Question

1. Research the Financial Statement for Verizon Communications Inc.

2. Define the following ratios, include the ratio for your business and explain what each ratio means for the business moving forward.

Return on assets

Return on equity

Return on capital

Gross margin

SG&A margin

Current ratio

Quick ratio

Total debt/equity

Total revenue

Gross profit

3. Explain which ratios you feel are most important for the business and why.

You can refer to the attached table or use the following website....

https://financials.morningstar.com/ratios/r.html?t=0P000005QY&culture=en&platform=sal

Verizon Communications Inc		2017	2018	2019
Return on assets		12.01	5.95	6.92
Return on equity		91.74	32.27	33.64
Return on capital		22.62	11.89	12.9
Gross margin		59.1	57.6	58.5
SG&A margin		22.48	23.75	22.74
Current ratio		0.91	0.91	0.84
Quick ratio		0.77	0.73	0.62
Total debt / equity		2.64	1.99	1.94
Total revenue (millions of US $)		126,034	130,863	131,868
Gross profit (millions of US $)		72,971	75,355	77,142

Answer 1

Return on assets :

It is to be calculated by dividing Net Income by Total Assets. The higher ratio represents the better company by using their assets to generate income hence it indicates company's intensity. However, in the given example, the ROA was 12.01% in 2017 which has reduced to 5.95% and 6.92% in 2018 and 2019 respectively. It means there is a heavy investments in Assets by the Company.

Return on equity:

It is calcuated to measures profitability related to ownership of the Company. Therefore, It also measures a firm’s efficiency at generating profits from every unit of the shareholders’ equity.

It is noted that ROEs are considered if it is between 15% to 20%. However, in the given question, the firms ROE's is considered to be very good

Gross margin:

It is calculated by using the following formula :

Gross margin ratio = Gross profit / Net sales

The gross margin ratio indicates and compares Gross Profit of a Company to its Net Sales to reflects as to how much profit a company makes after paying its cost of goods sold

SG&A margin:

It refers to Selling, General & Administrative Expenses (SG&A). The CEO of the company targets how to reduce such cost to increase profitability of the Company. It is generallly Caclulated as SG&A divided by Net Revenue. Therefore the higher the ratio indicates lower of profit. The ratio may depends on industry to industry. In the GIven Question, It has to be contolled to increase profitability of the Company.

Current ratio

The current ratio measures a company’s ability to pay off short-term liabilities with current assets, if can be calculated as under :

Current ratio = Current assets / Current liabilities

In the given question, the Current ratio is less than 1, hence the company may have difficulty meeting short-term obligations.

Quick ratio

The Quick ratio measures a company’s ability to pay off short-term liabilities with quick assets i.e. Total Current Assets - Inventories

The formula for calculation is ............ (Current Assets – Inventories) / Current Liabilities

It is recommended to have 1:1. In the given question it is less than 1 hence it may affect liquidity problems in future. Therefore it refers how fast the company can realise money out of disposal of Current Assets and Current Liabilities.

Total debt/equity

The debt to equity ratio indicates the weight of total debt and financial liabilities against shareholders’ equity.  

It can be calculated as under :Debt (i.e. Liabilities ) / Equity

In the given question, the D/E ratio are declining that means debts are being paid off and stake of Equity Shareholders are strengthen.

Total revenue

It indicates, total revenue generations from the operation of business. The increasing trend in % indicates healthy and growth of the Company. In the given situation, there is increase in total revenue by 6% during 2018 over 2017 but there is decline during 2019 hence the management needs to look into % decrease in over previous year.

Gross profit:

It can be calculated as under :

Gross Profit = Total Sales - cost of goods sold

It represents the direct profit earned by the operation of business

In the given question, there is continous increase in GP which indicates healthy earning potential of the Company.  

It can also be measured with the help of % of GP to Total Sales. Hence increasing GP is always to be reviews from time to time.