AT&T Internal Environment

Posted: August 25th, 2021

AT&T Internal Environment

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AT&T Internal Environment

Introduction

Investors, stakeholders, shareholders, and other interested groups make investment decisions based on several factors. These include public reputation or popularity of a company, profitability potential, and competitive advantage of a firm. AT&T Inc. is anAmerican conglomerate which meets the outlined factor requirements. As a result, its stock prices have kept increasing over the years. In this technology advanced era, AT&T, which is a telecommunication multinational, faces stiff competition. For the mentioned interest groups to make the right investment decisions, especially in investing their capital through stock purchases, they must assess the financial health of the company. This detailed internal analysis elaborates the current state of the financial health of AT&T, and through an assessment of strengths and weaknesses, the firm demonstrates unmatched financial health.

Internal Analysis

The internal analysis of AT&T involves an in-depth study of the firm’s financial state. This entails calculation of relevant profit ratios, activity ratios, leverage ratios, liquidity ratios, and market ratios. Financial health is subject to these ratios as they answer crucial financial questions. Notably, internal analysis is limited to the performance of the company without comparison to other industry players.

Profit Ratios

• Gross Profit Margin

It is a ratio that measures a company’s profitability at the first cost level. In other words, it shows how a firm mark up sales above the cost of goods sold (COGS) (Peavler, 2009). For AT&T, the gross profit margin is positive for three years. Though it decreased in 2017, the firm experienced a rebound in 2018 after the ratio shot to 0.535. With regard to gross profit ratio, hence, AT&T exhibits good financial health.

• Operating Profit Margin.

Operating profit margin is the proportion of sales left after adjusting for additional operating expenses (Wilkinson, 2019). AT&T experienced a decrease in operating profit margin in 2017, but it recovered the following year after recording a high ratio of0.153. It is a demonstration that the company is in the right direction with regard to financial health. 

• Net Profit Margin.

It is the proportion of sales left after adjusting for all expenses and taxes. It shows the ability of a company to generate earnings after taxes. Between 2016 and 2018, AT&T has experienced a difficult time with regard to net profit margin. Despite experiencing an increase in the ratio between 2016 and 2017, there has been a significant decline from 2017 onwards as shown below. In brief, AT&T is heading towards ill financial health based on net profit margin.       

Activity Ratios

• Inventory Turnover

This is a measure of how soon a firm is able to sell its inventory. Generally, it is good to have a higher inventory turnover which increases over time (Sakevych, n.d.). Between 2016 and 2018, AT&T’s inventory turnover has been decreasing consistently. This means the firm is not doing well as its stock stays unsold for longer periods.  

• Fixed Assets Turnover

This ratio measures how good a company is in using fixed assets to generate sales (Sakevych, n.d.). A high fixed assets turnover ratio means that a company is efficient in using its fixed assets to generates sales. AT&T demonstrates high efficiency with regard to the use of its fixed assets. Though the ratio decreased between 2016 and 2017, it has risen sharply from 2017 onwards.      

• Total Assets Turnover

It is a measure of how good a company is at using its total assets to generate sales. AT&T has poor efficiency in exploiting its total assets to generate sales. This is shown by the observed decrease in the total assets turnover since 2016.  

Leverage Ratios

• Debt-to-Total Assets Ratio: Total Debt/Total Assets

            A business sources for funding from lenders. The debt-to-total assets ratio measures the extent of borrowed funds/capital relative to the total assets of a company. A smaller ratio is recommended as it shows a firm is not heavily reliant on borrowed capital. AT&T is now experiencing a decrease in debt-to-total assets ratio as shown in the chart below despite an increase recorded in 2017. This means that it is on the right track as it is reducing its reliance on borrowed money.

• Debt-to-Equity Ratios:  Total Debt/Total Stockholders’ Equity

It is a measure of the extent to which a firm uses borrowed capital to finance its operations as opposed to using its wholly-owned capital. A bigger ratio is not recommended as it demonstrates a company is over-relying on borrowed capital. AT&T is on the right track with regard to using borrowed funds relative to equity in financing its operations. 

Liquidity Ratios

Current ratios and quick ratios measure the ability of a company to meet its short-term obligations. For both, a higher figure is recommended. Although AT&T has positive liquidity ratios, their trends are alarming as they have been decreasing since 2017. This means that the company’s ability to meet its short-term obligations is decreasing.     

Comparing AT&T with Competitors

		RATIO	RATIO	RATIO	RATIO
COMPANY NAME	TICKER	QUICK	WORK. CAP.	DEBT / EQUITY	ASSET TURNOVER
At&t Inc.	T	0.13	0.78	0.08	0.33
Comcast Corp	CMCSA	0.25	0.89	0.05	0.44
Centurylink, Inc	CTL	0.1	0.78	0.03	0.33
Cablevision Systems Corp	CVC	0.93	1.06	–	0.9

Table 1: (Source: https://csimarket.com/stocks/competitionNO5.php?&code=T)

From the above charts, it is clear that AT&T faces stiff competitive with regard to financial health. In the four cases shown, AT&T does not lead in any. This means that despite its popularity in the telecommunication industry, its competitiveness is at risk. 

Strengths and Weaknesses

Strengths

• The increase in both gross and operating profit margins shows the company has been able to control is major operating and costs of goods expenses. 
• The company is excellent in exploiting fixed assets to generates sales.

Weaknesses

• Decreased appeal or demand for the company’s services/products explains the decreasing inventory turnover. 
• The decrease in net profit margin is a demonstration of increased taxes which decrease its profitability.
• The firm is over-reliant on debts which might collapse its operations in the event that they are not repaid on time.
• The firm’s liquidity ratios demonstrate an inherent weakness in meeting short-term obligations.

Conclusion

AT&T is a global corporation whose market capitalization is beyond reach for most upcoming competitors. With regard to financial health, the company exhibits strong efficiency, profitability, and liquidity. Nonetheless, activity and leverage ratios show that AT&T is heading towards the wrong direction as far as financial health is concerned. The fact that a few competitors outmatch AT&T in terms of financial ratios comparison is sufficient evidence that the corporation’s competitiveness is at risk.    

References

At&t Inc’s competition efficiency comparisons by company, debt to equity, asset turnover. CSIMarket.com. (n.d.). Retrieved July 28, 2019, from https://csimarket.com/stocks/competitionNO5.php?&code=T

Peavler, R. (2009, November 17). How gross profit margin reveals a company’s financial health. Retrieved July 28, 2019, from https://www.thebalancesmb.com/what-is-the-gross-profit-margin-393201

Sakevych, A. (n.d.). Activity ratio analysis. Finstanon.com. Retrieved from https://www.finstanon.com/articles/42-activity-ratio-analysis

Wilkinson, J. (2019, February 7). Operating profit margin ratio formula &calculation?The Strategic CFO. Retrieved July 28, 2019, from https://strategiccfo.com/operating-profit-margin-ratio/