Introduction
AT&T Inc. is an American multinational telecommunications company headquartered in Dallas, Texas. It has grown to become one of the world’s largest wireless and consumer service providers, with services available worldwide. It provides satellite TV and internet services in 21 states, as well as mobile services, fixed-line connections, voice-based services, data services, and internet connections. It has a significant presence in Latin America, with 355 million people (Narayanan & Heilprin, 2018).
Competition
Verizon Communications, Comcast, and Charter Communications are AT&T’s main rivals. With 108 million customers spread across 500 markets, or 98% of the US population, Verizon Communications is the largest wireless service provider in the country (Narayanan & Heilprin, 2018). Cable TV, super-fast internet, and phone services are among the telecom services it provides to individuals, the government, and companies.
With a significant presence in 21 states, Comcast is the largest provider of cable TV and high-speed internet services in the US (Serrumbia, 2020). Charter Communications is the second-largest cable TV, high-speed internet, and home phone services provider and the third-largest provider overall (Mitchell, 2021). It offers its services in 25 American states.
With Verizon, Sprint, and T-Mobile offering a wide range of telecom services and a sizable customer base, AT&T faces intense competition. With their discontinuation of wireline services and the introduction of 5G services, all three companies represent a significant threat. Better customer service, quicker turnaround times, and more reasonable prices are some of the ways that competitors compete (Serrumbia, 2020). Despite increased competition, AT&T remains a contender due to its financial resources and market knowledge.
Financial Statement Analysis
Financial statement analysis offers an in-depth examination of a company’s financial position and operations. Ratios such as liquidity, asset utilization, debt management, and market value reflect the company’s strength and overall health. Compared to the industry average, AT&T and Verizon have higher and lower ratios, respectively. While Verizon has higher investor confidence, as evidenced by its higher Return on Equity (ROE) and Price-to-Earnings (P/E) ratio, AT&T’s profitability is below average.
Liquidity
One can determine a company’s ability to pay short-term debts using liquidity ratios, such as the current and quick ratios. The ability of a company to pay its short-term obligations with current assets that can be quickly liquidated or mature within a year is measured by the current ratio (Agustina & Suprayitno, 2020).
The quick ratio, also known as the acid-test ratio, measures a company’s ability to cover its short-term obligations using only short-term assets that can be quickly converted into cash. The quick ratio for AT&T is 1.04, and the current ratio is 1.62, demonstrating the company’s strong liquidity position (Narayanan & Heilprin, 2018). AT&T relies less on short-term borrowing because its current ratio is higher than the industry average of 1.46, and its quick ratio is above the 0.93 of the average.
Conversely, Verizon’s current and quick ratios are both lower than those of AT&T, at 1.34 and 0.92, respectively (Narayanan & Heilprin, 2018). This indicates that Verizon is increasingly relying on short-term borrowing. Compared to Verizon, AT&T is better able to meet short-term obligations due to its higher current and quick ratios. Additionally, when measured against the industry average, AT&T’s financial stability is evident. As a result, it may attract potential investors due to its stability and guarantee of obligation fulfillment.
Asset Management
Asset Management Ratios gauge how effectively a business uses its current and fixed assets. Stakeholders can use these ratios to assess a company’s operating cycle, revenue generation, capital structure, and solvency performance. The asset Turnover Ratio for AT&T is 0.80, which is lower than the industry average of 0.81 (Narayanan & Heilprin, 2018). To calculate this ratio, one must divide the total assets by sales, which shows how effectively a company can generate sales from its assets. Because AT&T’s ratio is below the industry average, it should utilize its assets more effectively and generate more revenue from them.
Additionally, AT&T’s Fixed Assets Turnover ratio of 0.79 is lower than the corresponding industry average of 0.87, which is again lower. This ratio, calculated by dividing total fixed assets by sales, indicates how effectively a company utilizes its fixed assets to produce goods and generate revenue. The lower ratio for AT&T indicates that the company uses fixed assets less effectively than the sector as a whole. It is interesting that Verizon, its main rival, also experiences this. Verizon has a fixed asset turnover ratio of 0.76, falling short of the industry median (Narayanan & Heilprin, 2018). This suggests that Verizon also uses its fixed assets less effectively than the industry average.
Debt Management
Ratios are used to compare a company’s total assets to its total liabilities, assessing its financial stability and solvency. 0.86 AT&T’s debt-to-equity ratio is surpassing the industry standard of 0.55, indicating a greater reliance on debt financing for the company’s assets. The debt-to-equity ratio for Verizon is 0.76, which is also higher than the industry standard. The ratio of AT&T’s accounts payable to total assets is 0.19, outperforming the sector median of 0.16, and indicates the company’s greater reliance on a payables-based financing approach (Narayanan & Heilprin, 2018).
A company’s debt ratio evaluates its total liabilities in relation to its total assets. It serves as a gauge of the company’s leverage position. It is frequently used to determine the company’s capacity to service its debt. A high ratio indicates higher debt levels compared to assets. It may suggest that the company’s assets are insufficient to pay off its debt or that its debt is too high. A lower debt ratio may indicate that the business has sufficient cash and assets to repay its debt. The fact that AT&T and Verizon have higher debt ratios than the industry average shows how heavily they rely on debt financing.
