From the income statements of the company, it is evident that the company is turning in great profits. But the benefits are not enough to determine whether the company is worth to invest in by any willing investor. Therefore, it is prudent that the investor assesses not only the company’s profitability, but also the solvency, efficiency, and liquidity to find out if it is deteriorating or improving ( Das, 2018) . For Verizon, the following metrics were evaluated to determine whether the company is a worthwhile investment.
Liquidity ratios are metrics that are used repeatedly by lenders and creditors to establish whether a company has the potential of paying off its short-term debts. These financial institutions normally use the ratios to determine if an organization qualifies for an extension of debt or credit. In Verizon’s case, the liquidity ratio used is the current ratio. The current ratio compares the company's existing assets about its liabilities ( Das, 2018) . The metric is flawed as it comprises inventory and categorizes it as a current asset. Generally, stocks are hard to exchange into cash, and thus may not be an appropriate indicator for liquidity. Anyway, from the assessment of the current ratio for 2017 and 2018, the proportions were found both to be strong (0.91), an indication of the company having nearly one time over its assets over the liabilities.
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Efficiency ratios evaluate the capability to generate income by using company assets. The main way in which these ratios assess companies is through the measurement of the time taken by a company to exchange cash with inventories or collect money from clients (time is taken to make sales). For Verizon, the management can use the metrics to enhance the company as the Asset Turnover ratio is weak ( Das, 2018) . Furthermore, the company’s ratio indicates a decreasing ability in the utilization of assets to generate sales. In 2017, the company had $1.01, and in 2018, $0.45 of every dollar asset to the dollar made in sales. The Account receivables turnover ratio for both years was zero while the inventory turnover ratio is weak as it indicates a decreasing demand for Verizon’s services.
Profitability metrics are known to indicate a company’s potential to produce profits from its ventures, especially from inventory and other assets. Verizon Communications has a gross profit margin of -58%, which is weak as it is deficient. This margin shows that the management is not able to control overhead costs and thereby to limit its potential of making a substantial profit from sales. Moreover, the company is slow in producing more revenue from sales, as indicated by the Return on Sales metric ( Tamulevičienė, 2016) . Additionally, the return on assets shows that the company is weak as it has diminishing effectiveness in converting the amounts used to buy assets into net worth. As computed in 2017, the company had a return on asset of 2.45 while in 2018, it lowered to 2.18. The return on equity also supported the argument of the slow nature of the company in producing profits from its stockholders' capital as it diminished from 48% to 37% in 2018.
Unlike the liquidity ratios, solvency ratios are meant to compute a company’s long-term obligations. Verizon is riskier as it has a debt ratio of 0.44 and 0.40 in 2017 and 2018 respectively. The Times Interest Earned is extremely low with -5.98 in 2017 and -7.28 in 2018. The solvency ratio makes the company more liquid, which not a good indicator is for investors even though the equity multiplier ratio indicates less of its debts to finance assets ( Ibendahl, 2016) . The company’s financial leverage is less risky as the amount of debt used to purchase more assets is lower making it easier for the company to repay its loans (0.65 in 2017 and 0.69 in 2018).
References
Das, S. (2018). Analysis of cash flow ratios: A study on CMC. Accounting, 4(1), 41-52.
Ibendahl, G. (2016). Using solvency ratios to predict future profitability. Journal of ASFMRA, 195-201.
Tamulevičienė, D. (2016). Methodology of complex analysis of companies’ profitability. Entrepreneurship and sustainability issues, 4, 53-63.
