Sprint Nextel Corporation - Case Study Example

Sprint Nextel Corporation Sprint Nextel Corporation Executive Summary Sprint Nextel Corporation is one of the largest telecommunication organizations in the United States that offers comprehensive range of wireless services and products (Sprint Nextel Corporation, 2013). The report evaluates the corporate performance of Sprint Nextel Corporation. Financial indicators have been used to review the financial positioning of the organization (Robinson, Henry, & Pirie, 2012). Telecommunication industry is rapidly expanding, and it is anticipated that Sprint Nextel Corporation sales shall grow in the coming years. Therefore, the performance of the organization has been anticipated through Pro Forma financial statements. The main objective of this report is to evaluate strengths and weaknesses of Sprint Nextel Corporation from an investor’s perspectives. Introduction The analysis of the Financial Statement provides an in-depth understanding about the financial positioning, potential and progress of the company in the industry (Robinson, Henry, & Pirie, 2012). It provides detailed information about the crucial aspects that have contributed to the company’s performance (Sinha, 2009). The main focus of this report is to determine performance of Sprint Nextel Corporation from an investor’s point of view. Company Profile Sprint Nextel Corporation is the third largest wireless telecommunication company in the United States that provides wireless services and global internet carrier (Sprint Nextel Corporation, 2013). The company has showed tremendous growth in its operating activities serving 54.3 million customers by the end of 2013 (Sprint Nextel Corporation, 2013). Sprint Nextel corporation also provides wireless voice messages and broadband services to different virtual network operators through its subsidiaries. The company was initially established in 1899 by Cleyson Brown and Jacob Brown under the name of Brown Telephone Company to provide telephone services to the rural areas in Kansas (Sprint Nextel Corporation, 2013). However, the company has gone through various mergers and acquisitions under different names. The company was known as Sprint Corporation before its merger with Nextel Communication in 2005. The company is operating different data transmission services for its customers under its subsidiary brands, Boost Mobile, Sprint, Virgin Mobile and Assurance Wireless (Sprint Nextel Corporation, 2013). The main focus of the company has remained to provide modernize network plans. Currently, the organization provides fourth generation services and Long Term Evolution (LTE). The company merged with a Japanese telecommunication company SoftBank Corpotation, but its stocks remain listed on the NYSE. The company has several subsidiaries offering a wide range of wireless services and products nationwide. Financial Statement Review According to the Annual Report of Sprint Nextel Corporation (2013), it can be observed that the company faced losses during that period. The pricing strategy and operations of the company remained inefficient, as well as the debt structure also significantly affected the performance of the company. It is one of the major reasons that the company faced losses during the period. The increase in the costs of goods also impacted the profitability of the company. One of the major aspects that were evident from the financial statements of Sprint Nextel Corporation is that the company had extensively relied on debt financing to carry out its operations. Though, the strategy has allowed the company to improve its performance in the short term but it can cast greater negative impacts in the long term. It means that most of the finances of the company were met through acquiring loans and borrowing. The management of the company was inefficient to improve its financial positioning by focusing on its operation. Sprint Nextel Corporation reliance on debt finances shall also increase the interest expenditures that can eventually decrease its profits in the future. However, the company had remained focused to meet its current obligation as the company’s current assets were sufficient to meet its current liabilities. Besides the poor financial positioning of the company, it is anticipated that the company shall not be bankrupted in the year. However, the company should find investors or outside financers to overcome losses that the company had been facing. It is also evident from the financial statements of the company that the current assets had increased, but significant increase in the long-term debts of the company had also been observed. It clearly indicated that Sprint Nextel Corporation made initiatives to sustain its financial positioning through acquiring long-term loans. Interest expenses and Selling and administrative expenses of the company were highest as compared to the other expenses of the company. Hence, it is determined that Sprint Nextel Corporation was spending a lot on its selling and