Increased ROA

A successful telecom company is a lean organization with tight cost controls and efficient investments in the future. Investors are applying higher valuations to efficiently managed telcos as those companies historically showed higher returns.

Graph below shows linear relation between Return On Assets and P/E multiple for a sample of publicly traded telcos.

  • Return On Assets measures percentage of earnings in fixed assets of the company.
  • P/E multiplier defines company valuation based on annual earnings.

    Higher ROA = Higher P/E
    Source: Yahoo Finance 07/29/2007
    Sample includes: Verizon, Deutsche Telecom, Sprint, AT&T, Qwest, IDT Corporation, Telephone & Data systems, Golden Telecom.

    Outsourcing network facilities allows firms to report higher ROA and hence prove to investors that company is managed better hence must be values at a premium

    Outsourcing network infrastructure allows telcos:

    • Minimize upfront cash outlays
    • Improve company cash-flows
    • Lower financial risk of a project
    • Keep facilitesout of the books
    • Achieve higher ROA and company valuations

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