You would not buy a home, car or other large purchases without researching what product offered you the most for your money. The same is true when investing in a company. Investors do avid research on multiple companies to find what company matches the investors' criteria. In this paper Team C will research both AT&T and Verizon's financial documents. Team C will compare selected ratios, cash flow and make recommendations how both companies can manage cash flow for the future.
Financial Ratio Analysis
Ratio analysis are useful tools when judging the performance of a company by weighing and evaluating the operating performance (Block-Hirt). There are 13 significant ratios that can separate by four main categories, profitability, asset utilization, liquidity and debt utilization ratios. The ratio analysis covered here consists of eight various ratios with at least one from each of these main categories. These ratios were used to compare and contrast the performance of Verizon versus AT& T over the years 2005 and 2006. This section will discuss ratio analysis for the following ratios: current ratio, quick (acid-test) ratio, average collection period, debt to assets ratio, debt to equity ratio, interest coverage ratio, net profit margin, and price to earnings ratio. Depending on the end user which ratio carries more importance, however, all must be familiar with ratio analysis. Details on each company's performance for each of these areas can be found in the attached ratio analysis worksheet.
The first analysis will be on Verizon. The current ratio and the debt to equity ratio both improved in 2006 when compared to 2005. However, the net profit margin dropped from 9.8% to 7.0%. What does this tell us as investors and analysts? Although the net profit margin decreased, the fact that the current ratio increased and the debt to equity decreased shows that the company is improving on shareholder's wealth. The company is cutting back on profits earned but not losing value for its investors with price to earnings being favorable at 19.18 (www.hoovers.com).
While analyzing AT& T a few differences are noted. As with Verizon, the current ratio did improve with an increase of five percent from 58% in 2005 to 63% in 2006. However, even though debt to equity decreased for both companies AT & T's decrease was only 4% compared to Verizon's significant decrease of 23%. The net profit margin ratio did opposite changes between the two companies while Verizon's increase not even one full percent AT &T's decreased by almost 3%. Even with these significant changes AT & T's price to earnings, as of 2006, was at 20.89 (www.hoovers.com). These variances tell us a couple of things. First, that AT& T has taken on more debt in 2006 versus 2005, but along with that debt they have been able to increase their net profit margin, helping the company in the way of earnings. The strong price to earnings ratio of 20.89 also shows that the shareholders are not faring too poorly either.
Both companies other ratios that are both similar and different. A further similarity between the two companies the average collection period of only 45 days, even with this similarity the vast difference in the two numbers that create these ratios are overwhelming. While Verizon had little changes in neither their accounts receivable nor average daily sales, AT & T almost double both of these items in one year. This indicates the large growth that AT & T experience from 2005 to 2006. From this growth the additional liabilities and assets are noticeable as well. With the large growth in AT & T a slight increase in the debt to assets ratio was incurred, with over a 70% increase in AT & T's total liabilities the company experiences over an 85% increase in the total assets.
Another debt coverage ratio analysis is the interest coverage ratio. This indicates the number of times that income before interest and taxes covers the interest obligation. In...