Investment Analysis For At&t Inc And Financial Recommendations For The Company

Decision making on investments is formed based on the relative profit potential of investment options. In any event, when quantitative and systematic methods are not used in investment decision making, in inappropriate choices may be implemented and investors can incur losses instead of profits.

In any given investment situation, technical and economic parameters concerning savings, profits, and costs should be considered. Financial analysis is used to identify projects and companies to invest, organize financial policies, build long-term business plans and relationships as well as evaluate economic trends through the synthesis of financial data and numbers. Investors should understand and determine the strengths, profitability, liability, weaknesses, and potential earnings of the business in the future (Samonas, 2015). Some of the methods used to carry out financial analysis include vertical analysis, ratio analysis, and horizontal analysis. As a funds manager, this is an analysis of the financial position of AT&T Inc. to decide if it is viable to invest $25 million and yield an annual return of 9%.

AT&T is among the largest communication companies in the world. The company is well known for offering one of the most powerful and advanced global networks. According to AT&T (2019), on an average business day, the network carries data summing up to 82.8 petabytes to almost every continent and country in the world. Due to AT&T wireless network services, millions of people can communicate and travel seamlessly anywhere and anytime around the world. Most of the current digital technologies use AT&T wireless network (Acquisdat, 2018).

Currently, more than 225 countries enjoy AT&T voice coverage services while more than 210 countries benefit from data roaming and 170 countries with 3G. AT&T U-verse TV offers an amazing alternative for cables with better DVR, better TV experience, and better apps and features. By the same token, it was the first company in the United States to launch an integrated Wireless Receiver. The launched piece of technology allows people to watch TV virtually anywhere in their homes or even in the absence of a TV outlet.

The company operates and owns Hot Spots spanning beyond 34,000 in common places like hotels, libraries, restaurants, government buildings and other related places. The roaming agreement permits consumers of AT&T to access more than a million Hot Spots across the globe. Besides, AT&T manages the largest nations' Wi-Fi networks. AT&T is among the largest companies that provide IP-based communication services with an extensive portfolio of Voice over IP (VoIP), Virtual Private Network (VPN), and related offerings under customer support capabilities and innovative security. The company is also a global leader when it comes to delivering highly secure and reliable end-to-end network, IP solutions, data, and voice to large-scale customers. Finally, it is a service portfolio widely regarded by third parties as a lead industry

Business Strategy Analysis

AT&T has several different deports with each having distinct business operations. As a result, it uses business-level strategies to provide guidelines that employees, managers, and owners follow. The two distinct strategies that AT&T corporation utilizes to gain a competitive edge in the technology industry are differentiation and low-cost strategies. Concerning the low-cost strategy, the corporation is committed to providing competitive pricing to a variety of services that it offers in the U.S. market. AT&T also practices switching costs strategy whose main focus is on competitors, industrial forces, products, and position of the business in the market.

Furthermore, in order for the corporation to attain competitive power in the market, the cost and business differentiation strategies have been integrated. To master its differentiation strategy in the best way possible, the corporation initiated an agreement with Apple to sell iPhones. As a result, AT&T has successfully differentiated itself from its competitors a factor that has contributed to its success in the industry over the years. Initially, the corporation’s market strategy was believed to be the best among service providers in both local and global markets. Nonetheless, it came up with a new market strategy that made it renounce its local market services in a bid to guarantee the business a future given the prevailing conditions in the industry. The new strategy addressed the long-term business goals for the company, as it ensured that it had adequate control and improved customer service and experience. AT&T successfully changed global customer rules and the market business-level strategy has been favored by the company’s promotion and branding strategies.

From the analysis of the company’s business-level strategies, its market strategies have guaranteed its profitability, which has been critical in its long-term success. Additionally, by focusing on global markets, quality, and satisfactory customer service, AT&T has been able to gain a competitive advantage in the market. Moreover, the long-term success that the company has enjoyed over the years is attributed to public responsibility and employee development.

Accounting Analysis

AT&T adheres to the general accepted accounting principles (GAAP) in all its financial dealings. For instance, after completing the acquisition of Time Warner Inc. on June 14, 2018, it excluded the operating results from Time Warner before the acquisition. Additionally, the preparation of financial statements is done in conformity with GAAP whereby it is required for the management to make assumptions and estimates that affect the amounts reported in financial statements and accompanying notes including estimates of probable expenses and losses.

As a result, in the company’s SEC 10-K, it is acknowledged that results can differ from estimates and in some prior periods, the estimates conformed with current period presentations as presented in Note 4 of AT&T’s 2019 10-K SEC filings. In Note 4 section of the report, it is evident that the company analyzes its four segments; Communications, WarnerMedia, Latin America, and Xandr based on the contribution of each including operating income, excluding costs related with acquisitions and other significant items, and equity in net income of affiliate investments that each segment manages.

