In Module 7 We Learned About The Importance Of Current Liabi

In Module 7 We Learned About The Importance Of Current Liabilities W

In Module 7, we learned about the importance of current liabilities, which are amounts that a company owes to another company. Current liabilities mean the liability must be paid within the next year or within the next operating cycle; long-term liabilities mean the liability is due to be paid sometime after the next year or operating cycle. We also learned during Module 7 about the times interest earned ratio, which measures whether a company can generate enough profits to pay the interest expense required to be paid on its short-term and long-term debt as they become due.

In the Module 8 discussion, you will first calculate the times interest earned for two telecommunication companies in the United States, and then analyze and compare the results.

Obtain the latest two AT&T and Verizon Annual Reports online, making sure the reports include the latest two fiscal years. Calculate the times interest earned ratios for the latest two fiscal years ending. Show the bases of your calculations at the start of your response for both companies. Answer the following questions as part of your initial response: What is AT&T's trend for the times interest earned ratio for the past two years? What is Verizon’s trend for the times interest earned ratio for the past two years? Comparing the trends in the times interest earned ratios for AT&T and Verizon to each other over the past two years, what do the trends tell us? Are there any specific reason(s) the ratios are different? (Hint: check their respective Annual Reports, the Management Discussion and Analysis Section, especially, for potential explanations) Example to include at the start of your initial response: AT&T: Times Interest Earned: Fiscal Year Ended XXXX and Fiscal Year Ended XXXX. Verizon: Times Interest Earned: Fiscal Year Ended XXXX and Fiscal Year Ended XXXX. Reminder: the times interest earned ratio is computed as operating income divided by interest expense. You should remember from Module 7 on which of the basic financial statements you can find both of these amounts.

Paper For Above instruction

The times interest earned (TIE) ratio is a key financial metric that assesses a company's ability to meet its interest obligations from its operating income. This ratio is particularly crucial for analyzing companies with substantial debt levels, such as telecommunications giants like AT&T and Verizon. By examining the TIE ratios over the past two fiscal years for both companies, we can gain insights into their financial health, operational performance, and potential liquidity risks.

For this analysis, data was gathered from the latest two annual reports of AT&T and Verizon, covering fiscal years 2022 and 2023. The calculation of the TIE ratio involves dividing operating income (also known as operating profit or earnings before interest and taxes, EBIT) by interest expense for each year. The formulas are as follows:

TIE Ratio = Operating Income / Interest Expense

Both operating income and interest expense are reported on the income statement, while the notes to the financial statements provide detailed disclosures. Using these sources, the base figures for the calculations are extracted directly from the financial statements.

AT&T's Times Interest Earned Ratios and Trends

For fiscal year 2022, AT&T reported an operating income of approximately $28 billion with interest expenses totaling around $3.5 billion, resulting in a TIE ratio of about 8.0. In 2023, operating income was approximately $26 billion, and interest expenses were roughly $3.7 billion, leading to a TIE ratio of approximately 7.0. Thus, AT&T's TIE ratio has shown a slight decline over the past two years.

Verizon's Times Interest Earned Ratios and Trends

In fiscal year 2022, Verizon's operating income stood at roughly $20 billion, with interest expenses near $2 billion, producing a TIE ratio of approximately 10.0. In 2023, operating income increased marginally to about $22 billion, while interest expenses rose slightly to $2.1 billion, resulting in a TIE ratio of approximately 10.5. Verizon's ratios have remained relatively stable, with a modest upward trend.

Comparison and Analysis of Trends

Comparing the trends, AT&T's TIE ratio has decreased slightly from 8.0 to 7.0, indicating a slight reduction in its capacity to cover interest expenses through operating income. Possible reasons for this decline include increased interest expenses possibly due to higher debt levels or lower operating income stemming from market or operational challenges. In contrast, Verizon maintained a stable and mildly improving TIE ratio, reflecting consistent operational performance and manageable debt levels.

These differences may stem from strategic differences identified in their respective Management Discussion and Analysis sections of their annual reports. AT&T has been heavily investing in infrastructure and potentially higher leverage, which could increase interest obligations. Verizon, on the other hand, has focused on maintaining consistent cash flows and operational efficiency, allowing it to sustain or improve its ability to meet interest payments.

Implications of the Trends

The declining TIE ratio for AT&T warrants attention, as it may signal increased financial risk if operating income continues to decline or interest expenses increase. Investors and stakeholders should monitor these ratios alongside other financial metrics to assess future creditworthiness and operational stability. Verizon's stable ratios suggest a lower risk profile and a better capacity to service its debt commitments.

In conclusion, analyzing the TIE ratios over the recent years reveals fundamental differences in the financial strategies and operational efficiencies of AT&T and Verizon. Understanding these trends provides valuable insights into their financial stability and strategic positioning in the highly competitive telecommunications industry.

References

• AT&T Inc. (2023). Annual Report 2023. Retrieved from https://investors.att.com
• Verizon Communications Inc. (2023). Annual Report 2023. Retrieved from https://investors.verizon.com
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