on equity of 11.2%, with a five-year average of 10.7%. These figures lag both Verizon and the industry. Both firms have decent returns on their shareholder equity, but lagging the industry indicates that both have room for improvement. Whereas at&T has improved its ROE figures this year, Verizon's number has slipped indicating the perhaps Verizon's performance was not as strong through 2008.

Return on assets measures the net profit gained from the firm's assets. Ultimately, the job of management is to utilize the firm's assets to generate profit, so ROA is a direct measure of managerial efficiency. The 2008 ROA for Verizon was 3.6%, compared with an industry average of 4.4%. The five-year average ROA for Verizon is 3.3%, the industry average again being 4.4%. This indicates that while Verizon trails the industry in efficiency, it has improved in the past year. at&T's return on assets in 2008 was 4.4%, in line with the industry. The firm's five-year average ROA is 4.3%, only slightly weaker than the industry average. Overall, at&T has stronger managerial efficiency with respect to the firm's assets than does Verizon.

Return on investment measures how much profit is earned for every dollar spent to try to make that profit. Again, this is a measure of managerial efficiency. Verizon's 2008 ROI was 5.2%, compared to an industry average of 5.5%. The five-year average is 4.7%, compared to the industry's 5.4%. At at&T, the return on investment for 2008 was 5.2% and the five-year average ROI was 5.0%. These results both lag the industry figures, but are stronger than Verizon's performance.

Overall, at&T outperforms Verizon on these three key measures of managerial efficiency. That company's managers are better able to convert the fiscal and physical resources they have been given into profit.

Debt Ratios

Debt ratios are a measure of long-term solvency at a company. Leverage (the degree of debt a firm has) impacts the firm's financial performance in a number of ways. Leverage increases risk. It allows the firm to capture high returns in good times, but represents an obligation that must be paid even in bad times. Therefore, a firm's financial flexibility is diminished if it is carrying too much debt. The ideal amount of debt that a firm should carry is determined in large part by the nature of the business in which the firm is engaged. The key debt ratios are debt-to-equity and debt-to-assets.

Verizon's debt to equity is 3.85. This is the highest level it has been in the past five years. The best the debt-to-equity ratio has been is 2.69 in 2007. at&T has a debt-to-equity ratio of 1.75. This is in line with the firm's degree of level prior to 2006. For that year and for 2007, at&T had a stronger debt-to-equity ratio following the major acquisition of BellSouth (Crockett & Grow, 2006) that nearly doubled the size of the company.

The debt-to-assets ratio is a similar indicator, highlighting how much of the firm technically belongs to creditors. The debt-to-assets ratio (or simply "debt ratio") for Verizon is 0.79. While this is within its normal range for the past five years, the figure represents a new high end. This can be attributed to a spike in long-term debt, from $28.2 billion to $46.9 billion. at&T's debt ratio is 0.63, which is the same level it was five years ago. The firm has taken on more debt in the wake of its acquisition in 2006 in order to restore its capital structure to pre-merger levels.

Overall, Verizon is a more highly levered company than is at&T. Their debt level is not unexpected given the massive investment the firm is presently undertaking to roll out the next generation Long-Term Evolution (LTE) network (Chen, 2009). at&T is slightly ahead of the investment curve with respect to this network, the result of which is that it has not needed to take on the added debt. The company has merely taken on debt to restore the capital structure it had before the BellSouth merger.

Profitability Ratios

The profitability ratios measure a firm's ability to convert revenues into profits. There are two major components to these measures. The first is the firm's ability to increase its revenues; the second is its ability to control costs. Doing both of these simultaneously will result in improvements to the profitability ratios. The key profitability ratios are the gross margin and the net margin.

The gross margin for Verizon is 59.9% and has held steady at that level for the past three years. Prior to that, the gross margins were higher, in the mid 60s. The shrinking of the profit margin indicates increased competition in Verizon's core businesses, but the steadiness of the numbers indicates that Verizon has strong control over its pricing structure. at&T's gross margin is 49.5%. This represents a slight decline from the previous year, but an improvement over the prior three years. at&T's gross margin hit bottom following the BellSouth acquisition, where it was at 42.8%, so the company has done well to bring that figure up higher. However, at&T is not able to extract the same margins as Verizon, and this may reflect their greater dependence on landline revenues.

