Verizon Financial Analysis - Case Study Example

Introduction Verizon is one of the few established communication services provider in the data and wireless voice markets. With its head office in U.S., the company also has its presence in U.K. and 17 other nations with a customer base of 142 million customer base both in data and service sectors and an average arpu (Average Revenue Per User) of $51.59. Overall performance of the company is presented in the December, 2008 financial statements in lieu with the accounting policies, for which a critical appraisal of these statements is done from an investor point of view to understand the various significant facts disclosed/non-disclosed by the company in the table given below. For analysis, the International Financial Reporting Standards (IFRS), International Accounting Standards (IAS) and even SFAS issued by the Financial Accounting Standards Board (FASB) are taken into account to test the criticality of the presentation. IFRS IAS SFAS Topic Name NOTE NOTE Name 3 Combinations of Business _ Introduction 27 115 Separate and Consolidated 1 Business description Financial Statements 28 141 Investments - Associates 2 Acquisitions information 5 Discontinued Operations, 3 Other dispositions, extra Saleable Non-current ordinary items & discontinued assets operations 38 142 Assets Intangible 4 Intangible assets, Goodwill, Wireless licenses. 28 141 Associate investments 5 Intangible assets and Marketable securities 16 Plant, equipment and property 6 Property, equipment and plant 28 Associate investments 7 unconsolidated businesses their investments 24 disclosure of related parties 8 interest in minority 17 Lease 9 Arrangements for leasing 7 Disclosure of related parties 10 Below 1 year debt maturity of financial instruments 39 133 Instruments of finance 11 Instruments of finance 29 157 Reporting of financial 12 Measurements of fair value statements 33 Per Share earnings 13 Share owners Investment and EPS. 2 123® Compensation on basis of 14 Compensation on basis of stock stock 19 158 Benefits for Employees 15 Benefits for employees 12 *48 Taxes for Income 16 Uncertainty Accounting for taxes for income 14 Reporting of segments 17 Information of segments 21 Foreign exchange rates, 18 Income Comprehensively changes and effects 7 Disclosures of Financial 19 Additional information instruments financially 29 Reporting of Financial 20 Contingencies and Information commitments 29 Reporting of Financial 21 Information of quarterly Information financial statements Notes: No Significant impact for: Plan assets disclosure improvements, replacing FSP 142-3 instead of SFAS – 142 for intangible assets, disclosure additionally for derivatives, non-controlling subsidiary interest when it is deconsolidated as per SFAS No. 160. Impact of additional expenses was felt while replacing SFAS 141 by SFAS 141 ( R ) for acquisitions and business combinations more on tax grounds than on goodwill. Assets and Liabilities are reported to the lowest level of their values implying the liabilities may be understated as per the SFAS 157 regarding fair valuation of assets and liabilities. Disclosure of higher debt and interest costs in the future as per the Cash flow statements and the notes pertaining to it as per IAS 29 and SFAS 157. (Gruening. H, 2006) & (Anon. 2008). The market risks are also ascertained to the maximum extent possible except for the fact that the company charges arpu of $51.59 while its competitor Vodafone charges arpu of $42.46 which may deteriorate the customer base. (Errity. M, 2007). The reports are duly signed by the internal financial control team and also the independent public accounting firms in consonance to the guidelines of the GAAP. Interpretation No. 48 is indicated with an asterisk - *. Analysis of Financial Strengths and weaknesses using the Ratio Analysis: Sl. No. Type of ratio Ratio name Verizon Industry S&P 500 Analysis 1 Liquidity Current 1 0.7 1.4 Higher ratio implies better ability to honour its bills. Here verizon is better in industry standards but not upto the S&P 500 index expectations. ___ _________ ________ ______ ______ _____ _______________________ 2 Quick 0.9 0.7 1.4 Same as that of current ratio but more penetrative in terms of ability to pay. ___ _________ ________ ______ ______ _____ _______________________ 3 Profitability Gross 59.90% 58.50% 39.80% Higher profitability than the Profit industry and the index 5 yr. avg. 61.80% 57.80% 39.40% expectations. 4 Operating 10% 13.60% 13.60% The operating expenses of the Profit company are higher than Margin the industry standards and 5 yr. avg. 10.60% 13.70% 16.80% index expectations. ___ _________ ________ ______ ______ _____ _______________________ 5 Net Profit 6.60% 9% 9.40% With high operating expenses, Margin Net profit tends to be lower 5 yr. avg. 7.10% 9.40% 11.60% than the industry and index expectations. ___ _________ ________ ______ ______ _____ _______________________ 6 Return on 13.90% 13.10% 27.30% Though the return of the Equity company is higher than the 5 yr. avg. 13.70% 12% 20.80% industry, it is lower in the index expectations. ___ _________ ________ ______ ______ _____ _______________________ 7 Return on 3.30% 4.20% 8.30% Return on Assets employed Assets is lower than the industry and 5 yr. avg. 3.30% 4% 8.60% index standards, suggesting lower efficiencies. ___ _________ ________ ______ ______ _____ _______________________ 8 Return on 4.80% 5.20% 11.40% Return on capital is more than Capital the industry standards