Verizon Communications Inc. is a major telecommunications company in the United States. Two recent balance sheets for Verizon disclosed

Verizon Communications Inc. is a major telecommunications company in the United States. Two recent balance sheets for Verizon disclosed the following information regarding fixed assets:

End of Year (in millions) Beginning of Year (in millions) Property, plant, and equipment $220,163 $230,508 Less accumulated depreciation 136,622 140,561 Property, plant, and equipment (net) $ 83,541 $ 89,947

Verizon’s revenue for the year was $131,620 million. Assume that the fixed asset turnover ratio for the telecommunications industry averages approximately 1.1. 

a. Determine Verizon’s fixed asset turnover ratio. Round to one decimal place.

b.  Interpret this ratio with respect to the industry average.

Answer:

Verizon: $

131,620 = 1.5 ($89,947 + $83,541) / 2

Verizon earns $1.50 revenue for every dollar of fixed assets. Telecommunications 

requires a significant investment in the network in order to generate revenues.

The industry average fixed asset turnover ratio is 1.1. Thus, Verizon is using its

fixed assets more efficiently in generating revenues than the industry as a whole. 

The reason would require further analysis into the nature of Verizon’s fixed assets

and revenues, but is likely related to having high data volume on its network.

The following income statement data for AT&T Inc. and Verizon Communications Inc. were taken from their recent annual reports (in millions):

The following income statement data for AT&T Inc. and Verizon Communications Inc. were taken from their recent annual reports (in millions):

 

 AT&T Verizon

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $132,447 $127,079

Cost of services (expense). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,611 49,931

Selling and marketing expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,697 41,016

Depreciation and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        20,393      16,533

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $   11,746 $   19,599 

a. Prepare a vertical analysis of the income statement for AT&T. Round to one decimal place.

b. Prepare a vertical analysis of the income statement for Verizon. Round to one decimal place.

c.  Based on Requirements (a) and (b), how does AT&T compare to Verizon?

Answers:

a.

Revenues.................................................................. $132,447 100.0%

Cost of services (expense).......................................... 60,611 45.8%

Selling and marketing expense.................................... 39,697 30.0%

Depreciation and other expenses................................. 20,393 15.4%

Operating income...................................................... $ 11,746 8.8%

b.

Revenues.................................................................. $127,079 100.0%

Cost of services (expense).......................................... 49,931 39.3%

Selling and marketing expense.................................... 41,016 32.3%

Depreciation and other expenses................................. 16,533 13.0%

Operating income...................................................... $ 19,599 15.4%

c. AT&T’s operating income is 8.8% of revenues, while Verizon’s operating income to revenues is 15.4%. Verizon appears to be more efficient in generating operating income from revenues. AT&T’s cost of services is 45.8% of revenues, while Verizon’s is over six percentage points less at 39.3% of revenues. This difference is a largecontributor to Verizon’s superior operating income-to-revenues efficiency. The other two expense items essentially cancel each other out in that the selling and marketing expenses are 30.0% of revenues for AT&T, while Verizon’s are slightly larger at 32.3% of revenues. In contrast, the depreciation expense is 15.4% of revenues for AT&T and only 13.0% for Verizon. In summary, it appears that Verizon is able to generate more operating income per sales dollar, mostly because of a lower cost of services per sales dollar in comparison to AT&T.