One of the things I like doing when comparing companies for possible long-term investments is to create a side by side comparison of the financial condition of each. In order to keep it simple, I like to use three different ratios: (Debt/equity ratio; Current ratio; Interest coverage ratio). This gives me a general idea of a company's overall debt, short-term debt, and ability to make interest payments. Let's take a look at three wireless companies and see how they look side by side: Verizon (VZ); AT&T (T); Sprint (S).
Debt/Equity Ratio
Verizon: 1.40
AT&T: 0.63
Sprint: 2.51 (industry- 0.72)
Industry: 0.99
This particular ratio reveals a portion of a company's equity and debt to finance its assets. A higher ratio reveals that a company is financed by creditors instead of its own financial resources. The higher ratio would be dangerous in the case of a business decline. For this reason, investors prefer a lower ratio. The higher the ratio the harder it may be to borrow money, or attract more capital. AT&T appears to be in the best position of the three here with a ratio a third below the industry average. Verizon is higher than the industry average, but it is Sprint which really looks indebted. I give the edge here to AT&T.
Current Ratio
Verizon: 1.0
AT&T: 0.6
Sprint: 1.5 (industry- 1.1)
Industry: 1.1
This ratios reveals a company's ability to meet short-term debt obligations. Why is this important? Does the company have enough resources to pay its short-term debt in the next 12 months? The higher the ratio the more liquid a company is and the more lenders are apt to make short-term loans to the company. A ratio above 1.0 means the company's short-term assets are greater than its liabilities. I would have to give the edge to Sprint on this one. If it needs short-term loans, it looks very healthy, whereas AT&T has a lot of short-term debt and more than assets to pay it. Verizon looks nicely balanced so the edge here would have to go to Sprint.
Interest Coverage Ratio
Verizon: 6.6
AT&T: 3.2
Sprint: -0.6 (industry- 4.1)
Industry: 4.2
How easily can a company pay the interest on its outstanding debt? This is what this ratio determines. It gives us a sense as investors how strong a company is financially. Will it meet its obligations, or is it closer to defaulting on its financial obligations? A lower than average ratio means the company is more susceptible to increases in interest rates- which is not good. A higher ratio is healthy and means a company can meet its interest payments with operating earnings. The healthiest company here is by far Verizon. It towers over the rest and looks financially healthy. Both AT&T and Sprint are not in a good financial position compared to the industry average but it is Sprint that really raises red flags here. It's ratio here is really in the red. The edge here has to go to Verizon.
Sprint is part of a different industry (Wireless) while the other two are categorized as (Domestic Telecom). Verizon looks like a strong financial investment and AT&T also looks financially sound except for short-term. But Sprint brought up red flags for me because of the danger of meeting interest obligations. I am not sure if I would invest in Sprint.
All financial ratios were taken from money.msn.com.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
