The Benefits of an Accounting Analysis Strategy

Running head: AT & T FINANCE ANALLYSIS 1 

AT & T Financial Analysis 

Accounting Analysis strategy and Disclosure Quality 

Accounting strategy is brought about by management flexibility where they can use financial statements to communicate the economic situation of the company or hide true performance (Krishna, 2007). This is evaluated based on a company’s accounting strategy compared to the industry standards. In the case of AT&T, it adheres to the accepted accounting principles of the United States. It uses an approach to show the true performance of the company over the period from 2012 to 2016; however, some accounts have been reclassified depending on the year of presentation to conform to the respective period of presentation. 

Disclosure quality is determined by the ease of any analyst to analyze the financial statements and use them to identify business operations. Quality disclosure can be voluntary or mandatory depending on the prevailing circumstances of presenting this accounting information. The quality of information strongly depends on the credibility of its contents and the reliability of the source. For quality disclosure, the information can be independently verified by external auditors to show that it show the true position of the company. 

In the United States, GAAPS offers the minimum requirements for disclosure, but managers can alter this depending on their current situations. AT&T offer overview into their financial statements through the managers' report clearly explaining the industry conditions and plans. The notes to the account help an analyst understand the changes in the accounting policies applied and the managers’ report to understand the reason behind an increase or a decrease in any accounting variable. 

AT&T managers' report gives an insight into the changing economic trends and how they are affecting its expenses and revenues. For example, 2016 financial report show the increase in net income from Mexican subsidiaries due to reforms in the tax structure leading to a decrease in tax liability (AT&T financial review). We can determine that the financial statement of AT&T give quality disclosure of information as the statements show accountability of all the variables in the accounting information. An independent audit by Ernest and Young proves that the information in the financial statements shows a true and fair value of the company as per the date of presenting the financial statements for the year ended 2016. 

Financial Analysis Forecasting and Valuation 

Financial forecasting is a tool used by a company to express its financial goals and priorities to ensure they are internally consistent ( Schmidt , 2006). It allows the firm to analyze its requirements to achieve those goals. A good percentage forecast relies on generating revenues through sales hence decisions are made to support these sales goals. AT&T expects stiff completion in the industry for the coming financial year, and they have made forecasts about this for some of its core operations. 

AT&T 2017 financial forecast include: 

Revenues will grow in 2017 supported by: 

• The annual operating revenue is expected to grow in 2017 due to the firm’s ability to offer integrated technology as well as growth in its long-term strategic services. 

• AT&T hopes that the strong competition in wireless and video technology will push the annual income and average revenue per user. 

• It is expected that most of their clients will increase their broadband usage together with data and video services. 

• However, there is an expectation that call and data revenue will decline due to changes in technology. 

• The company’s acquisition of strategic businesses in Mexico is expected to increase revenues even though there will be integration costs incurred in the new market. (AT&T management analysis, 2016). 

Financial forecasts for expenses is expected to change as follows: 

The company expects that the operating profit margin to grow in the coming year as their strategy is expected to push handset costs downwards in the long run and also lower their operational costs and video services. AT&T intends to focus on continued service automation to drive the decrease in costs. The company hopes to achieve efficiency in supply chain management, product design, online transactions and optimal network costs.AT&T migration to a more efficient service approach using new software upgrades which are expected to offer a decrease in expenses over the next few years. In any case, costs identified with the development of the business alongside the combination of the recently procured operations will put counterbalancing weight on the operating income margin. (AT&T management analysis, 2016). 

The current valuation of AT&T can be computed using various ratios as follows using a three-year average: 

A forward valuation based on its forecast is equally shown as: 

Assessment of Solvency 

The assessment of a company's solvency is a calculation of the company to meet its long-term financial obligations. A solvent company has a large assets base than its debts. That is it is worth more that it owes regarding debt. This is shown by the use of ratios like the debt/equity ratio, the debt/asset ratio and the interest coverage ratios. They show the financial risk faced by the company in its financing policies in debt and equity. The solvency of AT&T is shown by its ability to repay interests and premiums on outstanding long-term debts. 

Altman Z-score Model 

The Altman Z-score is a measure of bankruptcy or insolvency of a company. It combines five business ratios to predict chances of business failure in the long run. It uses standard coefficients to calculate the Z score where a conclusion based on a range. That is a Z score above 2.99 is considered as safe from financial distress. A score between 1.81 and 2.99 shows a company is susceptible to distress in the next few years. A score below 1.81 shows a company will experience distress in the current period (Altman, 2000). The Altman formula is given as: 

Z = 1.2X 1 + 1.4X 2 + 3.3X 3 + 0.6X 4 + 1.0X 5 . 