The net margin for Verizon is 6.6%. This is the highest figure in the past three years. Prior to this, net margins were in the high 8s. This confirms what was indicated in the gross margin, that Verizon's competition level has increased, forcing the company to adjust its prices downward. The firm has not been able to cut its costs to restore the figures of the mid 00s. at&T has a net margin of 10.3%. This is at the low end of its historic range. at&T did not suffer as strong a drop in its net margins three years ago as it did in its… READ MORE

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Quoted Instructions for "Financial Analysis the Company I Have Chosen" Assignment:

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Objective: Familiarize students with the application of ratio and trend analysis.

This project allows students the opportunity to perform critical thinking, by addressing specific financial trends and industry comparisons for a company of their choosing. This project will be a comparison/contrast paper that shows a demonstration of the application of financial analysis and critical thinking in a large organization. The student will be performing trend analysis and industry comparisons on 3-5 years worth of financial statement data (whatever tells the story).

Trend Analysis & Ratio Analysis

Ratio analysis uses percentage or decimal calculations of comparison to at least two different sets of financial data. You are comparing how one relates (compares) to another. Decision makers use ratios because they illuminate relationships between financial data taken from the company's statements.

Although ratio analysis can be used to evaluate financial performance, the number, by itself, does not reveal the entire story. To take the analysis to the next level, one must engage in trend analysis. Trend analysis utilizes the aforementioned ratios and shows the changes in those ratios, over time. Stakeholders can use trend analysis to not only compare "this year" to "last year" for this company, but can compare each year to the industry as a whole and even to the number one competitor for benchmarking purposes.

When you are setting up your paper, it would help to group your ratios and analysis together by content area (profitability, debt management, asset utilization, liquidity, and market value ratios).

Deliverables

Choose a publicly traded, publicly held, U.S. company. This means you need to pick a company that is public and has stock. You will use a variety of sites to find your financial date. Start with either Yahoo! Finance site or www.reuters.com. These two sites will allow you to capture one year of data for each of the two companies you are going to review as well as the industry ratios you will need. You will need to acquire annual reports for the company sites for years older than the most current year. You will need to review three - five years of financial information on this company, more years of data will produce a more thorough analysis.

Specific areas of analysis are noting major ratio categories and identifying whether the trend is up or down, whether that is good or bad, and why. Once the data are gathered, analyzed, and trends revealed; the student will acquire the same information for a competitor within the same industry. The same ratio and trend analysis will be gathered for the competitor. A comparison will ensue, identifying specific strengths and weaknesses of various components of the financial statements. Upon completion of the original company trend analysis and the competitor's trend analysis, an analysis and trend comparison with the industry is required. This will allow the student to demonstrate an understanding of financial ratios and what trends are present among two different companies in one industry, as well as, being able to determine the position of the industry and be able to project future trends and how the company being evaluated can budget for changes in the industry.

So . . . .what is required . . . .

1. Your chosen company (financial ratios and trend analysis)

a. Using the data provided at the Yahoo! Finance site, use the ratios in the textbook and determine the status of your chosen company based on those ratios. Also, identify any trends you notice and what the impact might be if those trends continue. The ratios you will be reviewing are the same ratios as you will find in chapter 3, page 57 of the text. Note that some of these ratios may not be applicable to your company. Some ratios are specific to certain types of firms. Not all firms carry significant accounts receivable as an example.

2. A competitor in the same industry (financial ratios and trend analysis)

a. Using the data provided at the site, use the ratios in the textbook and determine the status of your chosen competitor based on those ratios. Also, identify any trends you notice and what the impact might be if those trends continue.

3. The industry as a whole; how does your chosen company compare and what evaluations can you make (predict) for future financial success?

a. Review industry data and determine where these two companies fit within that industry. Are they leaders/followers? What does the future hold for this industry?

4. Using your chosen company and the current conditions in the financial markets, assume the firm needs to raise a large amount of cash. Compare the choices of raising these funds in the capital market (selling new shares of stock) versus the bond market (debt financing), and make a decision as to what is best and why.

5. Take one of the following positions and justify your decision:

a. You are a banker who has been approached by this company to borrow a sum of money (you decide how much, and why). Based on the company*****s financials and its future business prospects, would you loan the money? Why or why not.

b. You are an investor with a large some of money (or a company looking for an investment), and buying either the company or shares of stock in the company is being considered. Determine, based on the company*****s financials and its future business prospects, whether you will invest in this company or not.

There is no specific number of pages required to do this assignment, but past experience has shown it takes at least 10 pages of text to adequately complete this assignment. This is a critical thinking assignment so all the specifics are not laid out in front of you. You must research, assess, analyze, and strategize about the company you have chosen, the competitors, and the industry as a whole.

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