Financial Statement Analysis Project Fin 2100 Fall 2015 Jessica Velez

Brief Background into compared companies

The companies chosen for this comparison are AT&T and T-­‐Mobile. These companies are part of wireless telecommunications services sector. Founded in 1983 AT&T is a holding company, which services in three segments Wireless, Wireline and other services . It services 22 states and as of December 2013 and had 110 million customers. As a valid competitor T-­‐Mobile was established in 2004 and provides services such as postpaid wireless, messaging and data and wholesale services. The company services 47 million customers nationwide.

Price Earrings Ratio

The price earrings ratio is used to analyze the investor’s wiliness to pay the firm’s earrings. The formula for computing price earrings ratio is the market price per share divided by earrings per share. If the results are high it is a good indication that the firm can expect future growth. Industry average ratio is

120

107.43

100 80

AT&T

60

T-­‐mobile

40

27.22

23.55

Industry

20 0

Price Earrings Ratio

23.55 which means investors will be willing to pay 23.55 for each dollar earned.

AT&T shows a ratio of 27.22 which is similar to the industry which means that AT&T investors will be willing to pay a little higher than the average industry. T-­‐Mobile’s ratio of 107.43 surpassed the industries 23.55. This suggests that investors are expecting more than the average firm. Investors will be expecting a greater return from T-­‐Mobile than AT&T.

Total Debt to Equity

The total debt to equity ratio helps show how much of the company consists

of borrowed money vs. how much the owner’s brought into to invest. A good result of this ratio is it shows the financial leverage of the company. Financial leverage is a result of borrowed money becoming more risky and a higher return occurring. If the ratio is lower than the money that was borrowed it is being used to make profits.

Total Debt To Equity

109.66

156.3

tmobile

industry

183.65

At&t

AT&T debt to equity ratio of 109.66 indicates that 52% of the assets are made up of borrowed money. It is lower than the industry’s ratio this is a good indication that AT&T had no financial leverage. T-­‐ mobile’s ratio is 156.3 indicates that 61% of their assets consist of borrowed money. There isn’t a huge difference on the amount of money each company has invested with borrowed money. When compared together it is clear that T-­‐mobile has gained leverage in the industry.

Interest Coverage Ratio

The interest coverage ratio which is sometimes referred to as times interest earned ratio which is a measurement of a firm’s ability to make due interest payments. This can be found by dividing the firm’s earrings before interest and taxes of the firm’s interest payment. It’s a form of measurement that will indicate

Chart Title AT&T

547.23

T-­‐mobile

Industry

9.21 1.01 Interest Coverage how much the firm will be able to pay their interest expense. The interest coverage ratio of 547.23 is the average for the telecommunications services industry. This ratio shows that the average company’s earrings before interest and taxes can be reduced by 5% of its levels and still be able to make their payments. An interest coverage ratio of 9.21 AT&T indicates that they are lower than the industry and their EBIT could decrease by 33% and they would be able to make their payments. T-­‐Mobile would have the same affect if their EBIT would decrease by 33% they would be able to pay their payments with their ratio of 1.01.

Beta

Beta is a measurement of possible return in the entire stock market. In this measurement returns are used to determine the companies Beta it is important to know that returns do not determine or predict its future returns. In the market the beta is considered to be one and all betas are compared to this number. A beta of

1.2

1.07

1

0.89

0.8 0.6 0.4

AT&T 0.39

Tmobile Industry

0.2 0 Beta

0.89 is the average of the telecommunications industry. This beta shows that for a 1% increase (or decrease) in return in the entire market investors expect a 0.89 % increase (or decrease) in return for a firm in this sector.

AT&T’s beta of 0.39 is below the industry. This tells us that for every 1% increase investors will expect an increase in return for every 1% increase of the market . This indicated that AT&T stock is less risky.

T-­‐Mobile’s beta of 1.07 is above both AT&T and the industry average. It shows that for every 1% increase in market return investors will want to see an increase of 1.07% of the company’s return. These ratio’s also indicate that T-­‐Mobile is more risky and more variable than both AT&T and the industry.

SUMMARY

T-­‐Mobile’s Price Earrings ratio and Beta are substantially higher than the industry and the competitor. It is a good indication that T-­‐Mobile has been successful in sales. It shows that T-­‐Mobile shall have a future within this sector.

AT&T ‘s total debt to equity s and interest coverage ratio’s indicated that they did not use borrowed money to their business. Since they have a low debt amount and ability to use but chose not to that lending facilities would love to see and

endorse. Investor’s will find it interesting that they chose not to use borrowing as a source of funds. They will be working hard on trying to get the company interested in borrowing money from their institutions. It will be hard to get AT&T to invest being that they are doing fine without borrowing money from outside sources.