Free Essay On AT&T Financial Analysis

Introduction

AT&T is a telecommunication services provider in the United States and internationally (Att.com, 2015). This paper uses a range of financial ratios to assess the financial health of the company and compare its performance against the industry benchmarks provided by Daily Finance. It also analyzes the corporate vision and explores the strategies for implementing the objectives.

FINANCIAL ANALYSIS

Liquidity analysis
i) Current ratio
Current ratio indicates the value of AT&T’s current assets for every dollar of its short-term obligations (Brigham & Ehrhardt, 2010). It is calculated by dividing the total current assets by the total current liabilities (Brigham & Ehrhardt, 2010). As at 31st December, 2014, AT&T had total current assets of $32,028 million and total current liabilities of $23,196 million (Att.com, 2015). The current ratio was, therefore, 0.859 indicating that the value of its current assets was less than that of its current obligations.
The total current assets of AT&T could only pay 85.9% of the firm’s current liabilities. This implies that the company is unable to pay its current obligations using its current assets. The current ratio for the company in 2013 was 0.663 indicating that it current assets could pay 66.3% of its current liabilities as at December 31, 2013. The ratio increased in 2014 showing an improvement in the liquidity of AT&T. According to Daily Finance, the industry average current ratio for the same period was 0.90 (Dailyfinance.com, 2015). AT&T’s current ratio was close to the industry average ratio hence its liquidity was almost the same as that of its peers in the telecommunication sector.
ii) Acid test ratio
This ratio indicates the amount of quick assets available in the company for every dollar of current assets (Peterson Drake & Fabozzi, 2012). Quick assets refer to the total current assets less the amount of prepaid expenses and inventories (Peterson Drake & Fabozzi, 2012). As at December 31, 2014, AT&T did not have a balance of inventory, and the total prepaid expenses were $831 million hence the quick assets were $31,197 million. As at the same date in 2013, total current assets were $23,196 million, out of which, prepaid expenses were $960 million hence the quick assets were $22,236 million (Att.com, 2015). Inventories were $1,933 million as at December 31, 2014 and $1,148 million as at December 31, 2013.
The acid test ratio for AT&T as at December 31, 2014 was 0.785 indicating that if it sold its quick assets, the proceeds could only meet 78.5% of its current obligations. The ratio was 0.603 in 2013 indicating that the liquidity of AT&T improved in the year ended December 2014.
iii) Working capital
This is the amount of current assets over and above the total amount of current liabilities. It indicates the company’s operating liquidity (Peterson Drake & Fabozzi, 2012). A positive working capital shows that the firm’s current assets are adequate to repay its current obligations. At the end of December 2014, AT&T had current assets amounting to $32,028 million and current liabilities amounting to $37,282 million. This indicates that AT&T’s working capital was -$5,254. This shows that its current obligations were more than its current assets and could not repay its short-term obligations if it sold all its current assets. This is a great concern since it can be forced to borrow additional funds to pay matured short-term obligations. The operating liquidity of AT&T improved in 2014 since its working capital was -$11,799 in 2013. The increase in the working capital indicates an improvement in its operating liquidity.

Profitability analysis

i) Return on assets
Return on assets expresses the amount of net income the company earns as a percentage of the total assets used in a given period (Gibson, 2011). It shows how efficient the company is in utilizing its total assets to generate net income. In the year ended December 2014, AT&T made a net income of $6,518 million and $18,553 million in the same the previous year. The total assets as at the end of 2014 and 2013 financial years were $282,829 million and $277,787 million respectively. This translates a return on investment of 2.305% in 2014 and 6.679% in 2013.
The return on assets shows that the AT&T earned a net income of $0.02305 for every dollar of assets used in the company during the year 2014. The ratio is less than the industry average of 6.1% showing that AT&T’s performance/profitability was lower than that of most of its peers in the telecommunication sector. The ratio decreased by about 65% in 2014 showing a decline in the profitability of the firm. It also indicates a reduction in the efficiency of the management of the company in using its total assets to generate net income for the shareholders.
The firms’ net profit margin for the year 2014 was 4.92% meaning that it earned a net income of $0.0492 for every dollar of revenue earned. This lower than the industry average ratio of 7.3% implying that the profitability of AT&T was lower than that of its competitors in 2014. The ratio declined by about 66% from 14.4% in 2013. This indicates that AT&T’s profitability declined in 2014.