administrative expenses. One of the most effective ways that the company should have focused was to control its expenses. In addition, the increase in the costs of the goods was a dominating factor that had suppressed the profit margin of the company. In addition, the deficit accounts of retained earnings were one of the most alarming situations for the company’s investors. It is because the company did not have sufficient earnings to pay off to its shareholders. Moreover, the decline in the profit margins of the company had decreased the dividends of the shares. The share value of the company had also declined during the period due to which the stock prices of the company have also declined. Analysis Pro Forma financial statements provide insight to the historical statements of the organization through determining past trends through projections of the business to determine future trends. Therefore, Pro Forma financial statements of Sprint Nextel Corporation have been illustrated through assuming ten percent growth in its sales and cost of goods sold to predict future trends of the company. Pro Forma income statement and Balance Sheet are presented below (Look Table 1 & Table 2). Sprint Nextel Corporation Pro Forma Income Statement Period Ending 31-Dec-13 31-Dec-14 31-Dec-15 Total Revenue 16,891,000 18,580,100 20,438,110 Cost of Revenue 9,777,000 10,754,700 11,830,170 Gross Profit 7,114,000 7,825,400 8,607,940 Selling General and Administrative 4,841,000 5,325,100 5,857,610 Non Recurring 309,000 339,900 373,890 Others 2,934,000 3,227,400 3,550,140 Operating Income or Loss (970,000) (1,067,000) (1,173,700) Total Other Income/Expenses Net 73,000 80,300 88,330 Earnings Before Interest And Taxes (897,000) (986,700) (1,085,370) Interest Expense 918,000 1,009,800 1,110,780 Income Before Tax (1,815,000) (1,996,500) (2,196,150) Income Tax Expense 45,000 49,500 54,450 Net Income From Continuing Ops (1,860,000) (2,046,000) (2,250,600) Net Income (1,860,000) (2,046,000) (2,250,600) Table 1: Pro Forma Income Statement (Showing growth by 10% in COS and Sales in next two years) Analyzing the Pro Forma Income statement it can be determine that the growth in the sales and the costs of the good shall greatly impact the performance of the company. However, the revenues of the company is anticipated to increase with the passage of time, but the other expenditures of the company shall also increase due to which the it is essential that the organization should take initiatives to control its costs. If the company does not control its expenditure negative trend in the operating profits is predicted. Sprint Nextel Corporation is now focusing on the new 4G services and LTG services and new products due to which it is anticipated that currently the company has to make further capital expenditures that would eventually increase the costs of the company. The information provided in the Pro Forma Income statement shows increase in the net losses of the company in next two years. It is because increasing trends in the interest expenses and other expenditures have been observed. Sprint Nextel Corporation Pro Forma Balance Sheet Period Ending 31-Dec-13 31-Dec-14 31-Dec-15 Assets       Current Assets       Cash And Cash Equivalents 6,364,000 4,318,000 2,067,400 Short Term Investments 1,105,000 1,105,000 1,105,000 Net Receivables 3,756,000 3,756,000 3,756,000 Inventory 1,205,000 1,325,500 1,458,050 Other Current Assets 628,000 628,000 628,000 Total Current Assets 13,058,000 11,132,500 9,014,450 Long Term Investments 143,000 143,000 143,000 Property Plant and Equipment 16,164,000 16,164,000 16,164,000 Goodwill 6,434,000 6,434,000 6,434,000 Intangible Assets 49,838,000 49,838,000 49,838,000 Other Assets 458,000 458,000 458,000 Total Assets 86,095,000 84,169,500 82,051,450 Liabilities       Current Liabilities       Accounts Payable 9,675,000 9,795,500 9,928,050 Short/Current Long Term Debt 994,000 994,000 994,000 Total Current Liabilities 10,669,000 10,789,500 10,922,050 Long Term Debt 32,017,000 32,017,000 32,017,000 Other Liabilities 3,598,000 3,598,000 3,598,000 Deferred Long Term Liability Charges 14,227,000 14,227,000 14,227,000 Total Liabilities 60,511,000 60,631,500 60,764,050 Stockholders’ Equity       Common Stock 39,000 39,000 39,000 Retained Earnings -1,887,000 -3,933,000 -6,183,600 Capital Surplus 27,330,000 27,330,000 27,330,000 Other Stockholder Equity 102,000 102,000 102,000 Total Stockholder Equity 25,584,000 23,538,000 21,287,400 Total Liabilities and Stockholder Equity 86,095,000 84,169,500 82,051,450 Table 2: Pro Forma Balance Sheet The Pro Forma balance sheet of Sprint Nextel Corporation shows increase in the total assets of the company, it is because the increase in the sales of the company has eventually increased Cash and Cash equivalents and Accounts receivables of the company. Therefore, the assets of the company are anticipated to increase in the next two years. However, the increase in the costs of good is expected to proportionately increase the expenditures and liabilities