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Adc Tellecommunications Financial Ratio Analysis

1519 words - 6 pages

ADC Tellecommunications Financial Ratio Analysis
Corporate Background

     ADC Telecommunications (ADCT) is a communication equipment manufacturer located in Minneapolis, Minnesota, USA. Since 1952, the company has successfully weathered the tumultuous transformation process of technology. Today, ADC Telecommunications exclusively focuses on manufacturing computer-networking equipment. Increasing demand for fiber optic transmission systems like asynchronous transfer mode (ATM), synchronous optical networks (SONET) and most wireless communications systems, provide significant opportunities for ADCT. The company currently focuses on enabling communications service providers to deliver high-speed services to residential and commercial customers. The following is an annual analysis of ADCT's financial ratios of years 1995-1999.

Overall Performance Measures

     The averaged price/earnings (P/E) ratios for ADCT are 36, 36.3, 39.4, 27.5, and 64.1 for years 1995-1999 respectively. The P/E ratio for ADCT is very stable from 1995 to 1997. In 1998, the P/E ratio fell over 43% to 27.5. The P/E ratio then rocketed to 64.1 in 1999, a 57% increase in one year. This dramatic increase indicates current investors are placing more value on future earnings as compared to previous years. One-reason ADCT investors pay more to own the stock is the growth potential in the communication equipment sector. For example, Internet traffic doubles every 100 days, illustrating the growth potential for ADCT's sales and bottom line earnings (Annual Report, 1999). Investors are currently willing to buy the stock at an inflated price due to two main reasons, the company's future earning potential and present growth rate in the industry.
The returns on assets (ROA) ratios for ADCT are 9.20%, 11.40%, 11.60%, 11.30% and 5.20 for the years 1995-1999. There were no ROA industry averages in the "Almanac of Business and Financial Ratios," written by Leo Troy. ADCT's ROA ratios remain constant (around11%) from 1995 -1998. In 1999, ROA dropped 54% to 5.20. This decline indicates that ADCT may not be utilizing its assets properly. One explanation for the 1999 decrease is ADCT's acquisitions. For example, ADCT purchased Broadband Access Systems for 2.25 billion exchange of stock (Datek, 2000). Recent acquisitions require additional long-term debt and are reflected in the ROA reduction in 1999. However, this trend is recent and may be viewed only as a temporary adjustment until the 2000 financial statements are released.

     There were no return on shareholders equity (ROE) industry averages in the "Almanac of Business and Financial Ratios," written by Leo Troy. ADCT's ROE ratios are 10.8%, 14.2%, 14.5%, 16.0% and 7.0% for the years of 1995-1999 respectively. One notable trend in the ROE ratios is the 56% drop from 1998 to 1999. One explanation for this is found on ADCT's income statement. There is a significant drop in net income in 1999 verses 1998. Non-reoccurring...

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