NOKIA INC LTD.

Task 1 ANALYSIS OF THE FINANCIAL STATEMENTS Financial analysis the analysis of financial statements or financial statement accounting, it refers to the calculation of profitability, stability and viability of a business firm or a project. It is done by professionals who have the job of preparing reports using the ratios that uses the financial statement information. For the in depth understanding of company accounts and evaluation of financial performance of business firms, today we will take an example of NOKIA INC. LTD. Financial analysis of NOKIA was done on the basis of comparative balance sheet, profit and loss account, cash flow statement and income statement for the year 2008-09. One of the first things that were observed was that the net profit after tax had declined from EURm4970 in year 2008 to EUR962 in year 2009, which means a huge reduction of 81% as compared to 2008. Although, the net sales of the company declined from EURm50710 in 2008 to EURm40984 in 2009, it accounted for reduction by 19 % over 2008. Out of its 10 major profit giving companies only India and China were able to generate more income than 2008, which was approximately 18.08 % in case of India and 6.30% in case of China as compared to 2008. In 2009, the main reason for deterioration of net sales and profits was due to global recession, constrained credit availability and weaker customer spending. Another important finding was that the share capital of the company remained constant at EURm246 in 2009 as well. This is a sign that although the company had reduction in profits but it never went public to ask for money. The retained earnings of the company were reduced from EURm11692 in 2008 to EURm10132 in year 2009, which happens to be of the reason that company have used it for bearing operating expenses and to save itself from economic downturn. The deferred tax liability of the company was also reduced by 27.08% in 2009 as compared to 2008, which implies that the companies liability was reduced as it puts a great burden on company. In other words, it is a good sign for any company. To strengthen this point, we should also look towards the short term borrowings, which were EURm3578 in 2008 has been reduced to EURm727 in 2009, which is 79.7% reduction and this is huge. But at the same time, the company has increased its long term interest bearing loans from EURm861 to EURm4432 which means a 414.75% increase. Now that s very rare for a company to raise such a huge amount of long term funds. This ultimately affects firm s goodwill in the market. To cancel the effect of this transaction and to maintain its goodwill in the market, even at times of recession, the company had to propose a dividend of EUR.40 per share in 2009 which is similar to that in 2008. However, the earning per share has reduced noticeably from EUR1.07 to EUR0.24 per share, which is about 78% reduction. The investment losses in 2008 were EURm123, which were converted into profits of EURm114 in 2009. That s a sign for any good company. The assets available for sale were increased from negative EURm15 in 2008 to EURm48 in 2009 which meant 420% of growth .Due to this the company has a very good chance of growth in terms of long term investing, that means the company is brightly running forward for the future. On careful analysis of company s cash flow statement for year 2008-09, we found that from net working capital of the company had grown drastically from a negative cash flow

of EURm2456 in 2008 to EURm140 at the end of 2009, which reflects that company had enough inflows of cash and that to of 105%,it gives an impression of great earning in terms of cash and this inflow crated the way for that much of investments, about which we had talked earlier. In this case most of the cash had come from long term borrowings. Also in this year the company had the profits available for equity holders amounted to EURm891 in 2009 as compared to 2008 s EURm3988 which meant reduced profits by 77%. Also, the value of assets of the firm has been reduced to EURm329 from last year s EURm1034 leading to downfall of 68.18% annually. It is significant to mention here that this year also company maintained a very good international creditworthiness. They got A-1 by the Standard & Poor s rating in short term securities and A rating in long term securities, making the firm a heaven for investors. It is advisable to mention here that on the basis of this rating only the company was able to secure large amount of long term debts and that too in such an economic downturn. KEY RATIOS A. CURRENT RATIO As per the standards the current ratio of any company must be 2:1, but the Nokia Inc ltd has maintained a current ratio of 1.55:1, which implies that for every EUR1 of current liability, the company has EUR1.55 of current assets which is satisfactory position to maintain as there has been an economic recession. But at the same time the company should try to make it as near as 2:1 in order to deal with any contingent situation, if arises. CURRENT RATIO = CURRENT ASSETS/CURRENT LIABILITIES = 23613/15188 = 1.55 [Balance sheet of NOKIA Inc ltd 2007-08 and 2008-09] B. QUICK RATIO The standard quick ratio is 1:1. But NOKIA Inc ltd has been able to maintain 1.13:1 quick ratio which is quite good for any company as for every EUR1 of current liability, the company can pay immediately EUR1.13. QUICK RATIO= CURRENT ASSETS-INVENTRIES-PREPAID EXPENSES/ CURRENT LIABILITIES = 23613-1865-4551/15188 = 1.13

