Term Paper: AT&ampT Is in Basic Terms

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[. . .] Table 1: AT&T's Financial Ratios

Financial Ratio

2012

2011

Liquidity Ratios

Current ratio

0.71

0.74

Quick ratio

0.71

0.74

Cash ratio

0.15

0.10

Profitability ratios

Gross profit margin

0.57

0.57

Return on equity

0.08

0.04

Return on assets

0.03

0.01

Solvency Ratios

Debt to equity ratio

1.95

1.56

Debt ratio

0.66

0.61

Proprietary ratio

0.34

0.39

AT&T Ratio Analysis

Based on the financial ratios I have computed in the text above, it would be possible to determine not only the financial viability of AT&T but also its stability. To begin with, the company's liquidity ratios clearly demonstrate that the firm does not have the ability to settle its obligations (short-term) should they fall due at the moment. According to Lasher (2010), the current ratio should ideally be above 1. In the case of AT&T, its current ratios during the two years under consideration are below 1. AT&T's quick ratio is similar to its current ratio largely because the company does not have inventory, i.e. It is a service provider. Using the current ratio, we can determine AT&T's ability to settle its short-term obligations using only cash and cash equivalents. From Table 1 above, although regarded an extreme liquidity ratio, the cash ratio clearly indicates that were its short-term obligations to become due, AT&T would face significant challenges settling them using only its cash and cash equivalents.

Next, we have the profitability ratios. These ratios come in handy when it comes to the determination of a firm's ability to generate healthy returns. Looking at Table 1, AT&T was able to rake in better returns for its investors in 2012 than in 2011. This can be discerned from its return on equity. Further, in comparison to the year 2011, AT&T's managers were able to better utilize the company's assets in 2012 to generate profits. My assertion is in this case based on the higher ROA ratio in 2012 in relation to 2011. The return on assets ratio according to Lasher (2010) helps in the determination of how effectively a firm's assets (as well as skills) are being utilized in profit generation. The company's gross profit margin tells us that the profit AT&T's earned on its sales did not change during the period under consideration. Comparing this information with that of AT&T's competitors would help us determine how successful AT&T is in profit generation.

In seeking to determine the long-term solvency of AT&T, it would be prudent to take into consideration its solvency ratios. From the firm's debt-to-equity ratio, it is clear that during both financial periods, a significant portion of AT&T's assets were supplied by its creditors (Table 1). In 2012, the company was even more aggressive in its utilization of debt than it was in 2011. This can be gleaned from the relatively higher debt-to-equity ratio in 2012. It is however important to note that based on AT&T's debt ratio of less than 1 during the two financial periods, the company has more assets than debt. The company's assets in relation to debt also increased marginally in 2012. The proprietary ratio of AT&T tells us that out of every dollar the company had in 2011 and 2012, the contribution of shareholders was $0.39 and $0.34 respectively. Given the low share of stockholders in the company's total capital, the long-term solvency of AT&T seems threatened.

Conclusion

From an investor's point-of-view, AT&T is a risky company to invest in. This is more so the case given the results of the analysis I have conducted above. In addition to being unable to meet its obligations (short-term) should they fall due, AT&T's long-term solvency is also in question. Although the company is currently profitable, it may find it difficult to access funds for expansion from creditors going forward.

References

Albrecht, W.E., Stice, E.K. & Stice, J.D. (2010). Financial Accounting: Concepts and Applications (11th ed.). Mason, OH: Cengage Learning.

AT&T. (2013). AT&T Company Information. Retrieved April 24, 2013, from AT&T website: http://www.att.com/gen/investor-relations?pid=5711

Booton, J. (2011, January 13). AT&T to Take $2.7 Billion Charge in 4Q to Revamp Accounting System. Retrieved April 25, 2013, from FOXBusiness website: http://www.foxbusiness.com/markets/2011/01/13/att-billion-charge-q/

Lasher, W.R. (2010). Practical Financial Management (6th ed.). Mason, OH: Cengage Learning. [END OF PREVIEW]

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