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
References: Block, S. & Hirt, G. (2005) Foundations of Financial Management 11th Edition. McGraw-Hill Irwin. Retrieved April 25, 2007 from http://finance.yahoo.com/ Retrieve from http://hoovers.com/verizon/--ID__10197,period__A--/free-co-fin-balance.xhtml Retrieve from http://hoovers.com/verizon/--ID__10197,period__A--/free-co-fin-income.xhtml Retrieve from http://hoovers.com/at&t/--ID__11379,period__A--/free-co-fin-income.xhtml Retrieve from http://hoovers.com/at&t/--ID__11379,period__A--/free-co-fin-balance.xhtml Retrieve from http://finance.aol.com/quotes/verizon-communications-inc/vz/nys Retrieve from http://finance.aol.com/quotes/atandt-inc/t/nys?tabs=quotesandnews