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Sample Finance Research Paper on Financial Management

Case Study: AT&T Inc.

Abstract

AT & T Inc. is a giant telecom and technology company based in Dallas, United States of America.  The company offers various tech solutions to the domestic and international market besides high-speed mobile and internet connectivity. As such, AT & T now is one of the top companies in the capital market, New York Stock Exchange. But then, the company to engage in excellent financial management and prepare financial statements as required by law and for the good of the company stakeholders. In this paper, you will find a critical financial analysis of AT & T Inc. based on its performance in the recent years for the purposes of investment decision making.

Financial Management

Case Study: AT&T Inc.

Introduction

Financial management is a key part of a company that the management have to be concerned about. It is concerned with appropriate procurement of the organizational funds and their proper utilization (MVN University, 2016). Through financial managers, a company is able to ensure that its central resources are used efficiently towards a positive performance. According to McNamara (2016) basic areas that financial managers should concentrate in include cash management and book-keeping that ought to done under the guidance of International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) so that they can facilitate important decision-making among the company stakeholders.

Financial data is useful for stakeholders including the government, investors, suppliers, creditors, among many other groups. The government needs the data for tax and regulatory purposes while creditors and suppliers need to know the company would be able to meet its financial obligations to them. This paper has based its focus on how the financial data is important to investors. An investor would want to know the performance of the company so that he would be able to make a decision whether to invest in it or not. Important elements of financial performance data for an investor include; yearly dividend payouts, net earnings, net cash flows, revenue on sales and services, and debt leverage.  

This financial management research paper is based on the financial of American Telephone and Telegraph Company that goes by its trading name AT & T Inc., an American giant technology and mobile services company whose headquarters are in Dallas, Texas. The corporation was founded by Alexander Graham Bell in 1876 but key people in the current management include John J. Stephens as the Chief Financial Officer &
Senior Executive VP and Randall L. Stephenson as the Chairman, President &
Chief Executive Officer. The company delivers innovative mobile and broadband services, modern pay TV, ultra-high-speed internet, and other technology solutions for individuals and business organizations within the domestic on the US and international market made up of 11 Latin America nations. AT & T’s customer base comprises of over 380 million people in the Northern America who are connected on its super-speed mobile network and more than 3.5 million businesses across the globe (AT&T Company Information | AT&T About Us, 2016).

AT&T Company has achieved has significant growth in the domestic and international markets in the recent years hence making it very attractive to investors from all over the world. Its financial statements and current performance are well prepared and available in the annual financial statements and reports that can be accessed on the internet. This research paper has exhaustively analyzed AT&T’s business strategies to show how the company counters competition and achieves growth. The paper has also done a proper accounting and financial analyses whereby the financial statements have been explored to reveal if they are accurate and reliable. Financial analysis has employed common accounting ratios in order to reveal the position of the company in terms of profitability, leverage, and liquidity. Finally there is a prospective analysis to show a forecasted performance based on various financial columns and personal assumptions.

Business Analysis

Strategy Analysis

Every business needs to have a business strategies that would enable it to set out means it will use to achieve its objectives in the short-term and long-term.  According to Zwilling (2016), a key to succeed in the current business world is to have a positive strategy. The strategy should incorporate elements including market and customer positioning, competitive and leadership leverage, constant restructuring for future advantage, and having customer and employee value propositions. AT&T has employed both generic and competitive strategies to enhance its operations in the technology market and the wider telecommunications industry.

Among its generic strategies, AT & T has employed growth strategy whereby it has expanded to acquire new ventures and come up with new products and services in the market. On 28 June, 2016, the company formally announced on its website that it had successfully acquired Quickplay Media, Inc (AT&T Company Information | AT&T About Us, 2016). Including Quickplay in its portfolio was a smart move aimed at delivering video content anytime and anywhere the viewers wanted it. AT & T purchased Madison Dearborn Partners, which is an ambitious capital investment company headquartered in Chicago.  Earlier in 2014 July, AT & T completed a deal worth billions of dollars to complete the acquisition of DirecTV to make it the leading pay-TV services provider both domestically and internationally. In Mexico, AT & T was able to acquire all businesses under Nextel Mexico for about $1.875 billion (AT&T Company Information | AT&T About Us, 2016). The company doesn’t seem to stop at that since it is targeting Hollywood acquisitions that could cost it up to $50 billion (Pressman, 2016). These acquisitions and expansion are all part of AT & T’s effort to establish and grow in the telecom industry.

