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Financial analysis on AT&T Essay

Financial analysis on AT&T

AT&T Inc. is the largest provider of both local and long distance telephone services, wireless service, and DSL Internet access in the United States with 71.4 million customers[1]. As it is expanding a look into its financial statements is important, hence this essay will further evaluate and analyze its financial performance.

Its operating revenues and operating income keep increasing during 2003 until 2007. In 2003 operating revenue was $40498 billion, rising to $118928 billion in 2007; creating an increase of 193.664%3. As well, operating income increases from $6284 billion in 2003 to $20404 billion in 20073; meaning an increase of 224.697%.

This means that AT&T are able to attract more customers to use their services, which could result from an effective marketing plan and strategy, special offers and discounts, better service, etc. But AT&T didn’t manage its expenses efficiently, since its expenses demands 84.48% of sales in 2003, while in 2007 expenses demands 82.84% of sales3. Although it shows a little improvement, but expense ratio is still high; since its operating revenue is high while operating income is low. Not to mention that there are other expenses, such as interest expenses (which demands 17.188% of operating revenue in 20073)

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and income taxes (which demands 30.646% of operating revenue in 20073)

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, hence creating an income of $11951 billion in 20073. Hence the company should identify, analyze and control its fixed and variable costs. This could be exercised by developing cost centers, which are particular areas, departments or sections of a business to which costs can be directly attributed to4; hence enabling the business to compare sales with each individual costs and thus allows AT&T to identify excessive costs. Costs could also be reduced by providing training to employees, while it will increase costs in the short-term, profits would be enhance in the long term since productivity and quality of service would increase.

But it accounts receivable turnover ratio of 7.35 days (in 2007) is well managed3, since debtors usually have 30 days to pay their debts. Managing its accounts receivable effectively means the company has effectively managed its credit policy as well as showing that it is efficiently collecting its debts. But is has worsened if compared to 2006, where its account receivable ratio was 3.89 days3. The company could provide discounts in order to encourage debtors to pay sooner or it could also use factoring where accounts receivable for a discounted price to a finance or factoring company (the business will receive 90% of amount of its receivables within 48 hours)5. An improved accounts receivable will also enhance its current ratio or liquidity.

Moreover its current ratio showed 0.248:1 in 2006 improving to 0.287:1 in 20073. Nevertheless it still shows risk of not being able to finance its current liabilities. Not being able to finance its debts shows risk of bankruptcy, as financial institutions have first claim of any money in the business in the event of liquidation. One way of improving this is to increase sales by improving its

marketing strategies, such as redesigning its advertisements, creating closer relationships with customers, improving its service, etc.

Furthermore its debt-to-equity ratio in 2006 showed 0.559:1 and 0.553:1 in 20073. A debt-to-equity ratio shows the extent to which a firm is relying on debt or outside sources to finance the business6 and showing the ratios above, AT &T is solvent and thus encourages investors to invest in the company since it involves less risk. In fact diluted earnings per share increase from 1.89 to 1.94 from 2006 to 20073.

A gross profit ratio represents an amount of sales that is available to meet expenses resulting in net profit6. It also shows changes from one accounting period to another and indicates effectiveness of planning policies concerning pricing, sales, discounts and valuation of stock6. AT&T’s gross profit reached 16.316% in 2006 increasing to 17.157% in 20073. This is relatively low, since it does not include the other expenses yet and it also shows risks of creating a deficit, since other expenses demands 47.834% of its operating revenue3.  In fact its net profits showed 6.367% in 2006 rising to 10.359% in 20073. Although an improvement is shown, its net profit is still low. A higher net profit would enable AT&T to invest and expand, hence increasing its sales, profits and market share.

Nevertheless it share performance was stable until it dropped in December 2007 to approximately to $36.2 but then improved up to $42.1 until it dropped again in mid January 2007 to $36 but increased again in April 2008 to $407.

These up and downs affect the company’s available funds for investments as well as its equity. At lower prices, shareholders are more likely to buy shares and thus increasing its available funds for investments and equity and higher prices will create an opposite effect. But the problem is that if a low price occurs, hence demand and thus share price will increase; hence then investors will sell their shares; resulting in a lower price and so on.

In fact AT&T reached the second place, after Sprint Nextel Corp. (S) for year over year quarterly stocks revenue growth of approximately 55% between 2006 and 20078. (T in the diagram)

8 Chart: Telecom stocks-quarterly revenue growth. http://seekingalpha.com/article/13150-chart-telecom-stocks-quarterly-revenue-growth. [online], ‘cited 6.5.2008’

Overall AT&T has performed well in their financial section but they need to be more efficient; especially in managing expenses in order to obtain higher net profits. They also need to improve its liquidity, which could also be improved by reducing expenses; since they would have more profits and thus cash.

[1] AT&T, http://en.wikipedia.org/wiki/AT%26T. [online], ‘cited 6.5.2008’
[2] The Regulatory Inefficiency Theorem .http://longorshortcapital.com/regulatory-efficiency-theorem.htm, [online], ‘cited 6.5.2008’
3 AT&T Inc. financial review 2007. http://www.att.com/Investor/ATT_Annual/downloads/07_ATTar_Complete10K.pdf, [online]. ‘cited 6.5.2008’

42005. Stephen Chapman, Cassy Norris, Natalie Devenish, Llian Merritt.

Business Studies in Action, chapter 8

5 2005. Stephen Chapman, Cassy Norris, Natalie Devenish, Llian Merritt.

Business Studies in Action, chapter 6

6 2005. Stephen Chapman, Cassy Norris, Natalie Devenish, Llian Merritt.

Business Studies in Action, chapter 7

7 http://chart.finance.yahoo.com/c/1y/t/t. [online], ‘cited 6.5.2008’

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