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...
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... low rate or utilize other financing activities with a low quick ratio. This is a negative trend in ADCT's profitability possibilities.
Financial Condition
ADCT's financial leverage ratios are 1.1, 1.2,1.2, 1.4 and 1.3 for 1995-1999. There are no industry comparisons available. The trend is constant with little variation.
ADCT's debt/equity ratios are 17.7% 24.5, 24.7, 42.2 and 34.0 for 1995-1999. There are no comparison ratios. There was a dramatic increase in 1998. This increase reflects ADCT's 1998 decision to sell additional stock in the NASDAQ exchange. ADCT has used the raised capitol to invest in operating activities and is reflected in the reduction of this ratio in 1999.
Cash flow/ debt ratios for ADCT are 49.1%, 42, 43, 21 and 81 for 1995-1999. There is a dramatic increase in 1999. This increase is due to increased expenses in 1999, reducing cash generated by operating expenses. ADCT also issued stock in 1998, increasing the total debt of the company. ADCT must use its newly acquired debt to generate more cash flow to improve the financial condition of the company.
Tests of Dividend Policy
ADC Telecommunications pay no dividends.
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