At & T Capital Structure Case Study

Assessing the Appropriateness of AT&T’s Capital Structure

AT&T leverages their finances quite well in comparison with the industry. Their main competitor is Verizon Communications Inc., together representing the two largest communication companies in the industry. The fiscal, customer, and services of these two companies make up a significant portion of the domestic telecom services industry. Therefore, they should provide the best comparisons in regards to capital structure.

Debt-to-Equity Ratio

The debt-to-equity ratio indicates a company’s reliance on loaned money. The lower the number, the less reliant a company is on borrowing money for operations. AT&T has a relatively low debt-to-equity ratio compared to the market average and

very low compared to Verizon; this proves to be an advantage, in that it means they have a much lower debt than their competitors. This would prove well when they want to borrow more for investments. Also, it means they do not have extensive overhead debt, which is another benefit when investors decide to loan more money.
Compared to Verizon and the market, AT&T does well to maintain a low debt-to-equity ratio, benefitting their ability to increase debt to undergo new ventures. Also, this low ratio means if debts needed to be paid quickly, AT&T would be in a better fiscal situation than Verizon or other market competitors.

Interest Coverage Ratio
The interest coverage ratio shows the ability to pay off debt. A ratio of three and higher means the company can pay off their debts well. As seen below, AT&T as a slightly lower ratio (3.25) than Verizon (3.99); although this is a relatively slim difference, it does indicate that Verizon is at a lower risk for not paying off debt. This is a disadvantage for AT&T’s capital structure because lenders would lean towards Verizon as a better investment. This also slightly hinders AT&T’s mitigating risk. However, a ratio around three is beneficial for a company’s ability to attract investors and overall is a great advantage in strategic opportunities.

Total Debt to Total Assets
The total debt to total assets ratio represents the financial risk and leverage of the company. AT&T has a very low total debt to total assets ratio, therefore a low financial risk and low degree of leverage. This low ratio in comparison with Verizon is a huge advantage for the company’s capital structure. This ratio means AT&T will attract investors at a far high rate than Verizon. Verizon is at a significantly higher disadvantage in attracting investors.
Verizon’s high debt-assets ratio is a great disadvantage for the organization’s capital structure. Their overhead debt is far greater than their assets. For investors, this high debt-asset ratio indicates Verizon is not currently a good investment.

Price to Earnings Ratio
AT&T greatly surpasses Verizon’s P/E ratio and slightly higher than the market.

This, again, makes AT&T very enticing for investors. This high ratio means AT&T is expected to produce higher earnings than the industry and Verizon. This is another advantage because it demonstrates AT&T’s ability to improve profit. With AT&T’s low leverage (as shown this far) combined with this high P/E ratio, they are very appealing to investors.

Verizon’s very low P/E ratio means their investors expect to make a lower amount per dollar than AT&T and the market in general. This is a huge disadvantage for Verizon’s capital structure and does not demonstrate good use of leverage when combined with their current debt.

Conclusion

Overall, AT&T does very well to promote investor interest. AT&T has a good capital structure, low debt ratios, and mitigates risks well. They are at a great advantage to attract investors because they leverage a low degree of risk. Verizon, however, is at a very high degree of leverage, making it far less desirable for investors. Verizon’s capital structure is at a huge disadvantage because of their currently high debt. In comparison with Verizon, AT&T appears to be a much better choice for investors and new company

ventures.