of the company. It means that the organization has made sufficient capital expenditures in the company. Declining trend in the retained earnings of the company has been observed; it is because of the overall increase in the liabilities of the company that are expected to increase. The increase in the capital expenditure also reflects the company would acquire more loans and borrowing that shall increase the current liabilities of the company in the next two years (Robinson, Henry, & Pirie, 2012). However, the increase in the assets of the company shall improve its financial positioning, but a decline in the retained earning shall cast negative impacts on the shareholder’s value and decline in the share price of the company is anticipated in the next two years. Ratio Analysis Financial Ratios indicates financial positioning, efficiency and potential of the organization. It is used to quantify several financial aspects of the organization (Sprint Nextel Corporation, 2013). Financial ratio analysis has been conducted to evaluate performance of Sprint Nextel Corporation. Ratios Liquidity Current ratio Current assets/current liabilities 1.22 Cash ratio Cash + Cash equivalent + invested fund/Current liabilities 0.70 Leverage Interest Coverage ratio Operating Income/Interest expense -1.06 Debt-to-equity total liabilities/equity 0.70 Asset Management Returns on Asset Net Income/Total Assets -0.02 Economic Value Added Net operating profit after taxes – (capital invested*cost of Capital) -8,278,752.60 Profitability Operating Margin Operating Income/Sales -0.06 DuPont or ROE (profit/sales)*(sales/assets)*(assets/equity) -0.02 Market Value Book Value Per Share Total Owner’s equity/ Number of shares outstanding shares 6.43 Earning Per Share Price per share/earnings per share -0.73 Table 3: Financial Ratios Liquidity Liquidity ratio determines the ability of the company to meet its short term obligation. According the financials of Sprint Nextel Corporation it can be identified that the company has been company has solvent to meet its short term liabilities (Sprint Nextel Corporation, 2013). The current ratio allows determining the availability of current assets of the organization to meet its current obligation. Current ratio of Sprint Nextel Corporation was 1.22 in 2013, it depicts that the company has sufficient assets to meet its current obligation (Sprint Nextel Corporation, 2013). It means that Sprint Nextel Corporation was liquid to meet its current obligation. In addition, cash ratio of Sprint Nextel Corporation was 0.7 in 2013. The cash ratio shows the availability of the cash and cash equivalents and short term investment that are available to meet its short term liabilities. It is evident from the liquidity ratio that the company has sufficient cash to meet its current liabilities. Leverage The leverage ratios show the ability and financing method of the company to meet its long term liabilities. The Interest coverage ratio of Sprint Nextel Corporation remained -1.06 and Debt to equity 0.70 in 2013. The interest coverage ratio of the company is -1.06; it showed that was incapable to pay off its interest expenses during the year (2013). It is because of the reason that the payments of the interest are made from the profits of the company and Sprint Nextel Corporation made operating loss that has affected ability to pay off its interest expenses. However the debt to equity ratio indicates that 70 percent of the equity and debt have been used by the company to finance its assets. It shows that the company had an aggressive financing growth with the debt, it can eventually caste a negative impact on the earnings of the company. In other words, most of the financing activities of Sprint Nextel Corporation is being done through the debts, it is because of the negative retained earnings of the company. Therefore, the financing activities of the company rely on debts (long term loans, borrowing, etc) due to which the company would encounter cost. In addition, it shall negative impact the shareholder’s value and the returns of the company in long run (Robinson, Henry, & Pirie, 2012). According to the annual report of Sprint Nextel Corporation (2013) it can be observed, increasing trends in the interest expenses of the company has been observed. It is because of the outside financing of the company and the overweighing of the returns of the company shall result in the decline in the returns of the company (Alice C. Lee, 2009). It shall lead the company to face severe financial crisis or bankruptcy (Sprint Nextel Corporation, 2013). Therefore, it can be determined that Sprint Nextel Corporation leverage measures have decline due to which the company is more likely to face bankruptcy in times to come. Consequently, it is essential for the company to focus to improve its earning in order to bring the company to a better positioning (Sprint Nextel Corporation, 2013). The leverage indicators of Sprint Nextel Corporation show that the company has poor leverage measures due to