Solvency analysis

Debt to Equity ratio
The ratio expresses the value of debt as a percentage of the total value of shareholders’ equity. It, therefore, gives a measure of the claim of debt holders in the company’s assets relative to the claim of the company’s equity holders (Gibson, 2011). It indicates the level of financial risk in a firm by assessing the security and protection of creditors. Unsecured creditors normally have their security in the equity of the company hence a higher debt to equity ratio implies a greater risk.
As at December 2014, total liabilities of AT&T were $205,905 million while on the same date in 2013, total liabilities were $186,305 million. The company’s shareholders’ equity on the same date for 2014 and 2013 were $86,924 million and $91,482 million respectively. The debt-equity ratio for 2014 was 2.369 while that of 2013 was 2.037. This indicates that the value of total debt was 2.369 times the value of equity of AT&T. The ratio is high indicating a significant financial risk of investing in or advancing credit to the company. The rule of thumb is that a debt to equity ratio of more than 0.75 is undesirable. The ratio increased in 2014 indicating a fall in the solvency of AT&T and a decrease in the protection of AT&T’s creditors. The ratio was lower that the industry’s average of 1.79 indicating that AT&T had a lower solvency than that of most of its competitors in the industry.
The high debt ratio also indicates the low solvency of the company. AT&T’s total debt ratio was 0.718 meaning that over 71% of the company’s total assets were acquired through borrowing. This is high and indicates a high financial since debt holders have a claim on a larger proportion of AT&T’s assets than the shareholders. In 2013, the debt ratio was 0.6707. The increase in debt ratio in 2014 also indicates a deterioration of AT&T’s solvency.

Strategic vision for AT&T

The current vision of the company states as follows (Corp.att.com, 2015):
We aspire to be the most admired and valuable company in the world. Our goal is to enrich our customers personal lives and make their business more successful by bringing to market exciting and useful communications services, building share owner value in the process.
The vision may be changed to: ‘to be the world’s leading designer and produce of service platforms, processes, and networks. The vision of being the leading firm will push the company to enhance its liquidity, solvency and improve its profitability.

Strategic objectives

Continuous innovation: The telecommunication sector is highly competitive hence innovation is crucial to the success of AT&T. Relevant innovations that suit the current and future needs of users will enable the company acquire and maintain the global leadership status in the sector.

Human capital development: innovation and efficient operations can only be achieved with a skilled workforce.

Strategy formulation
The company should pursue a cost leadership strategy. An examination of the AT&T’s income statement indicates that its cost of providing services in 2014 was about 91.1% of its total operating revenue. This explains the low profit margin seen in the year 2014. A cut in the cost of providing services will improve its profitability as well as enabling it to invest in innovation and other important capital projects (Hitt, Ireland & Hoskisson, 2013). This will also improve the performance of its stock in the stock market and increase the confidence of investors in its future.

Plan to implement the Strategy

Cost leadership will be attained by enhancing the skills of employees. The company should, therefore, organize training programs for its employees, especially the technocrats. In addition, the company should revise its reward scheme in order to reward innovation. This will enhance innovation and the skills of employees (Hitt, Ireland & Hoskisson, 2013). This can only be attained by modifying the organization structure to allow the staff to take initiative actions. Skilled employees perform their activities efficiently thereby reducing the time and resources required to carry out the activity. The company should also create awareness among the employees to ensure they are committed to the low-cost strategy. Implementation will also require tightening the control systems and enhanced supervision.
The cost of production can be lowered through vertical integration. AT&T can acquire or merge with firms supplying the raw materials. Through synergies and other economies of scale realized through integration, AT&T will be able to cut down the cost of raw materials. In addition, the company can enter into long-term contracts with the suppliers of raw materials (Hitt, Ireland & Hoskisson, 2013). The vendors will supply at lower costs since long-term contracts give them a sense of security and stability in revenues.

Evaluation and control

Functional heads will be responsible for the implementation of the strategy within their areas. They shall assess the training needs of their employees and develop plans to meet them. Targets will be set for each functional area. The functional managers will provide quarterly reports on the progress of the implementation process shall be monitored and controlled.

Conclusion

The current and acid test ratios of AT&T indicate that it is unable to settle its current obligations using its current assets. The current assets can only repay about 85% of total current liabilities while the quick assets can cover only 78% of the short-term obligations. The company faces working capital challenges since its working capital is negative. The debt ratio indicates that AT&T’s solvency is low since its total debt is about 73% of the total assets. The company can pursue a cost leadership strategy to achieve the vision of being the global leader in the sector. This will require improved efficiency that the firm can achieve through training employees, among other measures. The company may also use vertical integration to reduce the cost of raw materials. The strategy will only succeed if the employees and functional managers are committed to it.

References

Att.com,. (2015). 2014 AT&T Annual Report, AT&T Financial Statements and Earnings. Retrieved 11 March 2015, from http://www.att.com/Investor/ATT_Annual/2014/
Brigham, E., & Ehrhardt, M. (2010). Financial management (11th ed.). New York: Cengage Learning.
Corp.att.com,. (2015). AT&T Labs - About AT&T Labs - Mission and Vision| AT&T Labs| AT&T. Retrieved 12 March 2015, from http://www.corp.att.com/attlabs/about/mission.html
Dailyfinance.com,. (2015). AT&T Financial Ratios T | DailyFinance. Retrieved 11 March 2015, from http://www.dailyfinance.com/quote/nyse/att/t/financial-ratios
Gibson, C. (2011). Financial reporting & analysis. Mason, Ohio: South-Western.
Hitt, M., Ireland, R., & Hoskisson, R. (2013). Strategic management. Mason, OH: South-Western Cengage Learning.
Peterson Drake, P., & Fabozzi, F. (2012). Analysis of financial statements. Hoboken, N.J.: Wiley.
Appendices