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Memorandum
To: Management of Verizon
CC: Professor Wichser
From: Clarissa McMickens-Thomas
Date: 8/19/2015
Re: Financial Analysis and Recommendations
Verizon
The financial analysis of Verizon will look at the profitability, liquidity, leverage,
operating returns, and Return on Equity of the company for the year of 2014. The standard of
comparison will be with AT&T which is a company within this industry. This financial analysis
will determine what Verizon is doing well and areas in which management should take a closer
look. The first area of analysis of profitability is net profit margin of Verizon in comparison to
AT&T. In 2014, the net profit margin for Verizon was 0.01% while AT&T had a net profit
margin of 5%. This analysis is a more accurate measure of the company’s profitability. The
fraction of each dollar in revenue is $0.01 cents which represents Verizon’s profit per dollar of
sales, while AT&T has a fraction of each dollar of $0.05 cents per dollar of sales. This is one
area that management should be proud of considering that Verizon is earning 1 cent per dollar of
sales which was $127.1 billion in 2014.
The next area in the financial analysis is liquidity which is measured by using current
ratio of both companies. This ratio will show Verizon’s ability to meet its’ near term obligations.
The current ratio in 2014 for Verizon was $1.06 while AT&T had a current ratio of $0.86.
Verizon is doing well in the value of their current assets being able to cover their short term
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obligations because the ratio is above 1. AT&T may have some liquidity problems since their
current ratio is less than 1. The leverage of Verizon is measured using the Book Equity
Multiplier which was $16.90 in 2014, and was $3.37 for the competitor AT&T. When looking at
these amounts, it is clear that Verizon has more leverage over AT&T which is an area where
management needs to take a closer look. The higher ratio of Verizon shows that assets were
being funded by more creditors than investors, and this is considered risky for the investors.
AT&T’s leverage shows that they are less dependent on debt financing. This is an area that
Verizon needs to take a closer look at, considering that the leverage increases the risk to the
company’s investors.
When taking a closer look at the asset turnover ratio, there is clear evidence that Verizon
is well and able to use their assets efficiently to generate sales. In 2014, Verizon had an asset
turnover ratio of $1 while AT&T had a ratio of $0.45. For each $1 of assets, a $1 of sales is
generated. The net sales are equal to the total assets in 2014. This is impressive, considering that
the competition’s asset turnover ratio is only $0.45 cents generated for sales of every $1 in
assets. AT&T is having some problems in using their assets efficiently which could be a sign of
management or production problems.
Return on Equity is a very important part of this financial analysis as it measures how
efficiently Verizon is using the money from investors to generate profits and help the company
grow. This is a profitability ratio that is important to the investors. In 2014, Verizon’s ROE was
$0.87 while the competition’s ROE was $0.07. Verizon’s investors should see a clear indication
that the company is using its investors’ funds most effectively. For every $1 of common
stockholders’ equity, Verizon is generating $0.87 cents of net income compared to AT&T
only generating $0.07 cents of net income to every $1 of common stockholders’ equity.
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Management needs to look closer at this ratio’s results because the higher the ratio the better for
potential investors who might be watching to see how efficiently Verizon is using their investor’s
money to generate net income. The higher the ratio, the more opportunities for potential
investors to invest in Verizon which is always a positive move forward. Also, management is
effectively using the equity financing to fund the operations of Verizon and to grow the company
as well.
Based on the financial analysis conducted on the 2014 financials of Verizon and in
comparison to AT&T’s financials, there are some recommendations as to stay ahead of the
competition and keep Verizon at the forefront of this industry. The first recommendation for
Verizon’s management is to first bring the leverage down of the Book Equity Multiplier. Even
though the profitability ratios show that Verizon is doing well, management needs to take a
closer look into their debt financing practices, because this is risky for the investors. Verizon
does not want the investors to question their practices or begin to sell their shares in lieu of
taking their investments somewhere else. Leverage is not always negative, but a closer look into
why there is so much debt financing and where to improve is a start.
Also, the recommendation of increasing the percentage of Return on Equity will only aid
in higher profits for Verizon. The current ROE is not bad, but if management is able to capitalize
in this area, then there is more funds to operate Verizon and to continue to aid the company in
their growth in the years to come. The higher the ratio the better investment opportunities the
company can decide to embark on which helps to spread the gap in financial profitability in the
industry. This will keep Verizon at the top of the list for the most successful and profitable
companies in the future. Overall, management is doing an outstanding job in the affairs of the
company and its external and internal entities. There is always room for improvement in order
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for Verizon to remain competitive in their market industry, and if the few recommendations are
implemented then the company will continue to soar in the future.
Clarissa McMickens-Thomas
Graduate Student
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References
AT&T Inc. (2014). AT&T Inc. 2014 Annual Report. Retrieved from
http://www.att.com/Investor/ATT_Annual/2014/downloads/att_ar2014_annualreport.pdf
Verizon. (2014). Verizon 2014 Annual Report. Retrieved from
https://www.verizon.com/about/sites/default/files/2014_vz_annual_report.pdf
CONFIDENTIAL