Financial Analysis on Nokia from 2008 to 2009 - Research Paper Example

Financial Analysis on Nokia from 2008 to 2009 Nokia is a manufacturer of mobile devices, which makes a range of devices for all major consumer segments and offers Internet services that enable people to experience music, maps, media, messaging and games. This paper presents an analysis of the financial performance of the Company for the year 2009 as compared with the year 2008. Key financial ratios have been calculated from the published financial statements to assess the relative performance of the Company. Working Capital Management of the Company The financial strength of a company can be assessed by studying the way in which the company has managed the various components of its working capital such as accounts receivables, inventory and cash. The Working Capital ratios indicate how well the company is able to manage its working capital. “The asset management ratios are also known as working capital ratios or the efficiency ratios. The aim is to measure how effectively the firm is managing its assets.” (NetTom, n.d.)The following are some of the working capital ratios which indicate the efficiency of the company in managing its working capital. Particulars September 2008 September 2009 Current Ratio 1.1 1.5 Debt to Equity Ratio 1.3% 36.7% Debt to Cash flow from Operations 0.7 3.8 Inventory Turnover (days) 32.2 33.9 No of days sales outstanding 69.7 83.4 Working capital to invested capital 30.2% 71.7% Cash Conversion cycle (days) 34.8 40.6 Source: (SeekingAlpha, 2009) Liquidity ratio is defined “as a class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger is the margin of safety that the company possesses to cover short-term debts.” (Investopedia, 2009) The above table indicates that the company has efficiently managed its working capital during the year ending September 2009 as compared to the year 2008. Nokia is maintaining a comfortable current ratio and the current ratio of 1.5 implies that the company has sufficient current assets situation which will enable the company to meet its current liabilities without any problem. However the company has increased its long-term debts during the year 2009 with the result that there is an increase in this ratio. This implies that the company will incur additional interest costs on borrowed funds. The cash flow to debts situation has therefore moved to an adverse situation in 2009 as compared to the earlier year. In 2008 the cash flow position of the company was comfortable enough to settle the short-term and long-term debts in just 7 months. Whereas, with the increase in long-term debts and the cash flow from operations it would take approximately 3.8 years for the company to settle the debts. This is not a good position from the equity shareholders’ point of view. However the purpose for which the long-term funds were mobilized is to be ascertained for a proper justification in the increase in debts. The number of days sales outstanding is another working capital ratio that indicates the efficiency of the working capital management of the company. This ratio has changed from the previous year figure of 70 days to 83 days. This implies that the company has not been able to collect the outstanding accounts receivable as efficiently as it was doing in 2008. However the increase in credit sales might be another reason for the change in this ratio. When the company has offered more liberal credit terms to its distributors and dealers in order to boost its sales, that situation might have resulted in increased debtors and the consequent increase in the number of days sales outstanding. A weaker sales environment is indicated by the increase in the number of days inventory expressed as a ratio to the cost of goods sold. There is an accumulation of inventory due to lower sales which is indicated by the change in this ratio. Source: (SeekingAlpha, 2009) Growth Potential The company’s growth potential can be assessed by comparing the revenue growth and growth in the operating and net income levels. The key growth indicators are presented in the following table. Particulars September 2008 September 2009 5 year Average Growth in Sales Revenue 14.3% -22.5% 7.8% Assets Turnover ratio 145.2% 110.1% 151.0% Growth in Operating Profit 31.0% -2.4% 4.1% Growth in Cash flow from Operations -9.0% -77.3% 4.7% Growth in Net income -17.6% N/A -2.7% Source: (SeekingAlpha, 2009) A comparison of the growth rates indicates a negative growth for the company during the year 2009 as compared to the last year. The company has performed badly as compared to the 5 year average growth rate in respect of all the factors that are compared. Even though the company has managed its working capital somewhat better, it appears that the company has used long-term funds to meet the short-term and current liabilities which may lead to a liquidity crunch for the company. It is not a good practice to utilize the long-term finances to meet the short-term obligations as this may lead to eventual bankruptcy. Source: (SeekingAlpha, 2009) There is a huge dip in the net Income for the company to the extent of Euro 908 million. This was due to intangible-asset impairment charge on account of Nokia Siemens Networks charged off to revenue during the year 2009. The change in the operating margin clearly indicates a steep decline in the profitability of the company during the year. Only positive observation is that the cash flow of the company has remained positive during the period with a total inflow of Euro 1.7 billion from the operations which will enable the company to sail through the difficult times caused by the general economic downturn. Profitability Ratios “Profitability ratios offer several different measures of the success of the firm at generating profits.” (NetMBA, 2007) The following table present some of the profitability ratios. Particulars September 2008 September 2009 Operating Expenses to Revenue 86.1% 95.7% Return on Invested capital 69.7% 10.5%% Free cash flow to invested capital 69.7% 7.8% Accrual Ratio 2.6% 3.1% Source: (SeekingAlpha, 2009) Source: (SeekingAlpha, 2009) It's clear from the table that Nokia has become much less profitable as Revenue has plunged. Nokia has to keep investing in research and development during cyclical downturns if it wishes to profit during the recovery phase. Because of the increased operating expenses there is a dip in the operating income and the consequently the net income has come down drastically. The price to earnings ratio has gone up from 13.3 as of September 2008 to 104.6 in September 2009 indicating that the stocks of the company are overprices considering the profitability and growth rates during the year 2009. Reference List Investopedia, 2009. Liqudity Ratio. [Online] Available at: http://investopedia.com/terms/l/liquidityratios.asp [Accessed 10 December 2009]. NetMBA, 2007. Financial Ratios. [Online] Available at: http://www.netmba.com/finance/financial/ratios/ [Accessed 10 December 2009]. NetTom, n.d. Session14:Calculation of ratio Analysis. [Online] Available at: [Accessed 10 December 2009]. http://cbdd.wsu.edu/kewlcontent/cdoutput/TOM505/page25.htm SeekingAlpha, 2009. Nokia Financial Gauge Analysis for September 2009 Quarter. [Online] Available at: http://seekingalpha.com/article/167259-nokia-financial-gauge-analysis-for-september-2009-quarter [Accessed 10 December 2009]. Read More