AT&T Inc. (NYSE: T) is a well-known telecommunications services provider. Despite the acquisition of DirecTV and expansion of its product offerings to consumers, the company continued to lose in 2015 due to a weak addition of new customers. Regardless, it remains a strong competitor in the telecommunications industry, with ample financial resources and a relationship with millions of residential and commercial customers it can leverage to its advantage. As of Dec. 31, 2015, the company carried about $126.2 billion in total debt, including $118.5 billion in long-term debt.

Debt-to-Equity Ratio

The debt-to-equity (D/E) ratio is one of the most commonly used debt metrics that allows investors to assess a company's leverage, and to some extent, the sustainability of its debt. All else equal, a low ratio translates into a small risk the company will default on its debt. The D/E ratio is calculated by dividing the sum of a company's long-term and short-term debt by its book value of common shareholders' equity. AT&T uses debt to fund its investing activities instead of issuing more stock and diluting its existing shareholders. It recently purchased wireless spectrum in the U.S. government-sponsored auction and substantially increased its debt levels in 2015, which resulted in shifts in leverage and its D/E ratio.

AT&T's D/E ratio steadily increased from 0.63 in 2010 to 0.95 in 2014, and the average D/E ratio from 2010 to 2014 was 0.75. The debt levels continued rising in 2015, and the company's D/E ratio stands at 1.02, as of Dec. 31, 2015. While the ratio may seem high by the company's historic standards, a few things need to be taken into account. First, the company substantially grew its balance sheet by investing in wireless spectrum, which is an asset that can be traded if there is a need. Also, it completed a significant stock repurchase worth $27.4 billion, resulting in a reduction of book value of equity.

Interest Coverage Ratio

The interest coverage ratio shows to what extent a company's earnings before interest and taxes (EBIT) can cover its interest expenses in a given period, typically a year. The higher the interest coverage ratio, the more cushion a company has against unexpected decreases in EBIT or increases in interest expenses.

AT&T's interest coverage ratio fluctuated significantly and was on a downward trajectory by 2015. The figure hit a low 2.90 in 2011 and a high 8.05 in 2013, and the average interest coverage ratio was 5.61 from 2008 to 2014. However, the figure improved to 6.0 in 2015 as a result of smaller selling, general and administrative expenses and the absence of costs associated with abandonment of network assets of $2.1 billion incurred in 2014. The company will likely incur smaller integration costs going forward as it continues incorporating DirecTV into its operations.

Cash Flow-to-Debt Ratio

The cash flow-to-debt ratio is another useful metric that shows to what extent a company's operating cash flows can cover its entire debt outstanding on its balance sheet, including capital leases, short-term debt and long-term debt. The ratio is calculated by dividing operating cash flow by total debt. While it is rare for a company's debt to come due all at once, this metric is useful in evaluating a company's leverage in times of stress.

AT&T's cash flow-to-debt ratio hit a 0.561 high in 2012 and a 0.382 low in 2014, and the average ratio was 0.488 from 2010 to 2014. This figure decreased further to 0.284 in 2015. While this may seem like a negative development, it is worth reiterating a few points. The company took most of its debt that year to finance investment in its networks, which should increase the quality of services. Also, most of the debt does not come due until 2025 and beyond, which provides room for the company to accumulate enough cash to pay off its debt.

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