which the company is more likely to fall in to severe financial issues. Hence, it is important for the company to seek investors or bring greater change in operating profits and retained earnings. Asset Management Asset management ratios determine effectiveness and efficiency of the organization to manage its assets to generate revenues. In order to determine asset management efficiency of Sprint Nextel Corporation, Returns on Assets and Economic Value Added have been calculated. The return on assets of Sprint Nextel Corporation remained -0.02 in 2013. It showed that Sprint Nextel Corporation has remained inefficient to utilize assets to generate revenues. Negative return on asset shows that Sprint Nextel Corporation had invested greater capital to generate revenues due to which the returns of company are negative (Sprint Nextel Corporation, 2013). One of the other reasons for the negative return on assets was because of the net loss and the reliance on the high level debts. In other words, Sprint Nextel Corporation had increased in the debts of the company to attain positive future return on assets. However, it is one of the risky strategies that the company has adopted to improve its performance because the company is already facing through severe losses from the last three consecutive years. The negative return on assets of Sprint Nextel Corporation also shows that the company has been investing more capital its production and services that are not providing sufficient income. The capital investments of the company yield lower profits that has eventually lead to negative return on assets. The ratio also indicates that the company is facing serve financial crisis due to which the company is now relying to increase debts to improve its performance in the future (Alice C. Lee, 2009). In addition, Economic Value Added of Sprint Nextel Corporation remained -8,278,752 in 2013 (Sprint Nextel Corporation, 2013). The EVA measures the economic profit that the company has generated over the costs of its capital. It provides understanding about the financial performance of the company in terms of real economic outcomes. Sprint Nextel Corporation had negative EVA in 2013 that indicates that the operations of the company did not made sufficient profits with respect to the costs of the business (Sprint Nextel Corporation, 2013). It reflects that the management performance of the company remained poor. It is because the company had not actually created wealth for the shareholders because the returns of the company were not above the cost of capital. It negative EVA of Sprint Nextel Corporation shows that the company is not generating a health economic value of the funds. It shall also affect the shareholder value of the company due to which the stock prices of the company are expected to decline in times to come. WACC (D/D+E)*Kd*(1-T)+(E/D+E)*Ke T 30% D 60,511,000 E 25,584,000 Beta (1.35) Rf (risk free rate) 2.43% Rm 17.11% Ke (Using CAPM) -17.39% Kd 27.80% D+E 86,095,000 WACC 8.51% Table 3.1 Showing calculation of WACC for EVA (NYSE US 100 INDEX, 2014) (Rf has been obtained through the using 10years treasury bond rate) Cost of debt Interest expense/ short term borrowing + long term borrowing 0.027 Capital employed total assets-current liabilities 75,426,000 Table 3.2: Calculations of Ke and Capital employed Profitability To determine profitability of Sprint Nextel Corporation Operating Margin and DuPont analysis has been conducted to assess the ability of business to generate earning in contrast to the expenditures incurred during the year. According to the financial information, the company had a negative operating margin (-0.6) in 2013 (Sprint Nextel Corporation, 2013). It showed that the company has poor pricing strategy and operating efficiency. The operating loss indicates that the company’s operations have remained inefficient to generate revenues as compared to its operating expenditures. In addition, the company had been facing losses through last three years, it depicted that the company shall need outside financing to overcome the bankruptcy. Moreover, the negative operating margin of 60 percent shows that the company makes a loss of $0.60 on every dollar sale (Sprint Nextel Corporation, 2013). Thus, it shall be determined that the operations of the company had remained inefficient to meets the expenditures of the company. In addition, Du Pont analysis had been conducted to determine return on equities of the company. The analysis showed -20 percent return on equities, it means that the company makes a loss of 20 percent with the money of its shareholders (Antonio Dávila, 2012). It is because the company had net loss in 2013 that has negatively impacted returns of the company. The Du Pont analysis provides breakdown of company’s performance through determining its profit margin, asset turnover and leverage factors. It can be analyzed that he profit margin of the company had remained negative. In addition, the total asset turnover of the company has also remained