Telecommunications companies engage in capital-intensive projects that require large investments in infrastructure, wireless towers, data lines and other communication equipment. To avoid stock dilution, telecom companies typically finance their investment projects by issuing corporate bonds or secure term loans from financial institutions, resulting in high debt-to-equity (D/E) ratios. Companies in the integrated telecommunication services subsector tend to have a lower average D/E ratio, while wireless communication companies have a higher D/E ratio.
Debt-to-Equity Ratio Variants
The D/E ratio is a popular metric used by analysts to assess a company's level of leverage and default risk. There are different variants of the D/E ratio depending on the type of debt included in the numerator. For instance, debt included could be strictly long-term or short-term. Certain analysts also lump preferred equity into the D/E ratio since mezzanine equity resembles in many respects debt rather than equity.
The U.S. generally accepted accounting principles (GAAP) have very specific thresholds for recognizing leases as either capital or operating. Capital leases are recorded as part of a company's liabilities and count toward indebtedness, while operating leases represent off-balance-sheet financing and are not part of the company's debt. Certain financial professionals lump operating leases into the company's debt, since this form of financing has very distinct and similar features of the loan or debt. Including this factor can have a significant effect on the D/E ratio.
(For related reading, see "What Is the Telecommunications Sector?")