Internationalization or Globalization is another generic business strategy that AT & T has widely used in the recent past to expand to the global telecom market. Having started as telephone company serving US locals only, it has expanded to serve quite a number of countries in the North and the Latin America. Currently, its pay TV service is available in 7 countries in the Latin America and still expanding. Its advanced technology solutions reach over 3.5 million business in 6 continents, which makes it all over the world except the uninhabited Antarctica continent.

But then, AT & T operates in the American telecommunication industry that is characterized by stiff competition hence need to come up with the best competitive strategies. In the local market, U.S., AT & T faces cut-throat competition from Verizon Wireless, T-Mobile and Sprint companies. Verizon Wireless is the largest telecommunication company in the US with a subscriber base of an estimated 142 million subscribers followed by AT & T. T-Mobile and Sprint have a significant proportion of the market with 67 million and 58 million subscribers respectively (Fierce Wireless, 2016). In the international telecommunications market, CNN money (2016) lists BT Group and Nippon Telegraph and Telephone (NTT) as its main rivals. BT is UK-based with telecommunication services in over 180 countries while NTT is the global telecommunications leader with headquarters in Tokyo Japan. Both the local and international rivals pose a serious threat to AT & T hence the need for strong competitive business strategies.

One of the strongest competitive strategies AT & T has come up with is high use of innovation. The company is constantly taking a step ahead of its rivals in creating new product ideas in the market. In an article published on its website, AT & T just launched a highly secure cloud connectivity that would become an important asset of beating its competition. (Business News | AT&T About Us, 2016). On the other hand, the company is making trials of its 5th generation network, 5G, which would serve its subscribers at homes and business with ultra-super-speeds. Hardy (2016) acknowledged AT &T’s 5G innovation, terming it as an innovation and an inspiration. Therefore, through these innovations and many more, AT & T stands strong in the telecommunications industry.  

Accounting Analysis

AT & T prepares all statutory financial statements based on the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS). Its financial statements and documents are published quarterly or yearly the external users. Its financial statements are audited by Ernst & Young LLP, an independent auditor and consultancy firm to AT & T. Management assertions in the auditor and management reports reveal that AT & T provides all necessary data and accounting records for the purposes of a proper audit. Since AT & T’s accounting statements are subjected to independent audits and are subject to GAAPs and IFRSs, it shows that accounting practices adopted by the company generally reflect an accurate picture its economic performance (AT&T Investor Relations | AT&T About Us, 2016). This means that its performance indicators have validity and can be depended upon by the investors and other stakeholders.

It is even better for the external financial data users of AT & T because its financial performance has been critically analyzed by the capital markets and various business columns and their results published on websites on the internet. Key statements that are subjected to critical analyses include the income statements, statements of financial position or balance sheet, statements of cash flows.  The income statement reports revenues and expenses generated during a specific period and then shows the net earnings or losses of the company. The statement of financial position indicates the value of the company by showing its value of its assets, liabilities and equity. On the other hand, the cash flows statements reveals activities regarding operations, investment, and financing of the company. Further, these statements are subjected to financial ratio analyses that show the company’s performance, liquidity, profitability and leverage (NASDAQ, 2016). 

AT & T submits 10K and 8K SEC files as annual reports pursuant to section 13 or 15(d) of the Securities exchange act of 1934 and transition reports pursuant to section 13 or 15(d) of the Securities exchange act of 1934. AT & T’s SEC files shed light on important aspects of the company especially those that could impact future performance and investor activities. In the 2015 annual report, the company reported that it did not have any material issues that could affect its operations. However, Forms 10-Q and 10-K submitted by 31 December 2015 disclosed more than 3 legal proceedings that could lead to sanctions. These sanctions were all monetary and could cost AT & T estimated US $100,000 or more. The reported proceedings include an investigation by California government of DirecTV on claims of hazardous material mismanagement in 2012 whereby there is no formal litigation but the company may incur huge settlements of up to $100,000; and an involvement in a penalty demand of over 100,000 dollars following an investigation of Cricket Communications Inc. by the San Diego County government. The company accepts these legal issues plus some more proceedings could lead to monetary settlements but believe all of them are immaterial regarding its operations.