Financial Analysis

A financial ratio analysis is a comparison of financial statement categories and accounts. Ratio analysis is a comprehensive assessment of the financial statements of companies in quantitative form. Ratio analysis is crucial in evaluating the financial standing and performance operation of a company through assessment parameters like profitability, financial competence, liquidity, and efficiency. The benefits of this form of analysis include the importance of analyzing the financial position of a particular entity, which aids other financial institutions in making decisions on lending and investment opportunities. This form of analysis also assists in simplifying the understanding of the financial figures from the books of a company hence making the assessment process an easy one.

Current Ratio

It is a liquidity ratio measuring the ability of companies to short-term obligations or dues within a year. The current ratio shows analysts and investors the strength of a company when it comes to maximizing current assets present on its balance sheet to settle debts and related payables (Chen, Chou, & Huang, 2018). A current ratio that is less than one as in AT&T implies that liabilities are more than assets; meaning a company is in a situation that it cannot achieve its short-term financial obligations. From the analysis, the current ratio of AT&T was 0.76 in 2016, 0.97 in 2017 and 0.8 in 2018.

Quick Ratio

Quick ratio shows the liquidity of companies and how well the company can meet its current liabilities and assets without inventories. The quick ratios of AT&T for the three years are less than one indicating that the company has fewer current assets compared to current liabilities (Wahlen, Baginski, & Bradshaw, 2018). The ratios of AT&T for the three years indicate that it is unable to achieve its obligations (AT&T, 2017). For example, a quick ratio of 0.49 in 2018 for AT&T shows that for every $1 of current liability the company only has $0.49 of liquid assets to cover it. In 2016, AT&T had a quick ratio of 0.45, which later increased to 0.82 in 2017, and a year later decreased to 0.49.

Debt to Equity ratio

The debt to equity ratio shows how companies fund operations through debt instead of equity. It is a ratio that asses the stability of a company. Debt to equity ratio that is lower than one, as in AT&T for the three years shows that the company has low debt compared to each debt-equity of a shareholder's equity (Wahlen et al., 2018). AT&T recorded a debt to equity ratio of 0.92, 0.89 and 0.9 in 2016, 2017, and 2018 respectively.

Earnings per Share (EPS)

Earnings per share are part of the profit companies allocate per outstanding share in the common stock. According to Chen et al. (2018), EPS is an indicator of financial health since it is a portion of net income that the company would earn per every share when shareholders get all profit. Traders and analysts use EPS to establish the strength of a company financially (Chen et al., 2018). Moreover, it is often considered as one of the essential variables when it comes to the determination of stock value. AT&T recorded an EPS of 2.1 in 2016, 4.76 in 2017, and 2.85 in 2018.

(e) Price Earnings Ratio

It measures the current share price or stock prices relative to EPS. Sometimes other two names are used when referring to the P/E ratio – price multiple or earnings multiples. The ratio is well known for providing investors a better sense of a company's value (Wahlen et al., 2018). It shows market expectation and the price to pay per every future earnings' unit or current earnings' unit – depending on the situation. Earnings are crucial, as they are a necessity when it comes to valuing the stock of a company and predicting the future profitability of the company (Wahlen et al., 2018).

It is a good idea to compare a company's current P/E to those of the competitors or that company's P/E recorded in the previous years to ascertain facts like whether a P/E of 50x could be costly or a P/E of 10x could be a bargain (Wahlen et al., 2018). For example, just looking at P/E for AT&T without comparisons will tell one less compared to when the P/E is compared with the competitors' or past P/E of the company.

Financial Leverage

Leverage ratios also known as Debt/Equity ratio measures the long-term solvency of a business and to what extent a company’s debt can finance its operations and activities (Sengupta & Hogue, 2014). Bankers focus on leverage ratios to determine how businesses finance their assets either whether by investments or credit (Samonas, 2015). A high Debt/Equity ratio implies that business finances its operations majorly through credit and debts. According to Goel (2016), aggressive leverage practices of a company are associated with high levels of risk (Goel, 2016). Consequently, increased expenses in a company may result in volatile earnings.

Asset Management

This ratio is used to analyze how efficiently or effectively a business manages its assets to produce sales. Two types of asset management ratios to be discussed in this section for AT&T include inventory turnover ratios and fixed assets turnover.

Inventory turnover. The ratio is important for companies that sell physical products and shows how a company effectively manages its inventory by comparing inventory and cost of goods sold (Wahlen et al., 2018). Thus, the ratio shows the sales of inventory during a given period. The ratio is essential because it depends on the stock purchasing and sales of a company (Marinšek et al., 2016). Therefore, companies need to sell a large amount of their inventory to increase turnover. Meaning that there is no overspending in inventory utilization. In the year 2018 and 2019 financial years, AT&T recorded an inventory turnover ratio of 28.66 and 29.38 respectively. AT&T has a high inventory turnover, which means that it is meeting its customer demands.

