Telecommunications companies to engage in capital intensive projects that require large investments in infrastructure, wireless towers, transmission lines, and other communication equipment. To avoid stock dilution, the telecommunication companies usually Finance their investment projects by issuing corporate bonds or guarantees term loan from financial institutions, resulting in a high debt-to-equity (D/E). Companies in the integrated telecommunication services sub-sector tend to have on average a lower ratio D/E, while Wireless companies have a higher ratio of D/E.
Debt to equity options ratio
Ratio D/E is a popular indicator used by analysts to assess a company’s level of leverage and default risk. There are different options of the ratio D/E depending on the type of debt, included in the numerator. For example, debt could be strictly a long-term or short-term. Some analysts have also one-time preferred stock in the ratio of D/E-mezzanine equity resembles in many respects the debt, but not equity.
In the United States generally accepted accounting principles (GAAP) have a very specific threshold values for recognition of the lease as to both capital and operating. Finance leases are recognised as liabilities of the company and in consideration of debt, while the Operating lease is off-balance sheet financing and are not part of the company’s debt. Some financial experts, one-time operating lease in the company’s debt, since this form of funding is very different and similar features of the loan or debt. Including this factor may have a significant impact on the ratio D/E.
(For associated reading, see: what is the Telecom sector?)