Question

Solvency and Profitability ratio of
AT&T Fixed Assets to L/T Debt 2017 was 0.37 and 0.33 for 2018. Times Interest Earned 2017 was 3.40 and in 2018 was 4.13. Assets Turnover in 2017 was 0.3615 and in 2018 was 0.3211.Gross Margin for 2017 was 51.80% and for 2018 was 53.49%.P/E ratio for 2017 was 7.58 and 2018 was 9.78.
Verizon Communicationd Inc
Fixed Assets to L/T Debt in 2017 was 0.46 and 0.43 in 2018. Times Interest Earned in 2017 was 4.06 and in 2018 was 5.35. Assets Turnover in 2017 was 0.50 and in 2018 was 0.50.Gross Margin in 2017 was 59.09% and 57.58% in 2018. P/E ratio for 2017 was 6.79 and 14.76 in 2018. Dividend Yeild for 2017 was $2.335 and in 2018 was $2.385.
Provide a detailed analysis comparing both companies to each other, highlighting trends , assumptions etc.

Answer 1

Company: AT&T
	2017	2018
Fixed assets to L/T debt	0.37	0.33
Times Interest Earned	3.40	4.13
Asset turnover	0.3615	0.3211
Gross margin	51.80%	57.58%
P/E	7.58	9.78
Company: Verizon
	2017	2018
Fixed assets to L/T debt	0.46	0.43
Times Interest Earned	4.06	5.35
Asset turnover	0.50	0.50
Gross margin	59.09%	57.58%
P/E	6.79	14.76
Dividend yield	2.335	2.385

For AT&T we can see that their fixed asset to long term debt ratio has declined and this indicates increased level of leverage. Thus we can see that the company’s solvency position has declined in 2018 compared to 2017 as either the amount of fixed assets has declined or the amount of long term debt used to finance fixed assets has increased. The company’s times interest ratio has increased in 2018 and this means that AT&T’s ability to service its interest expenses has increased. This is a good sign for AT&T. Asset turnover = Net sales/total assets and for AT&T this figure declined in 2018 from last year. This means that the efficiency with which the company is using its assets has declined in 2018. Gross margin increase indicates improved level of profitability for the company and increase in P/E ratio reflects higher growth prospects and positive shareholder orientation for the company.

For Verizon we can see that its fixed asset to long term debt ratio has declined and this indicates increased level of leverage. Thus we can see that the company’s solvency position has declined in 2018 compared to 2017 as either the amount of fixed assets has declined or the amount of long term debt used to finance fixed assets has increased. The company’s times interest ratio has increased in 2018 and this means that Verizon’s ability to service its interest expenses has increased. This is a good sign for Verizon. Asset turnover is constant and hence there is no change in efficiency of asset utilization and gross margin decline indicates deteriorating profitability at the gross level. P/E ratio has more than doubled and this indicates high level of optimism in the stock market with regards to prospects of shares of Verizon. The company’s dividend yield has increased marginally in 2018 and this augurs well for the shareholders of Verizon.

In terms of comparing both the companies we can see that AT&T makes less use of debt as indicated by a lower fixed asset to long term debt ratio and so debt associated risks for AT&T is lower when compared to Verizon. Times interest earned ratio of Verizon is higher and this indicates better ability on part of Verizon to service its interest payments. Asset turnover is higher at Verizon when compared to AT&T and this indicates that Verizon is able to generate higher sales per dollar of assets used by it when compared to AT&T. Verizon outshines AT&T in terms of profitability and this is indicated by Verizon’s higher gross margins. P/E of Verizon outpaced AT&T in 2018 and this indicates better outlook and growth prospects for Verizon causing its prices to increase at a faster rate than AT&T.

In terms of assumptions I have assumed that the business and operating environment for both the companies are exactly same and hence financial metrics of both companies are comparable.