Fixed asset turnover. On the other hand, fixed asset turnover measures the operating performance of a company. A high fixed asset turnover ratio shows that it utilizes its fixed assets effectively to generate income (Tennent, 2014). A high turnover shows that a company utilizes its assets efficiently or can also mean that a company has sold its equipment and is outsourcing its operations (Sengupta & Hogue, 2014). Nevertheless, low turnover indicates that a company is not utilizing its assets to the fullest, thus, insinuating that a company produces goods that people are not willing to buy or a company overestimates the demand of its products (Marinšek et al., 2016). Moreover, bottlenecks in the value chain can also be associated with low fixed asset turnover. In the year 2017 and 2018 financial years, AT&T recorded an asset turnover ratio of 0.3615 and 0.3211 respectively. The asset turnover ratio shows that AT&T Company utilizes its assets to generate revenue.

Profitability

A profitability ratio is used to assess the ability of a company to generate profit. Therefore, they show how well a company utilizes its assets in profit generation and increment in shareholders’ value.

Gross Profit Margin. The gross profit margin provides a comparison between a business' revenue and gross profit. According to Samonas (2015), the ratio measures earnings of a company by considering the cost required for a company to offers services and produce goods that meet the needs of its customers. Penman, (2013) argues that companies are efficient in their core operations when they record a wider gross profit margin (Jarrow & Chatterjea, 2013). On the other hand, when the profit margin is low, it indicates that the high cost of goods a company sold is associated with wrong promotions, strategies and sales, stiff competition in the market, low sales, stiff market, and adverse purchasing policy. In the year 2017 and 2018 financial years, AT&T recorded a gross margin of 51.5341 and 53.4898 respectively. The high gross margin means low cost of goods of the company sold that are associated with a competitive advantage and effective marketing strategies.

Return on Assets (ROA)

ROA is a good measure of the net earnings to total assets in a business. Goel (2016) adds that ROA is used to determine the amount of revenue a company can generate after paying taxes and how well they are utilizing the assets available. According to Penman (2013), a company becomes more asset-intensive when it records a lower profit per dollar (Tennent, 2014). As a consequence, asset-intensive companies require huge investments to acquire equipment and machinery to generate income. In the 2017 and 2018 financial years, AT&T recorded a ROA of 6.72 and 3.75 respectively. The low ratio shows that AT&T is asset-intensive meaning that it requires huge investments to acquire equipment and machinery to generate income.

Market value

Market values ratio evaluates the current share price of the stock of a publicly owned company. Investors use these ratios to determine whether the shares of the company are overpriced or underpriced (Tennent, 2014). Market value ratios discussed in this section include book earnings per share and value per share.

Prospective Analysis

In 2016, Moody's subjected notes of a new senior of AT&T to Baa1rating; the outcome was a negative rating outlook. According to the rating, the new senior to AT&T would keep the company 'slightly above or near the 3.0x limit' based on the rating of the Baa1 (AT&T, 2017). Apart from that, Moody's noted that 'the large asset purchase or the ongoing weakness in wireless revenues might place additional pressure on the ratings of AT&T' while the acquisition of the DirecTV would 'relieve some pressure on EBITDA.' Same to the first one, the second discovery is also a warning to AT&T that 'the high dividend is the cause of the weak retained cash flow' (AT&T, 2017). AT&T recorded an increase in the long-term debt by 56% yearly to 118.5 billion dollars in 2015 (AT&T, 2017). In 2016, the current liabilities increased by 28% to 37.3 billion dollars.

Summary

AT&T is among the biggest communication companies in the world. The company is providing one of the most effective and state of the art global networks. AT&T’s business strategy integrates differentiations and low price, which have successfully helped it gain a competitive edge in the market. Additionally, the success of the company has been associated with compliance with the GAAP as evident it its 10-K SEC filings. Concerning financial ratio analysis, AT&T has healthy financials, which are expected to strengthen in the future with its continual cementing of it position in the market.

Conclusion and Recommendations

Financial ratios result in relationships between the financial statement account that assist internal company management, creditors, and investors to understand the performance of the business and identify areas that require improvement. The ratios are popular, as they are the tools used to analyze the financial standing of businesses. The ratios are the raw computation of financial performance and position. With the help of the ratios, people can freely compare companies from different fields, as well as varying sizes, to determine the weakness and strength of the companies in question. AT&T is a renowned company in the world dealing with wireless network services.

The company has a big name though it has some challenges across its business operations. High dividends are one of the challenges the company is facing. The high dividend has led to weak retained cash flow. Finally, the company is trying to clear the debt and soon the challenge is likely to end. Therefore, it is advisable to invest $25 million in AT&T stocks because there are high chances that it will yield a 9% annual return.