Question

RATIOS	Communications/Electronics	AT&T	Sprint	ANALYSIS
Profitability Ratios (%)
Gross Margin	59.02	54.23	58.08
EBITDA Margin	-	-	-
Operating Margin	16.23	13.84	-2.89
Pre-Tax Margin	13.79	9.59	-10.1
Effective Tax Rate	18	18.91	-1.8
Financial Strength
Quick Ratio	1	0.52	0.26
Current Ratio	1.02	0.81	0.67
LT Debt to Equity	145.46	87.2	196.43
Total Debt to Equity	160.44	96.06	196.43
Interest Coverage	-	-	-
Valuation Ratios
Price/Earnings Ratio	65.95	11.21	203.67
Price to Sales P/S	1.91	1.18	1.09
Price to Book P/B	3.4	1.14	1.38
Free Cash Flow per Share	59.33	18.63	-
Management Effectiveness (%)
Return On Assets	5.04	0.94	-3.11
Return On Investment	6.49	6.97	-3.59
Return On Equity	8.2	13.03	9.92
Efficiency
Receivable Turnover	13.88	8.44	8.86
Inventory Turnover	27.28	-	13.37
Total Asset Turnover	0.49	0.32	0.37
Free Cash Flow/Net Income	13.88	-	8.86

1- Ratio Analysis: Compare the two companies based on their ratios. Use the last column and describe how each company is doing in relation to the ratios. Explain the significance of how the company ratios compare to the industry and each other.

2- What is Ratio Analysis?

3- Based on the ratio analysis above, in which company would you be willing to invest and why

Answer 1

Sol:

1. Gross margin of AT & T and Sprint is 54.23% and 58.08% respectively. It shows that Sprint sales numbers are good with higher margin than AT & T but slightly lower than industry average of 59.02%. AT & T is lagging behind with huge difference from Industry average and Competitor Sprint. It shows overall profitability of AT & T is much lower than Competitors.

Operating Margin is relationship between operating profit and net sales. It shows operational efficiency of a business. As operational margin is higher in case of AT & T than Sprint that shows AT & T good efficiency in operation but lower than Industry average whereas Sprint efficiency is very poor. They has to improve it for better profitability.

Pre tax margin is very poor for Sprint because of its operating margin and cost of goods sold but AT & T has somewhat managed it cost efficiently though there has room for improvement because industry average is lot higher.

Effective tax rate shows which company is originally paying more tax than other. Marginal tax rate can not able to show this difference. Here, effective tax rate is higher in AT &T than Sprint and Industry average. So it shows AT & T's inability to reduce tax liability through proper tax management.

Quick ratio is used to measure solvency of a firm. Its always good if ratio is more than 1 because this ratio assumes that there should be $1 of asset for $1 of liability. Here Solvency position is not good for both the company as per Industry average. More so, Sprint should immediately improve it ratio. As it is very poor.

Current ratio shows ability of a company to meet short term liability. Here current ratio is also not good for both against Industry average. It shows high debt in balance sheet.

Long term debt to equity and Total debt to Equity shows that AT & T has almost balanced liability to equity but Sprint has very high liability even higher than industry average. It shows that too much dependence on debt and reduced margin of safety of creditors and low profitability because higher interest payments.

Price / Earning ratio shows AT &T is undervalued and Sprint is overvalued on comparing with Industry Average.

Price to sales ratio shows that both the companies ratio lower than industry average. Market capitalization is higher for AT & T than Sprint.

Price to Book shows price investors ready for $1 of book value. Here both the company undervalued comparing with industry average as per book value. But Sprint book value is more than AT & T.

Free cash flow of AT & T is 18.63 which is lower than industry average because FCF shows amount available for distribution among all the shareholders.

Return on assets very bad for both the company.

Return on investment shows return on long term money invested in business. Here AT & T has good ROI but Sprint is very poor.

Return on equity shows efficiency on management of shareholders fund by the management. Here AT & T has above average return where Sprint has below average return on comparing with industry average.

Receivable turnover is manageable with both the company but lower than industry average.

Inventory turnover is very low for Sprint. It shows unsold assets in inventory.

Assets turnover is good for both the company though it is lower than industry average. Low ratio means under trading of assets.

Cashflow to net income is low for Sprint.

2. Ratio analysis is relationship between two variable to analyze company's performance.

3. AT & T would be good investment because its good ROE , ROA and ROI and better solvency position and good profitability than Sprint.