Financial Analysis

The financial analysis of AT&T is executed in the context of common financial ratios from 2013 to 2015 as shown and explained below. (The values in the tables are in $ ‘000)

  1. BEP and ROA
RatioCalculation201320142015
BEP (Basic Earning Power)EBIT ( Earnings before Interest and Tax) / Total assets X 100%31,990,000 / 277,787,000 = 11.52%13,968,000 / 296,834,000 = 4.71%24,812,000 / 402,672,000 = 6.16%
ROA (Return on Assets)Net income available to common stockholders/ Total Assets x 100%18,418,000 / 277,787,000 = 6.63%6,442,000 / 296,834,000 = 2.17%13,345,000 / 402,672,000 =3.31%

The Basic Earning Power Ratio indicates how efficient a firm is before it is subjected to taxes and finance leverage while the Return on Assets shows the net earning power of the company. The two ratios are almost similar because they share the same denominator, total assets, though their numerators are different (Irfanullah, 2016). Based on AT& T’s financial statements; the BEP or raw earning power in 2013 was 11.52% while ROA was 6.63% showing that about 4.89% could have gone to interest expenditure and taxation because returns reduced significantly when interest and tax were expensed out. ROA was 2.17 and 3.31% in 2014 and 2015, representing a decline from 4.71 and 6.16% respectively showing that almost half of the returns for these years was expensed out in taxes and interests.

  1. ROE
RatioCalculation201320142015
ROE (Return on Equity)Net income available to common stockholders/ Equity x 100%18,418,000 / 90,988,000 = 20.24%6,442,000 / 89,716,000 = 7.18%13,345,000 / 122,671,000 = 10.88%

Return on Equity ratio shows the profitability of the investment by the shareholders of the company (Irfanullah, 2016). AT & T recorded excellent returns in 2013, at 20%, showing that the investment was profitable by this percentage. However, the returns for 2014 reduced significantly to 7.18% but increased by about 3.5% in 2015 financial year.

  1. Profit Margin On Sales
RatioCalculation201320142015
Profit Margin On SalesNet income available to common stockholders/ Sales x 100%18,418,000 / 128,752,000 = 14.31%6,442,000 / 132,447,000 =4.86%13,345,000 / 146,801,000 = 9.09%

Profit Margin ratio is a basic measure of the percentage of net earnings to its net revenues (Irfanullah, 2016). Since it is used for performance comparisons both internally and externally, for AT &T, we can conclude that the margin on sales has reduced significantly from 2013 at 14.31% to 9.09% in 2015. The company, however, achieved a dismal margin in 2014 at 4.86%.

  1. Fixed Assets Turnover
RatioCalculation201320142015
Fixed Assets TurnoverSales/ Net Fixed assets128,752,000 / 110,968,000 = 1.16132,447,000 / 112,898,000 = 1.17146,801,000 / 124,450,000 = 1.18

FAT shows the activity of the company whereby it measures how each unit value of revenue earned per each unit value of fixed asset investment (Irfanullah, 2016). Based on AT & T performance, it can be concluded that the company has achieved moderate results. A FAT ratio of 1.16 in 2013 shows that the company generated $1.16 per every $1 of its fixed assets. The ratio remains almost constant throughout the three-year period under consideration showing a constant return on fixed assets of the company.

  • Total Assets Turnover
RatioCalculation201320142015
Total Assets TurnoverSales/ Total assets128,752,000 / 277,787,000 = 0.46132,447,000 / 296,834,000 = 0.45146,801,000 / 402,672,000 = 0.36

FAT shows the activity of the company whereby it measures how each unit value of revenue earned per each unit value of total asset investment (Irfanullah, 2016). The TAT ratios for AT & T from 2013 have been dismal with the lowest of 0.36 in 2015 showing that the company returns poorly on its overall assets.

