Question DuPont Analysis – Lucent Technologies ROE = Net Profit X Asset x Financial Margin Turnover Leverage = Net Income X Revenue x Total Assets Revenue Total Assets Shareholders’ Equity 1st Quarter 1998 = 1124 X 8724 x 24752 8724 24752 4671 = 0.1288 X 0.3525 x 5.2991 ROE = 24.06% 1st Quarter 1999 = 1523 X 9842 x 31641 9842 31641 8437 = 0.1547 X 0.3111 x 3.7503 ROE = 18.05% 1st Quarter 2000 = 1175 x 9905 x 38634 9905 38634 16079 = 0.1186 x 0.2564 x 2.4028 ROE = 7.31% The increase in ROE in 1st quarter of 1998 was continuity in Lucent Technology’s start-up soaring of profits as the company was enjoying gains. However, in the same period, a considerable decline was observed in ROE mainly because of Lucent Technology’s losing grip on its operations, as a result, earnings went down from 24% to around 18%. The major setback which hit Lucent Technology in 1st quarter of the year 2000 that erased the earnings so sharply had significant reasons.
The filing of material information as per Form 8-K to SEC hurt Lucent Technology a lot. The material information that was reported included the impacts of decrease in the earnings from Service Provider Network (around 2%), customer shifts to optical based technologies, capacity problem, production problems, delivery issues and huge cancellations of customer orders. These problems shrunk the ROE of Lucent Technologies from 18% to somewhat 7% as compared to the same period in the previous year. Question 2 Seasonally Adjusted Change Dec-99 Sep-99 Jun-99 Mar-99 Dec-98 Sales 9,905 10,575 9,315 8,220 9,842 -6.34% 13.53% 13.32% -16.48% Accounts Receivable 10,143 10,438 9,486 8,752 9,185 -2.83% 10.04% 8.39% -4.71% Inventory 5,380 5,048 5,179 4,332 3,778 6.58% -2.53% 19.55% 14.66% Gross Profit 4,646 4,869 4,481 3,893 5,212 -4.58% 8.66% 15.10% -25.31% The explanation of "bump in the road, " provided by Lucents Chief Financial Officer, Don Peterson seems a bit unrealistic.
The claim of fall in the earning being a temporary cause does not seem valid because of severe problems in the operations of the business. Lucent Technology was losing sales growth on consistent basis. Accounts Receivables were on the varied side as well with no persistent growth. However, due to cancellation of orders, the inventory also piled up a lot with huge growths in amount inventory increasing holding cost of the company.
Gross Profit growth was also disappointing with high negative growth percentages on consistent basis. Question 3 (a) The 2nd quarter of 1999 was the exact year when troubles hampered the performance of Lucent Technology. Major declines in sales and earnings were reported along which put the company into extreme difficulties. Lucent Technologies could not make those impacts till 1st quarter of 2000. Question 3 (b) The class-action lawsuits might not have merits because it is the absolute disclaimer of the listed companies that investment in shares is subject to risk and volatility.
Therefore under such protections available to Lucent Technologies, there are fewer chances of Lucent Technologies to be penalized. Question 3 (c) Apparently there are very less chances for Lucent Technology to recover as current operations are adding nothing to the company. More strategic changes need to be implemented if recovery and future growth is required in future. References R. A. Brealy, S.C. Myers, and F. Allen. Principles of Corporate Finance, 8th ed. Northwestern University: McGraw-Hill/Irwin P, 2008. Print