negative because the sales of the company had remained ineffective (Sprint Nextel Corporation, 2013). One of the reasons can also be the poor pricing strategy of the company that had suppressed the sales of the company (Sprint Nextel Corporation, 2013). In addition, the poor leverage measures of Sprint Nextel Corporation has greatly affected the return on equities of the company, it is because the company relies on aggressive debt financing that has lead to negative returns on equities of the company (Sprint Nextel Corporation, 2013). The Du Pont analysis showed that the debt structure of Sprint Nextel Corporation is the major factor that has casted negative impact on the returns on equities of the company (Alice C. Lee, 2009). Thus, it is of great importance that Sprint Nextel Corporation should amend its debt structure to overcome the losses in the future (Alice C. Lee, 2009). If the company relied on debt financing it is anticipated that the company shall face severe losses in the future (Robinson, Henry, & Pirie, 2012). Market Value Market Value ratio evaluates market positioning of the company in the stock market. The Earning Per Share indicates the profit that the company allocated to its outstanding shares of common stock. It is the key driver to determine share price of the company in the market. According to the financial of Sprint Nextel Corporation it can be observed that the EPS was -0.73. the negative EPS is the one of the fundamental factor that is used by the investors to determine the stock price of the company. It is evident from the EPS of Sprint Nextel Corporation that the share price of the company had decline because the assets have been undervalued. It clearly shows that the company is losing its money due to which it had negative shareholder value. In other words, Sprint Nextel Corporation reported loss in its four quarters due to which the EPS of the company is negative. Hence, the investor should be careful as the company is already losing its money per share. In 2013, Market to Book Value of the company was 6.43 it measures the market value of the company with respect to its historical prices (Sprint Nextel Corporation, 2013). The ratio indicates that Sprint Nextel Corporation’s stock has been overvalued due to which it is anticipated that the price of the stock is expected to fall. It can be observed that the market value of Sprint Nextel Corporation has declined during the period. It indicated that the investment in Sprint Nextel Corporation’s stock price shall decline due to which the investment in the company can be riskier (Sprint Nextel Corporation, 2013). In the case of Sprint Nextel Corporation the Market to Book value of the company is greater than one, it means that the company is not liquid to persuade its operation. Therefore, it can be determine that Market Value of Sprint Nextel Corporation’s stock shall decline in times to come due to which it can be anticipated that the investment in stock of Sprint Nextel Corporation shall lead to greater losses to its shareholders (Sprint Nextel Corporation, 2013). Conclusion On the bases of above analysis it can be concluded that investment in the stock of Sprint Nextel Corporation would be riskier (Alice C. Lee, 2009). It is because the operations of the company have significantly declined due to which the company faced net losses that has negatively impacts share value of the company. Seeing the current financial positioning of the company, it shall also be noted that the company has not made sufficient efforts to improve its strategies to control its costs, pricing and managing its assets. The company is only liquid to meet its current obligations due to which the company had survived. However, the company is not solvent to carry out its operations in long run; it is because the company does not have sufficient assets to meet its long term liabilities. Therefore, Sprint Nextel Corporation is more likely to bankrupt, if the company is not able to find outside financer to meet the needs of its future operations. In addition, the market value of the shares of the company had been overvalued; it clearly indicates that the investment Sprint Nextel Corporation’s stock would be of great risk. Therefore, it is highly recommended that the investment in the stock of Sprint Nextel Corporation should not be made. References List Alice C. Lee, J. C. (2009). Financial Analysis, Planning and Forecasting: Theory and Application. London: World Scientific. Antonio Dávila, M. J.-F. (2012). Performance Measurement and Management Control: Global Issues. Bingly: Emreld Group of Publishing. NYSE US 100 INDEX. (2014, September 7). Retrieved from http://finance.yahoo.com/q/hp?s=%5ENY&a=08&b=6&c=2014&d=08&e=7&f=2014&g=d Robinson, T., Henry, E., & Pirie, W. L. (2012). International Financial Statement Analysis (2 ed.). New York: John Wiley and Sons. Sinha, A. (2009). Financial Statement Analysis. London: PHI learning. Sprint Nextel Corporation. (2013). Annual report. New York: Sprint Corporation. Read More