- Compute the following for each of the two most recent years:
Profit margin = Net Income / Total revenues
2016 (Verizon, 2017, p. 40)
Profit margin =$13.608B / $125.98B
= 0.108 or 10.8%
Profit margin = $18.375B / $131.620B
= 0.14 or 14%
Return on Shareholder’s Equity
Return on Shareholder’s Equity (ROE) = Net Income/ Shareholder’s equity
2016, (Verizon, 2017, 42)
Return on Shareholder’s equity = $13.608B / $24.032B
= 0.566 or 56.6%
Return on Shareholder’s equity = $18.375B / $17.842B
= 1.03 or 103%
Current ratio = current assets / current liabilities
Current ratio = $26.396B / $30.340 B
= 0.87 or 87%
Current ratio = $22.355B – $35.052B
= 0.64 or 64%
Interest Coverage Ratio
Interest coverage ratio = Earnings Before Interest and Taxes (EBIT) / Interest expense
Interest coverage ratio = $25.362B / $4.376B
Interest coverage ratio = $28.240B / $4.92B
- If you were an accountant for a potential vendor for this company, explain which of these ratios would be of the most interest to you. Would there also be a second ratio of interest to you?
The first and most important ratio that I would have is the current ratio. Current ratio is a liquidity ratio determining a company’s ability to pay-off its short-term debts (O’Hare, 2016). A vendor is primarily concerned about a company’s ability to pay its debts which can be assessed using the company’s current ratio. The ratio determines the company’s capacity to pay its short-term expenses which sometimes have an impact on the long-term debts of the company. A current ratio that is greater than 1 is considered as good and the current ratio that is less than one is considered as poor. Verizon has a moderate current ratio which is at 87% in 2016 but it was relatively poor in 2015 at 64%.
The second important ratio to consider by a vendor is the interest coverage ratio. The ratio assesses the company ability to pay interest expense of outstanding debt. A high interest coverage ratio means a company is more capable of settling its debts. The interest coverage ratio for Verizon in 2015 and 2016 are relatively similar
- If you were an accountant for a potential investor in this company, explain which of these ratios would be of the most interest to you. In your opinion, what other ratio or ratios beyond the ones listed above should also be considered in an investment context?
As an accountant to an investor, the first ratio to consider is the return on shareholder’s equity. Every investor is concerned about the amount of money they would earn if they invested in a particular project. The ROE is primarily compared to the industry average before an investor can make a decision (Damodaran, 2012). Verizon’s ROE decreased from 2015 to 2016 but it has a relatively high ROE of 56.6% which is attractive to investors.
The second consideration is the price-to-earning which is used to assess how cheap or expensive a stock is. P/E ratio is also viewed as the amount one is willing to pay for every $1 that the company earns. The other important ratio is the asset turnover ratio which measures how efficiently an organization utilizes its assets. Thirdly, dividend yield is the amount that varying stocks pay dividends to stock holders. Most of the investors would prefer stocks with high-yields while others would prefer stocks with steady yield.
- What is your overall opinion of this company based on the limited analysis completed via the four ratios? Feel free to mention any questions that you feel should still be considered in view of the ratios and/or the changes from one year to the next.
The company has a relatively good profit margin of 10% as at 2016 but this has decreased from 14% as at 2015. The biggest issue is on revenues which decreased from 2015 to 2016. Revenues can be boosted by increasing marketing activities and new products.
The ROE for the company is good at 56.6% as at 2016. Despite the drop from 103% in 2015, the company is still attractive to investors. The third ratio is the current ratio which is an improvement for the company as it jumped from 64% to 87%. A high current ratio means the organization is capable of meeting its short-term obligations. At 87%, the company is in a good position to pay debts related to day-to-day operations.
Interest coverage ratio for Verizon is considerably high meaning the company is capable of paying its interest to its outstanding debt. A good debt or liquidity ratio improves a company’s credit score.