FREE ESSAY ON ADC TELECOMMUNICATIONS FINANCIAL RATIO ANALASIS

ADC TELECOMMUNICATIONS FINANCIAL RATIO ANALASIS

Accounting 6000
Financial Statement Analysis
ADC Telecommunications
October 29, 2000
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 charges were 148,977,000 and 9,168,000 for years 1999 and 1998
respectively. These increased expansion costs decrease net income, thus reducing the ROE
ratio for 1999. ADCT must focus on revenue generation from these recent acquisitions to
improve the return on shareholders equity. This recent drop in ROE needs to be compared
to 2000 ROE ratios to provide a more complete picture of future returns for ADCT
investors. 
Profitability Measures
The gross margin percentages for ADCT are 52.5%, 50.4%, 50.0%, 50.5% and 51.7% for the
years 1995-1999. The industry comparisons of gross margin averages are 43.1%, 40.3%,
41.2%, 40.4% and 40.6% for the same years. One noticeable difference is ADCT's gross
margin percentages are consistently 10% higher than industry comparisons. One reason for
exceptional gross margin performance is ADCT's sales mixes, sales volume, lower component
costs and consolidation through acquisitions. ADCT's gross margin is 10 percent higher
than the industry average, illustrating another aspect of the company's high
profitability.
ADCT's profit margins are 9.4%, 10.6, 9.3, 10.6 and 4.5 for 1995-1999 respectively. There
were no profit margin industry averages in the Almanac of Business and Financial Ratios,
written by Leo Troy. Profit Margins have remained stable at 10% until a 1999-drop to
4.5%. This sudden drop in 1999 can be attributed to the previously mentioned decrease in
net income in 1999 due to non-reoccurring charges. This drop in 1999 can be viewed as a
temporary decline until compared to the 2000 financial statements for ADCT.
Earnings per share (EPS) for ADCT are $.45, .69, .90, 1.16 and .58 for the years
1995-1999 respectively. There were no EPS industry averages in the Almanac of Business
and Financial Ratios, written by Leo Troy. The EPS trend is a gradual increase from
1995-1998 and a sudden drop in 1999. These figures reflect ADCT's reduced net income due
to increased non-reoccurring expenses and the issuance of 45,000 shares on the NASDAQ
market to raise additional revenue for expenses. Industry leader Cisco has a $.17, .30,
.34 and .44 cents of EPS for 1995-1998. ADCT has consistently returned more EPS than the
industry leader Cisco, reflecting ADCT's superior profitability. 
Despite expansion expenses, ADCT still remains very profitable. Both gross margins and
EPS indicate strong profitability. A weak profitability margin in 1999 reflects increased
expansion expenses and can be viewed as temporary until the 2000 Annual Report is
available.
Investment Utilization
ADCT's asset turnover ratios are .97, 1.1, 1.2, 1.1 and 1.2 for years 1995-1999
respectively. Industry asset turnover ratios are 1.6, 1.9, 1.7, 1.8 and 1.7 for the same
time period. ADCT's asset turnover ratio trend remains constantly lower than industry
averages. This suggests that ADCT is not properly using its assets to generate sales
revenues. Competitors are more efficient by creating more revenues with fewer assets, as
compared to ADCT. An increased profit margin would improve the current use of assets and
improve income generation.
Day's receivable for ADCT are 67 days, 72, 77, 97 and 83 for 1995-1999 respectively.
There were no comparable day's receivable industry averages in the Almanac of Business
and Financial Ratios, written by Leo Troy. The averages used in Troy conflicted with the
methods of the Anthony, Hawkins and Merchant textbook. A 30% noticeable trend increase
occurs between 1995-1998. This indicates the time it takes ADCT to receive cash from
customers is increasing, making the company tie up assets for longer periods of time.
This is considered a negative trend and needs further investigation to determine the
cause. 
Day's inventory for ADCT is 113 days, 116, 105, 94 and 96 for 1995-1999 respectively. No
comparable industry averages were presented. A noticeable decline indicates ADCT is
taking less time to sell its inventory. ADCT is improving the time it takes to convert
inventory into sales revenues. This trend is considered a positive trend for ADCT.
However, since day's receivable's is increasing, cash flows from day's inventory are
being realized later, due to extended credit payment deadlines. 
ADCT's inventory turnover ratios are 4.5, 3.8, 3.9, 4.0 and 4.4 while industry standards
are 4.5, 3.8, 3.8, 4.4 and 4.9 for years 1995-1999 respectively. ACDT ratios directly
reflect industry averages. Inventory at ADCT turns over every four months or three times
a year. The inventory turnover trend can be viewed as a positive trend.
ADCT's current ratios are 5.1, 4.0, 3.1, 2.3 and 2.5 while industry averages are 2.3,
2.0, 2.2, 2.1 and 2.0 for 1995-1999 respectively. ADCT has higher current ratios than
industry standards. This trend can be viewed as both a positive and a negative trend. For
example, a high current ratio indicates ADCT can easily pay its debt, 3 times more than
in industry standard in 1995 (excess current assets). However, this also indicates that
ADCT is not using its assets efficiently. By taking on more debt, the company could
increase spending on research & development or acquisitions/mergers. Since 1997, ADCT has
been inline with industry standards concerning current ratios, increasing profitability
possibilities.
ADCT quick ratios are 2.7, 1.3, .6, .8, .4 while industry standards are 1.4, 1.2,1.4, 1.1
and 1.1 for 1995-1999 respectively. ADCT's short-term debt paying ability has been
decreasing since 1997 when compared to industry standards. This suggests ADCT may have
excess inventories on hand or reduced its immediate available cash more than it should
have. ADCT must improve its short-term debt paying ability or it may risk becoming an
acquisition target. ADCT may also find it more difficult to issue bonds at a 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.
Bibliography
ADC Telecommunications Financial Ratio Analasis (1995-1999)