  • P/E ratio
RatioPPSEPSCalculation2015
P/E (Price to Earnings) Ratio= 39.3313,345,000 / 6,495,000 = 2.05  Price per share/ Earnings per share39.33 / 2.05 = 19.19

The P/E ratio indicates how the market or stock price of a company relates to the earnings per share in its financial statements whereby it is normally between 15 and 25 (Irfanullah, 2016). P/E ratio for AT & T is 19.19 which is relatively efficient. We can conclude that the company’s stock value is performing well enough because of the high P/E ratio.

  • Current Ratio
RatioCalculation201320142015
Current RatioCurrent Assets/ Current Liabilities23,196,000 / 34,995,000 = 0.6633,606,000 / 37,282,000 = 0.9035,992,000 / 47,816,000 = 0.75

The current ratio reveals the liquidity of a business organization by giving a snapshot on how current assets cover the current liabilities. Normally, a business should have a CR of 1 or more to show that it has the ability to cover wholly its current liabilities using the current available assets (Irfanullah, 2016). Based on AT & T’s analysis, the company had current ratios of 0.66, 0.90, and 0.75 for 2013, 2014, and 2015 years respectively, showing that all these years it doesn’t have a cushion over its current liabilities. However, in 2014 it had a ratio of 0.9 which is relatively efficient whereby the current assets during the year almost covered the current liabilities.

  • DSO
RatioCalculation201320142015
DSO (Days Sales Outstanding)Receivables/ (Annual sales/365){14,117,000 / (128,752,000 / 365)} = 40.02{14,527,000 / (132,447,000 / 365)} = 40.03{16,532,000 / (146,801,000 / 365)} = 41.10

The ratio shows an estimated number of days a company takes to retrieve its payments from creditors or receivables after sales or service is given (Irfanullah, 2016). AT & T takes about 40 days to collect its payments as shown from the calculations for the three years analyzed. This predicts inefficiency since the company takes over a month to translate sales into cash; it would have been profitable if the debt collection period was less than three works whereby the company can receive the money early enough and reinvest it.

  1. Inventory Turnover Ratio
RatioCalculation201320142015
Inventory Turnover RatioCost of Goods Sold/ Inventory51,191,000 / 0 =N/A60,145,000 / 0 =N/A67,046,000 / 0 =N/A

Since AT & T is Telecommunication Company with plenty of services than tangible products, its consolidated financial statements have no inventory figures hence the ratio doesn’t apply in the financial ratio analysis of the company.

Statement of Cash Flows Analysis

AT & T’s cash flow statements show unpredictability of the future financial performances of the company due to the fluctuating net cash flows. AT & T reported a negative cash flow of $1,529,000,000 in 2013, a positive of $5,264,000,000 in 2014, and a negative of $3,482,000,000 in 2015. This makes the cash flows statement unreliable because even calculations of average cash flow growth cannot give a clear reflection regarding cash and cash equivalents of the company.

Prospective Analysis

AT & T is a growing company with a huge potential to do even better in the large telecommunication industry that extends from its domestic market in the US to the entire globe. Based on its financial results it has shown an excellent return on equity as shown with the calculated ROE of  20% in 2013, 7.18% in 2014, and 10.88 in 2015. If were to find an average ROE to help us forecast future returns on equity, it would be; (20 + 7.18 + 10.88) / 3 = 12.69%. Therefore, the future promises an estimated ROE of about 12% which could do well for the investors. Then again, the company boasts with a 19.19% Price to Earnings Ratio which I consider excellent in this case and shows that AT& T’s stocks are just but strong in the market.

According to Yahoo Finance (2016), growth estimates for AT & T in the next quarter is about 6.3%, current year 5.50%, next year 5.6%, and 8.37% per year for the next 5 years. These figures forecast a positive trend that shows the company has a positive future. Data obtained from the NYSE indicate that the dividends for AT & T have been increasing for the past 5 years; 1, .72 in 2011, 1.76 in 2012, 1.8 in 2013, 1.84 in 2014, and 1.88 in 2015, representing an increase of 2.33% every year. Based on this dividend history, the dividend could be over 2.08 (10.64%) in the next 5 years.  Apparently, AT & T’s equity appeals in the capital markets considering its price-to-earnings ratio; plus, it has all the opportunities and strengths to achieve better in the telecom market (DeFranco, 2015).