but Employed lesser than the index 5 yr. avg. 4.30% 4.90% 11.60% standards. ___ _________ ________ ______ ______ _____ _______________________ 9 Stability Debt-Equity 1.25 1.31 1.07 Lower ratio implies better stability. However, it may also imply unused funds. Here the stability ratio is quite satisfactory in terms of industry and the index ___ _________ ________ ______ ______ _____ _______________________ 10 Turnover Receivables 8.3 7.7 15.8 Higher ratio implies more occurrence of bad debts. Though higher in industry terms, quite satisfactory in index terms. ___ _________ ________ ______ ______ _____ _______________________ 11 Inventory 20.4 9.1 12.2 High ratio implies that there is no unused inventory. Satisfactory than the industry And index standards. ___ _________ ________ ______ ______ _____ _______________________ 12 Assets 0.5 0.5 1 Higher ratio means total assets are over traded. However, 2 times is commendable. Here, the index itself is non-performing as also, industry and company implying idle capacity. ___ _________ ________ ______ ______ _____ _______________________ 13 Market-test Price- 13.2 13.4 12.4 Higher ratio implies lower earnings returns to the share holders. 5 yr. high 24.3 17.7 16 The ratio is quite in line with 5 yr. low 12.1 3.8 3.3 index and industry standards. The 5 year high and low are better than the industry and index standards and the gap between them is also minimum implying stability of share price. ___ _________ ________ ______ ______ _____ _______________________ 14 Price- 0.87 1.09 1.44 Lower ratio implies that the Sales sales are not in line with the index and industry standards. ___ _________ ________ ______ ______ _____ _______________________ 15 Price- 2.03 1.84 3.15 The book value of the shares Book value recorded is higher than the industry but lower than the index standards. ___ _________ ________ ______ ______ _____ _______________________ 16 Price- 4 4.3 8.7 The Cash flows are higher than Cash Flow index and industry standards. This implies better cash position. ___ _________ ________ ______ ______ _____ _______________________ 17 Growth Sales 3.4 2.5 -3.3 Better positioned in this rates (Qtr. Vs. Quarter revenue wise. yr. ago Qtr.) Net Income 16.7 6.2 9.2 Sales 7.61 17.26 13.16 Average performance is not (5 yr. avg.) in line with industry and index standards. Dividends 2.94 2.45 12.21 Share holder earns more in industry standards but lower in index standards. Market 85.73b Better than Vodafone. Capitalisation Earnings 2.26 Commendable. Per Share Stock 9 out of Good rating implying a buy rating 10 for the share. ___ _________ ________ ______ ______ _____ _______________________ (Jain & Narang, 2006) & (Anon, 2009). Review of the Analyst community: ‘A’ rating for long term and ‘A-1’ rating for short term debt was assigned to the firm by the S&P credit rating agency. Fitch assigned downgraded the rating with grade ‘A’ from ‘A1’ for Long term and F 1 for short term. It also confirmed ‘negative rating watch’ for the time being. Moody’s investor services placed an ‘A3 debt rating for the long term and a short term rating of debt of ‘P-2’. It has given a negative outlook from stable which was given in the previous year. These analysts have identified the following points which may affect the profitability of the firm: Operating performance of wireless has been diminishing owing to the economy weakness and cut throat competition. In this scenario, Vodafone which is quite near to the company’s market capitalization earns arpu of 42.46 while the company charges $51.90 implying that the competitor is stronger price wise. Significant long term synergies have not been achieved by the company. Wireline losses have been accelerated pulling down the profitability of the firm. (Anon, 2008) However the stock scouter rating is 9 of 10 grades implying that short term investors can look into buying this stock owing to its better gross margins. (Anon, 2009) Conclusion: It has been observed that though the company has performed satisfactorily well in the last year, the 5 year performance was not very commendable implying instability of the stock performance for the long term point of view. The future outlook also looks grave with falling arpu levels and growing interest costs on debts as the credit markets are dwindling and the company’s operating activities are dependent on external debt possibilities. The net profit margins are very low in spite of high gross margins indicating lower operating efficiencies of the firm. However, for the short term investor it’s still a buy owing to the better revenue realizations of the firm this quarter. Book Bibliography: Gruening. H.V. (2006). International Financial Reporting Standards – 4th edition. The International Bank for Reconstruction and Development/World Bank. Washington. D.C. Jain & Narang. (2006). Ratio Analysis. Advanced Accountancy – Volume II. Pgs. II-925-994. Kalyani Publishers. New Delhi. Internet References: Errity. S. (2007). Customer numbers up, ARPU dips at Vodafone. ENN – Irelands IT news source. Available from: http://www.electricnews.net/article/10077221.html. 19th March, 2009. Anonymous. (2008). Sec-Filings-Verizon. Part – II. United States Securities and Exchange Commission. Available from: http://investor.verizon.com/sec/sec_frame.aspx?FilingID=6435582 19th March, 2009. Anonymous. (2009). Verizon Communications Inc. Company Report. Thomson Reuters. Available from: http://moneycentral.msn.com/companyreport?Symbol=VZ. 19th March, 2009. Read More