With that being said, let us examine a variety of information extracted from the annual report to get a more accurate picture of the company’s financial health. To do so will require a review of the financial statements found in the financial performance section of the annual report: the balance sheet, the income statement, the statement of retained earnings and the statement of cash flows.
The different ratios use different criteria so it is important to first determine your objective in order to know which ratio would give the information needed to make a more accurate assessment. For example, liquidity ratios give a picture of the company’s “ability to meet short-term financial obligations” whereas asset management ratios are a picture of the company’s use of their assets “to generate sales” (Moyer, McGuigan, Rao, 2007). In other words, the liquidity ratio gives us a picture of the level of risk if Verizon needed to immediately pay its short-term bills, debts which normally must be paid in one year or less.
Current ratio is determined by current liabilities into current assets. In 2006 Verizon reported a total of $32,380 million in current liabilities and $22,538 million in current assets. Based on those figures, the current ratio for 2006 would be 0.70 or $0.70 in current assets for every $1 in liabilities. In 2007 current liabilities was reported to be $24,741 million and $18,698 million in current assets which equates to a current ratio of $0.756 or rounded up to $0.76, indicating assets of $0.76 for every $1 in liabilities. Current Ratio
(in millions)(in millions)
National Averages 1.1 to 41 to 4.1
Figure 1 Current Ratio / National Averages
The industry average for 2006 ranged for companies with assets up to $25 million ranged from a low of 1.1 to a high of 4. In 2007 the industry average ranged from a low of 1 to a high 4.1. Verizon’s current ratios for both years were lower than the national average which could indicate an investment into Verizon could be considered risky but to get a better picture, let us look the “acid test” as Moyer, et al. (2007), referred to the quick ratio. The current liabilities into current assets minus inventory will provide the quick ratio. Verizon’s quick ratios were 1.32 for 2006 and 1.11 for 2007. The national averages for 2006 ranged from 0.6 to 1.7 and 0.7 to 1.2 for 2007. Based on the national averages, Verizon’s quick ratio was within the national averages and therefore is beginning to look less risky than when looking at the current ratio. Quick Ratio
(in millions)(in millions)
National Averages0.6 to 1.70.7 to 1.2
Figure 2 Quick Ratios / National Averages
Figure 3 2005 - 2007 Current & Quick Ratio Chart
(ADVFN Financials, 2008)
The next group of ratios are referred to as asset management ratios which give a picture of how well the company is utilizing its...