C. EQUITY RATIO The equity ratio of the firm signifies the net funds [liabilities] of equity shareholders against the assets of firm. EQUITY RATIO= CAPITAL AND RESERVES ATTRIBUTABLE TO THE COMPANY S EQUITY HOLDERS+MINORITY SHAREHOLDERS INTEREST / TOAL ASSETS- ADVANCE PAYMENT RECEIVED =41.9 As per our study of the report till now, we are able to find that the company has not been doing well at all as compared to last few years. But the problem company is facing is the reduction of profits which is mainly due to recession and also because of increase in direct operating costs of the company. The company thus, needs to pay attention on this and should try to reduce this. One of the methods what company can do is to find ways to reach its customers and suppliers in the market. Also the company should try to reduce its long term debts as soon as possible as they can because this can hamper their future investment prospective. Also by making some investments in long term assets the operating expense of company would come down, as the company has already reduced its fixed long term assets. The decision of investing in these long term assets would definitely improve financial performance of the company. TASK 2 WHETHER NOKIA INC. LTD SHOULD MAKE IINVESTMENTS OR NOT As we have just studied the annual reports of the company and we also got to know that the company has a fairly good chance of growth in future by investing in long term, the company is taking huge steps to grab the opportunities in future years. But before making any long term investments, the company should analyze the credibility of that investment. Weather to expand globally or in certain economies is truly depended on company s policies, on the other hand the company should look into the returns of the investment and only then should decide to invest because it involves hefty amount of money and as it is done on long term basis the decision once taken cant be reversed . Now the question arises where the investment should be made, whether in plant and machinery, land and building or any other asset. For making a choice amongst these the technical experts in the company has to make a list of all possible investing assets. Next, the amount of cash involved should be calculated as per the present market conditions. After that, the returns should be calculated and also the number of years required reaching the break even point and that for how many years the company will reap profits from the investment. Here the FIXED ASSETS TURNOVER RATIO is helpful to us because it will show the times that fixed asset is being utilized for reaching the desired sales level of the company. Here the FIXED ASSET TURNOVER RATIO of the company is 6.008 times. This indicates that the company is utilizing 6 times of its fixed assets to achieve the sales of the company. The company

should try to increase this ratio and in order to do so, production of the company from the same assets have to be increased on one hand and the sales on other hand. This ratio also shows that how much funds of proprietor is engaged in business which helps in sales. On the observations made, we can now suggest that the company should invest in that asset which would give them a yield of at least 15-20% in future. However, it is up to the management to decide from where the funds of the company must be arranged which are to be engaged in investment. There are three options available for the company in this case, i.e. bank loan, equity financing, debt financing [both, long term and short term]. Short term debt means those which have o be paid in time span of 12 months. And long term debt means for 20 to 30 years. Equity financing is that when the voting equity shares of the company are issued in public on premium or discount, whichever company feels better. As we already know the company has arranged for long term debts in previous year, so now it s not advisable at all that the company should go for this option. Banks have to be given interest beach year and equity share holders would be given dividend out of profits [if company wants to retain profits, it can also do so], but the rights of the ownership will also be diluted in this option. Now this board of company has to decide. The normal returns of the investment have to be designed using arithmetic weighted average method. Here, the possibility of earning normal rate of return is acting as a weight. By doing this we can actually calculate the return by each asset against all alternatives of money. And then only that asset needs to be selected which gives the maximum return on investment. The best investment chosen by the company will bring in goodwill and would reduce the costs and increase the profits.