X 1 = Working Capital / Total Assets. This evaluates the ability of the company to meet short-term obligations based on company size. 

X 2 = Retained Earnings / Total Assets. It evaluates the returns of the company based on its asset base. 

X 3 = Earnings before Interest and Taxes / Total Assets. It evaluates the operational efficiency of the company. It perceives working income as being imperative to long haul suitability. 

X 4 = Market Value of Equity / Book Value of Total Liabilities. 

X 5 = Sales / Total Assets. This is a general measure of asset turnover and changes from industry to industry. 

For AT&T the Z-score is calculated as: 

The financial information for the year ended 2016 from AT&T financial review is given as 

Total Assets was $403,821 Mil. Total Current Assets was $38,369 Mil. Total Current Liabilities was $50,576 Mil. Retained Earnings was $34,734 Mil. Pretax Income was 3191 + 5193 + 5421 + 6007 = $19,812 Mil. Interest Expense was -1221 + -1224 + -1258 + -1207 = $-4,910 Mil. Revenue was 41841 + 40890 + 40520 + 40535 = $163,786 Mil. Market Capitalization (Today) was $247,524 Mil. Total Liabilities was $280,686 Mil. 

X 1= working capital/total assets 

-12207/403821= -0.03023 

X 2= retained earnings/total assets 

34734/403821= 0.086 

X 3= EBIT/Total assets 

14902/403821= 0.0612 

X 4= Market value equity/book value of total liabilities 

247524/280686 = 0.8819 

X 5= revenue/total assets 

163786/403821= 0.4056 

This shows that the company is in a financial distress zone. 

Estimate of Credit Rating and Actual Bond Rating 

A credit rating is an estimate of the credit worthiness of a company for potential investors (Frost, 2007). This is based on the ratio of debt to earnings before interest, tax, depreciation and amortization. It is a measure of the company risk of investment depending on its liabilities, and it’s assigned when a borrower wants to access debt. A credit rating determines whether a company has access to loans and if so at what interest rate. A poor credit rate shows high investment risk. In the United States, credit rating is done by credit rating companies such as Standard & Poor’s ,  Moody’s  or Fitch . They offer credit rating service for a company or on any of itself debt obligations. The credit rating is assigned letters to show the rank from AAA to C and D. A bond rating below BBB- is considered as a speculative or junk bond which means it is most likely to default on bond payments. 

For companies, a credit rating is calculated based on the past debt borrowing and repayment patterns with any defaults impacting negatively on the rating. Also, any future economic potential will lead to a rise in credit rating because it shows the viability of the business in future. A negative economic expectation leads to a fall in credit rating. 

The estimated bond rating of AT&T for the financial year 2017 is expected to fall due to its expected merger with Time Warner. This is due to an increase in debt in future resulting from the adoption of Time Warner debt burden expected to be experienced in future from the merger. Moody and S&P credit ratings have already placed AT&T just three levels above the junk zone. The merger is expected to push the debt to EBITDA ratio to 3.7 times from 3.1 as per S&P’s credit watch report (S&P, 2016). 

The actual bond rating for AT&T is placed at A- since it has a stable income and has not defaulted on any loans though it has a huge debt burden. This rating is favorable for AT&T and its ability to access debt to finance the cost of the anticipated merger. The ability of the firm to meet it current and future financial obligations gives it a good bond rating with a large chunk of its debt being long term debts. 

References 

Altman, Edward I. (2000). "Predicting Financial Distress of Companies." Retrieved on April 11 th , 2017 from http://pages.stern.nyu.edu/~ealtman/Zscores.pdf 

AT&T financial review report 2016. Retrieved on April 11th, 2017 from 

https://www.att.com/Investor/ATT_Annual/2016/downloads/att_ar2016_completeannualreport.pdf 

AT&T management discussions and analysis. Retrieved on April 11th, 2017 from https://www.att.com/Investor/ATT_Annual/2016/downloads/att_ar2016_mda_consolidat edtables.pdf 

Frost, C. A. (2007). Credit rating agencies in capital markets: A review of research evidence on selected criticisms of the agencies. Journal of Accounting, Auditing & Finance , 22 (3), 469-492. 

Krishna G. Palepu , Paul M. Healy (2007). Business Analysis and Valuation: Ifrs. 

Schmidt, A. P. (2006). The persistence, forecasting, and valuation implications of the tax change 

Component of earnings. The Accounting Review , 81 (3), 589-616.