Summary

Based on the accounting, financial, and prospective analyses of AT & T company, there is potential in the company to progress based on the forecasts given. Currently the company is performing excellently even the stock markets as indicate by the P/E ratio of 19.19. The future also holds better things for investors who wish to purchase stocks of AT & T because of the indicators of a better future performance including; progressive dividends that show a forecasted 2.33% increment per year and average ROE of 12%.  Therefore, investors should not have qualms about obtaining their stocks from AT & T because it is an excellent investment.

Conclusion and Recommendation

Given a sum of $25 M to invest in a single stock, I would definitely find AT & T an attractive venture. With a required rate of return 9%, I would have to consider if AT & T would give me a good investment with a moderate risk but with a promise of a return of over 9% and above. From the prospective analysis part, the company promises a dividend growth of over 10% based on the growing dividends in the last five years. On the other hand, ROE ratios project that the company will receive returns on investments at 12.69%. Also, financial analysts believe that the company would achieve general growth of about 8. 37% per year in the next five years. Stocks of AT & T indicate a potential investment with a return of more than 9% hence I would invest in the company.    

References

AT&T Company Information | AT&T About Us,. (2016). AT&T Company Information | AT&T About Us. Att.com. Retrieved 12 October 2016, from http://www.att.com/gen/investor-relations?pid=5711

CNN Money,. (2016). T – AT&T Stock quote – CNNMoney.com. Money.cnn.com. Retrieved 12 October 2016, from http://money.cnn.com/quote/quote.html?symb=T

DeFranco, K. (2015). AT& T: A Short SWOT Analysis. Valueline.com. Retrieved 13 October 2016, from http://www.valueline.com/Stocks/Highlight.aspx?id=16855#.V_6cSPl97IU

Fierce Wireless,. (2016). How Verizon, AT&T, T-Mobile, Sprint and more stacked up in Q2 2016: The top 7 carriers | FierceWireless. Fiercewireless.com. Retrieved 12 October 2016, from http://www.fiercewireless.com/wireless/how-verizon-at-t-t-mobile-sprint-and-more-stacked-up-q2-2016-top-7-carriers

Hardy, Q. (2016). AT&T’s Strategy Is One Part Innovation, One Part Inspiration. Nytimes.com. Retrieved 12 October 2016, from http://www.nytimes.com/2016/02/15/technology/atts-strategy-is-one-part-innovation-one-part-inspiration.html?_r=0

Irfanullah, J. (2016). Financial Ratio Analysis | Types of Ratios | Examples. Accountingexplained.com. Retrieved 13 October 2016, from http://accountingexplained.com/financial/ratios

McNamara, C. (2016). All About Financial Management in Business. Managementhelp.org. Retrieved 12 October 2016, from http://managementhelp.org/businessfinance/

MVN University,. (2016). Introduction to Financial Management: DEFINITION OF FINANCIAL MANAGEMENT. Mvn.edu.in. Retrieved 12 October 2016, from http://mvn.edu.in/lms/mod/book/view.php?id=439&chapterid=105

NASDAQ,. (2016). T Financials. NASDAQ.com. Retrieved 13 October 2016, from http://www.nasdaq.com/symbol/t/financials?

NYSE,. (2016). NYSE. Nyse.com. Retrieved 12 October 2016, from https://www.nyse.com/quote/XNYS:T/company

Pressman, A. (2016). Why AT&T Could Be Looking for Hollywood Acquisitions Worth Up to $50 Billion. Fortune. Retrieved 12 October 2016, from http://fortune.com/2016/10/05/att-media-acquisitions/

Zwilling, M. (2016). A Positive Business Strategy Is Key To Success Today. The Huffington Post. Retrieved 12 October 2016, from http://www.huffingtonpost.com/marty-zwilling/a-positive-business-strat_b_12446122.html

Appendices

Appendix 1: AT & T Income Statement (NASDAQ, 2016) 

Appendix 2: AT & T Statement of Financial Position (NASDAQ, 2016)

Appendix 3: AT & T Statement of Cash Flows (NASDAQ, 2016)

Appendix 4: AT & T Key Financial Ratios (NASDAQ, 2016)

Appendix 5: AT & T Market Summary (Yahoo Finance, 2016)

Appendix 6: AT & T Dividend History (NYSE, 2016)