Financial analysis of Sprint Nextel Communications from 2004 to 2008

Executive Level Financial Report

CFO

Ref.: Financial Analysis of SPRINT NEXTEL Communications, Inc. -- financial and stock performance

In view of the opportunity arising from using Sprint Nextel as a supplying company, our own company needs to ensure that this company is stable and solid, able to provide the necessary equipment over a longer period of time. In this sense, this report will be formed of three parts: the analysis of Sprint Nextel financial performances over the period from 2004 to 2008, an analysis of the stock performance over the same period of time and a general evaluation and recommendations.

Financial Performance

In terms of the profitability indicators, the operating margin is perhaps the most concerning financial ratio at Nextel. The variations of the operating margin in the analyzed period are significant: as low as -72.0% in 2007, with a significant rebound in 2008 (-7.4%), but still a negative value. The negative value of the operating margin raises questions as how well the company is managing its variable costs and to its capacity of paying its fixed costs, such as interest or rent.

The same negative values are also noticeable in terms of the EBT Margin, with the decrease starting around the same period (positive values in 2005 and 2006, negative values in 2007 and 2008). The explanation for this, as for the operating margin, resides in the evolution of the cost of goods sold, which, as can be seen from the table, has gradually increased starting in 2006. From 40.4% in 2006, the value is 47.0% in 2008 and could continue to grow.

Other profitability indicators, such as the return on assets and return on equity, still have negative values in 2008, although the values in 2008 were somewhat more encouraging than those in 2007. These negative values show that the company is not profitable at the present time. They may also show the fact that the investors may refuse to invest in the company, given such low profitability values.

The revenue growth rates are similarly concerning. The company's revenues has decreased with 2.2% in 2007, 11.2% in 2008 and 12.1% in the latest analyzed quarter. If one takes into consideration the fact that the cost of goods has increased in the same period, the general conclusion is that the company is able to obtain less for a bigger cost. This is also seen in the low 3-year revenue growth average of only 0.9%, down from 13.5% in 2007.

Despite these low performances in terms of the company's profitability, the financial indicators of asset management efficiency are somewhat better. The asset turnover, showing the capacity of the company to efficiently use all its assets, has fluctuated, in the period from 2004 to 2008 around the value of 0.6, which is reasonable, although a higher value could reflect a higher efficiency. A similar observation can be made in the case of the fixed asset turnover, averaging around 1.5.

The inventory turnover values are difficult to interpret, because of their recent high fluctuation from 16.3 in 2007 to 22.9 in 2008. Generally, a low inventory turnover means that the company is not able to sell as fast as it is produces, which should be a bad commercial and economic signal. Nevertheless, if the inventory turnover is too high, this may also make the company more vulnerable to the price fluctuations on the market. The fact that the inventory turnover has increased so fast and to such a degree is most likely an indication that the company could be vulnerable in the future.

One of the positive aspects of the efficiency ratios is the receivables turnover, which has gradually increased from 2005 to reach 9.4 in 2008. This financial ratio and its value indicates that the company is doing a good job out of collecting payments due from other companies, which will tend to make it more financially stable on the short and medium terms.

In order to analyze the financial stability and health, several important liquidity and debt ratios are necessary. The current ratio, comparing the current assets to the current liabilities in a company, was 0.95 in 2007, decreasing gradually from 2004. It is generally recommended that this ratio is 1 or higher, however, 0.95 is a value close to that, giving a good reflection of the company's short-term financial viability. This is also important because any liquidity problems can then translate into bigger medium and long-term financial problems.

The financial leverage of the company, along with the debt to equity ratio, has, however, increased significantly from 2005 to 2007. In 2005, the financial leverage was 1.98 and the debt to equity ratio 0.40, while in 2007, the financial leverage was 2.91 and the debt to equity ratio 0.93. This shows that the company is starting to rely from on bank credits and debt rather than on financing its actions from the shareholders' equity. The financial leverage may be too high if one considers the other financial indicators of the company, especially the profitability indicators. The overall reasonably high asset management ratios may show, however, the company's capacity to pay its debt and not affect financial stability.

Recommendations

Sprint Nextel is currently in a difficult situation, characterized by low profitability and bad stock performance. The cost of the goods sold has increased, while the overall revenues of the company have subsequently decreased. The financial leverage of the company has increased as well, probably because the shareholders' and investors confidence in the company has decreased, because of its performances, which means the company needs to borrow from banks rather than by selling its shares. The only potential positive aspect could come from the asset management efficiency, all the indicators analyzed in this category having average or positive values.

The stock performance has been similarly bad and even below the industry averages. It is definitely a challenging economic time, but the performance of the Sprint Nextel stock has been lower than the industry average and below the S&P 500. This shows a decrease in the confidence of investors to purchase the company's share, a trend that may continue in the future, given the values of the internal indicators.

As a result, the performances of the company show that it is not a company to justify a long-term commitment. Despite the fact that the it industry may rebound at some time in the future, some of the problems that have been accumulating at Sprint Nextel, including the higher financial leverage and debt ratios, make this a dangerous investment for the future.