Future Forecast - Sprint Nextel - Case Study Example

Spring Executive Summary Report (Based on future forecast) Evaluation of SPRINT NEXTELs financial performance: 2009, and In order to understand whether commitment to the communications system of SPRINT NEXTEL would be a viable decision in terms of sustaining the performance and profit of High Technology Corporation (HTC), it is required to evaluate the financial performance of SPRINT NEXTEL from 2009 to 2011 and then reach a decision based on the evaluation. The evaluation of financial performance of SPRINT NEXTEL is based on key financial performance indicators. The key financial performance indicators are given by financial ratios. Based on the current value and trend of these financial ratios, HTC would be in a position to forecast the future and expected financial performance of SPRINT NEXTEL and this would enable them to take the required decision. Profitability ratio The profitability ratio of SPRINT NEXTEL gives us the measure of financial performance of the company in terms of staying in a profitable position in its business. It shows how well the company has managed its resources in generating profits and value for its shareholders. Return on Equity The return on equity is given by (Net Income / Shareholder’s equity). As calculated in the attached excel the return on equity for SPRINT NEXTEL has been found to vary from -0.13 to -0.25 during 2009-11. This shows that the company has been running at a loss and has not managed its resources efficiently. Based of the trend, it is difficult to justify the profit earning capability of the firm in future. Return on Assets It is given by (Net Income / Assets). The return on asset shows the total income as a percentage of the assets of the company. The return on assets of the company has been found to vary from -0.04 to -0.05 during 2009-11 which shows that the company has run at a loss. Thus, it is difficult to enter into a long term commitment with the company based on this ratio. Operating performance ratio This financial ratio would provide us with the measure of productivity of operating performance of SPRINT NEXTEL. Fixed Asset Turnover The investment in fixed assets of the company represents the largest component of assets. The fixed asset turnover for SPRINT NEXTEL has been found to increase from 1.76 in 2009 to 2.40 in 2011. This will help HTC to understand how well SPRINT NEXTEL has managed its fixed assets for operation and this would help in framing a future forecast of the same. Inventory Turnover It is given by (Cost of goods sold / Ending inventory). The inventory turnover for SPRINT NEXTEL has decreased from 26 in 2009 to 20 in 2011. This means that sitting period for items in the inventory has been increasing which is not a good sign for future. Leverage ratio Leverage ratios can be used to determine the company’s financial risk. This can be determined as proportion of assets to equity or proportion of debt incurred by the company in comparison to its shareholder’s equity. Financial Leverage It is given by (Assets / Shareholder’s equity). The ratio has increased from 3.06 in 2009 to over 4.32 in 2011. This means that the company is showing a trend of reducing it’s of bankruptcy over a period of time and is expected to attain a safer position in future. Debt-equity ratio It is given by (Debt / Equity). This ratio has increased from 1.12 in 2009 to 1.77 in 2011. Thus SPRINT NEXTEL is moving towards a risk of being overburdened with debt obligations in future if not managed strategically. Liquidity ratio The liquidity ratio provides with the measure of capability of servicing current liabilities with the help of its current assets. Current ratio It is given by (Current assets / Current liability). The current ratio of SPRINT NEXTEL has increased from 1.26 in 2009 to 1.59 in 2011. This shows that the company is moving towards a better position in future to service its short term liabilities by using its short term assets. Quick ratio It is given by [(Current assets – Inventory) / Current liability]. Quick ratio for SPRINT NEXTEL has increased from 1.17 in 2009 to 1.45 in 2011. This shows that the current liquid position of the company is showing an increasing trend in future to be able to service its short term liabilities from its short term assets. Key findings from financial statement analysis From the evaluation of financial performance of SPRINT NEXTEL with the help of ratio analysis, HTC can understand that the profitability of the company from 2009 to 2011 has not been satisfactory to consider long term commitment. However, SPRINT NEXTEL has shown sign of improvement in terms of management of its fixed assets for operation. Although debt incurred by the company has decreased, SPRINT NEXTEL has also increased its asset size with respect to share holder’s equity in order to put itself in a safer position from bankruptcy. The current position of liquidity has also shown signs of improvement which will put itself in a better position to service its short term liabilities. It is also to be noted that the net income from continuing operation registered a compounded annual growth of over 19% from 2009 to 2011. Keeping all these factors into consideration, HTC can decide of a long term commitment with SPRINT NEXTEL. Evaluation of SPRINT NEXTELs