The Accounts Payable to Total Assets Ratio measures how a company’s assets compare to its short-term debt. A high ratio could indicate that a business utilizes payables financing, meaning it has short-term obligations to repay debts or loans. Additionally, this ratio reveals how effectively a business manages and controls its financial operations. Because AT&T’s accounts payable-to-total assets ratio is above the industry average, it employs a financing strategy that is more reliant on payables than the average company.
Profitability
Profitability ratios determine a company’s ability to generate profits from its available resources. The better the company performs, the higher these ratios tend to be. AT&T and Verizon are significant players in the telecommunications sector, so it is crucial to compare their profitability when evaluating each company’s success. The Gross Profit Margin is the first profitability metric that contrasts AT&T and Verizon. By dividing gross profit by sales revenue, this ratio can be used to calculate the profit margin from the revenue generated (Davis & Orhangazi, 2020).
The industry average gross profit margin is 64.96%, while AT&T’s is lower at 59.91%. This indicates that AT&T is generating less revenue from its operations than the industry average. Compared to the industry average of 64.67%, Verizon’s gross profit margin is higher at 62.63% (Narayanan & Heilprin, 2018). This indicates that Verizon outperforms AT&T and the industry average in generating a profit from its operations.
As a second measure of profitability, the Operating Profit Margin (operating profit divided by sales revenue) assesses how efficiently each business converts revenue into profit from operations. Verizon, with a margin of 34.06%, outperforms both its competitor and the industry average of 32.99%. This suggests superior operational efficiency. Conversely, AT&T’s margin of 28.54% is slightly lower than the sector average of 29.02% (Narayanan & Heilprin, 2018), implying that AT&T could boost its overall profitability by improving its core operations.
Market Value
Market Value Ratios are used to give a snapshot of a company’s stock performance. AT&T’s P/E ratio is 13.90, which is worse than the average of 25.64, indicating that investors are still willing to pay a premium for the company’s stock. Similarly, the company’s ROE is 16.6%, lower than the industry standard of 18.54%. This underlines the need for more investor confidence. In contrast, Verizon has a higher P/E ratio (17.61) than AT&T and a higher ROE than the industry average (16.04%) (Narayanan & Heilprin, 2018). This reflects a very positive sentiment toward the stock among investors.
The Market Value Ratios provide stakeholders with information about the stock performance of companies. The P/E ratio and ROE indicate the investor’s faith in the business. As a result, high P/E and ROE ratios indicate investor confidence in the company and correspond to high stock prices. As a result, Verizon currently has a competitive advantage over AT&T in terms of financial ratios. Its P/E and ROE are higher, reflecting high investor confidence, while AT&T’s are lower.
Capital Budgeting
Capital budgeting is a vital financial management tool for assessing and ranking investments. A component of capital budgeting, the net present value is used to estimate a project’s future value, taking into account anticipated future cash inflows.
Net Present Value (NPV)
NPV = CF0 + (CF1/ (1+r)1) + (CF2/ (1+r)2) + …
Where:
- CF0 = Initial investment
- CF1 = Cash flows in a subsequent period
- r = Discount Rate
Then,
NPV = $-450 + ($120/ (1+0.12)1) + ($250/ (1+0.12)2) + ($340/ (1+0.12)3) + ($550/ (1+0.12)4) = $-450 + $107.94 + $204.43 + $285.48 + $408.44 = $454.86 million.
Weighted Average Cost of Capital (WACC)
WACC = (E/V x Re) + (D/V x Rd x (1-T))
Where:
- E = Market value of equity
- V = Total value of the firm
- Re = Cost of equity
- D = Debt
- Rd = Cost of Debt
- T = Tax rate
Then,
WACC = (650/ 1150 x 0.12) + (350/ 1150 x 0.07 x (1-0.34)) = 0.06477 = 6.48%.
Working Capital
Working Capital = Current Assets – Current Liabilities
Then,
Working Capital = $1760 – $2200 = -$440 = -$4.04 billion.
Conclusion
The financial analysis ratios indicate that AT&T effectively manages its assets and liquidity. Although slightly below industry averages, the company’s debt management and profitability ratios show that these areas may need improvement. Although AT&T is not performing as well as its rivals in terms of market value ratios, its capital budgeting strategies are impressive.
Overall, AT&T has had moderate success as a business. However, to what extent it will be a wise investment in the future will depend on its capacity to resolve its debt and profitability problems and enhance its market value ratios. Also noteworthy is AT&T’s effective capital allocation and commitment to high-quality projects, both of which will undoubtedly benefit the business over the long term.
References
Agustina, Y. N., & Suprayitno, H. (2020). Analysis of financial statements using liquidity ratio to measure financial performance in 2017-2019: JOSAR (Journal of Students Academic Research), 5(2), 32–39. Web.
Davis, L., & Orhangazi, Ö. (2020). Competition and monopoly in the U.S. economy: What do the industrial concentration data show?Competition & Change, 25(1), 3–30. Web.
Mitchell, C. (2021). America’s monopoly problem: Broadband how telecom monopolies are blocking better Internet access, and what we can do about it. Web.
Narayanan, V. G., & Heilprin, Joel. L. (2018). AT&T versus Verizon: A financial comparison.
Serrumbia, M. V. G. (2020). Equity research – Verizon Inc. Run.unl.pt. Web.