stock performance: 2009, 2010 and 2011 Performance of stock of SPRINT NEXTEL in the market would give signal to the investor about their future moves that is an expected return considering the average return during the period of 2009 to 2011. This would help HTC in deciding whether to enter into a long-term commitment with SPRINT NEXTEL. Performance of the market is also an indicator of stock performance. For example, performance of stock of SPRINT NEXTEL and the performance of its market, i.e. S&P 500 are correlated. The performance of stock of SPRINT NEXTEL varies over the period from 2009 to 2011 which is given by standard deviation of the stock. Also the variation of stock performance of SPRINT NEXTEL would depend on the variation of market performance. This is given by a statistical measure of the covariance between the two performances. From the stock performance of SPRINT NEXTEL in terms of its closing price from 2009 to 2011, we have found that the average return on the stock over the said period is 1.18%. The return on stock has been calculated as (Stock price at interval p2 – Stock price at interval p1) / (Stock price at interval p1), where p1, p2,…. pn are the intervals showing the stock prices. Please refer to the detailed calculation in the attached excel. Compared to SPRINT NEXTEL’s stock, the performance of market stock has shown an average return of -1.06% calculated in a similar way. This shows that the stock performance of SPRINT NEXTEL is better as compared to the industry’s stock performance. Also the standard deviation of the SPRINT NEXTEL’s stock is found out as 15.04% which can be seen in the calculation attached in excel format. This signifies that the stock price of the company has not fluctuated too much from its mean value or fluctuated to the extent of 15.04%. This means that the stock performance is not much volatile and can be relied upon. The beta value of the stock has been calculated as 0.56. Beta value of a stock shows the sensitivity of stock price with respect to the market. This means that the return on stock of SPRINT NEXTEL is 56% of the market return during the same period. The risk free rate of return on the stock has been taken as 26% as available from the sources. Thus an expected return on the stock of SPRINT NEXTEL has been calculated in the excel worksheet as 11.13% taking into consideration, the stock performance of the company from 2009 to 2011 (Yahoo Finance, 2013). Key findings from stock performance analysis By analyzing the performance of stock of SPRINT NEXTEL, HTC can understand that the stock performance of its client can relied based on the performance of last 3 years. Also the fact that the return of stock of SPRINT NEXTEL form a major part of market return, i.e. 56% is fact which can be taken into account for entering into a long term commitment. Based on the stock performance from 2009 to 2011, the expected rate of return, 11.13% is much more than the average rate of return, i.e. 1.18% during the said period. Recommendation based on present trend and future value The financial performance and the stock performance evaluated for SPRINT NEXTEL will help HTC in taking a decision whether the recent financial and stock performance from 2009 to 2011 as compared to the expected future values and prices have sufficient strength for entering into long term commitment. Although profitability of SPRINT NEXTEL from 2009 to 2011 is not up to the mark, it should also be noted that the net income from continuing operations has shown a steady compounded annual growth rate of over 19%. Although the company has been running at a net loss, the net income over the last three years during 2009 to 2011 has recorded a compounded annual growth rate of 8.92%. Total current assets have shown an increasing compounded annual growth rate of 9.68%. This shows that SPRINT NEXTEL has shown sign of improving its position of liquidity and has also to put itself in a comparatively safer position from bankruptcy over 2009 to 2011. SPRINT NEXTEL has also managed its fixed assets in an improved manner from 2009 to 2011. These recent trends in its financial performance are expected to sustain and increase in future. Considering the stock performance of SPRINT NEXTEL, HTC should take into account that the return on stock of SPRINT NEXTEL forms a major part of the market return which is given by its beta value. The future performance of the stock based on the recent performance trend is reliable as the standard deviation of the stock is not very high. Hence the stock performance is not so volatile. The expected return in future based on recent trends has been found to be quite high. Thus the stock performance of SPRINT NEXTEL can be considered to be growing based on the recent trends which are considered prudent to enter into a long term relationship commitment with SPRINT NEXTEL. Thus the financial performance indicators and the stock performance indicators indicate that SPRINT NEXTEL is growing and is likely to increase its net income and stock prices and returns to its shareholders in future. Hence, HTC can take a prudent management decision in favor of entering into a long term commitment with SPRINT NEXTEL. Reference Yahoo Finance. (2013). Historical Prices. Retrieved from http://finance.yahoo.com/q/hp?s=S+Historical+Prices. Read More