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Financial Performance Of The Nokia

Corporation Finance Essay


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Nokia Corporation is a Finnish multinational telecommunication corporation having
its headquarters' situated in Keilanieme, Espoo. It is one of the world's leading
mobile phone suppliers and fixed telecom networkers. Nokia's engaged in the
manufacture of mobile devices and in converging Internet and communication
industry. It offers an extraordinary Internet services platform called as Ovi which
allows all its customers to buy digital content, such as music and videos, get maps for
navigation services and manage contacts and photo files online. The Company
operates in three business segments: Devices and Services; NAVTEQ, and Nokia
Siemens Networks. It has over 123,000 employees spread over 120 countries. Its
subsidiary Nokia Siemens networks produces telecommunications network
equipment, solutions and services. It also provides free digital map information and
navigation services through its wholly owned subsidiary NAVTEQ.
Nokia being the world's largest manufacturers of mobile telephone has a global
device market share of 30% in the latest financial report taken in the third quarter
2010. But however, it is still a disappointment to see a dip from an estimated 34% in
the third quarter of 2009 and from an estimate of 33% in the second quarter in 2010.

In this report, the financial performance and the marketing strategies of Nokia is
analyzed based on the various financial ratios. The financial report of the past five
years from 2009 - 2005 is studied considering the change in the marketing strategies
implemented in 2005 and the global recession which has been hitting the market
lately..The marketing strategy of Nokia is studied in the light of PESTLE, SWOT and
BCG matrix.

FINANCIAL PERFORMANCE OF NOKIA:


In the modern business, the managers should have a good understanding of the
various business functions in order to make effective decisions and plannings for the
successful operation of the business. One of the key functions of the business is

bringing together the financial information of the company which is in the form of a
cash flow statement, profit and loss account and balance sheets and carrying out the
necessary calculations to determine the financial position of the company. The sales
volume, and profitability generated from the shareholders' investment, the
company's ability to pay its debtors and the company's position compared to its
competitors help not only the management but also the investors in determining
whether to invest in the company's share or not. [1]
The financial statement of Nokia is analyzed in the light of the various financial
ratios such as Profitability, Activity, Solvency, Financial structure and Stock Market
Measures. These ratios interpret the various items found in the company's balance
sheet and income statements. This process not only reviews the past results of Nokia
but also helps in evaluating the current situation of the company.
The financial performance graph exhibited by Nokia in the past five years has been a
fluctuating one.(cont)

PROFITABILITY ANALYSIS:
Profitability analysis is an analysis that enables a company to evaluate the market
segments. It allows them to report the sales and profit data of a company using the
different customised characteristics and key figures. This analysis can be categorised
on the basis of products, customers, orders or any combination of these. Using these
profitability calculations, the business profits made in one year can be compared with
the other years and also the profitability of different business can be compared.
The aim of this system is to provide the various departments within the organisation
namely marketing, product management and corporate planning departments with
the necessary information to support the internal accounting and decision making
process. It measures the management's capacity to generate profits on sales and total
investment in the business. In the case of Nokia.................(profitability analysis of
nokia)

1.1GROSS MARGIN:
The gross margin of a company is the percent of total sales revenue that the
company retains after incurring the direct costs associated with producing the goods
and services sold by the company. The higher the percentage, the more the company
retains on each Euro of sales. This shows the percentage of control that the
management has over cost. [2]

Gross Margin (%) = Gross Profit / Operational


Profit X 100
Turnover
(2009 = 13264/40984*100 = 32.36%)
The gross margin (%) of Nokia is

YEAR
2009
2008
2007
2006
2005
Gross Profit
13264
17373
17277
13379
11982
Turnover
40984
50710
51058

41121
34191
Gross margin (%)
32.36
34.26
33.84
32.54
35.04
(All the figures mentioned above are in EUR millions)
As we can see from the table above, the gross margin % had a raising trend in the
2006 -08 , where it increased from 32.54% to 34.26%. But however, in the year 2009
the profits have come down from 50710Eur m - 40984Eur m resulting in a decrease
of 1.90% in the gross margin.

1.2 NET MARGIN:


The net margin ratio of a company is the ratio that allows an external person to make
an overall assessment of the profitability of the company over a given period of time
by comparing the level of net trading profit to the sales volume. [3] The percentage of
net margin shows how much of each Euro earned by the company is translated into
profits.

Net margin (%) = Profit Before Tax X 100


Turnover
(2009 =962/40984*100 = 2.347)
Year
Profit Before Tax

Turnover
Net Margin (%)
2009
962
40984
2.35
2008
4970
50710
9.8
2007
8268
51058
16.19
2006
5723
41121
13.91
2005
4971

34191
14.53
(All the figures in the table above are in Euro m)
As the figures show, there has been a significant fall in the net profit % from the year
2008 -2009; the net profit % in the year 2008 was 9.8% which then decreased to
2.34% in the year 2009. However, the years 2005 - 2007 have been good with the
profit % being 14.53, 13.19 and 16.19 respectively. This shows that the operating
expenses of \nokia have increased and the cost of must be controlled. The cost have
increased drastically resulting in a decrease in the net profits.

1.3 RETURN ON EQUITY:


Return on Equity is the amount of net income returned as a percentage of
shareholders equity. It measures the company's profitability by revealing how
much profit a company generates with the money shareholders have
invested. [4]

Return on Equity = Profit after Tax X 100


Shareholders' Funds
(it is given in d annual report)
Year
Return on Equity (%)
2009
6.5
2008
27.5

2007
53.9
2006
35.5
2005
27.1
(All the figures in the table have been taken from
the nokia's official wesite) [5]
The return on equity % showed steady growth in the years 2005 and 2006 and then
reached the peak value in 2007 with a ROE % of 53.9 but the ROE has decreased to a
great extend in the years 2008 and 2009. As a result of the decrease in the profits
after tax, the profits of the tax in year 2008 were 3889 Eur m which decreased to 260
Eur m in 2009.

1.4 RETURN ON CAPITAL EMPLOYED:


Return On Capital Employed is the ratio that indicates the efficiency and profitability
of a company's capital investments. The Return On Capital Employed should always
be higher than the rate at which the company borrows, otherwise any increase in
borrowing will reduce shareholders' earnings.

Return on Capital Employed = Earnings Before


Interest and Tax X 100
Net Assets
(it is given in d annual report)
Year
Return on capital employed (%)

2009
6.7
2008
27.2
2007
54.8
2006
46.1
2005
36.5
ACTIVITY ANALYSIS:
Activity analysis measures the company's efficient utilization of resources. The
greater the efficiency in the use of its assets to generate sales, the higher is the
potential profitability. Hence, the analysis compares the level of sales with the
investments in selected assets. The activity analyses that are considered here to study
about Nokia are:
Turnover of Assets
Turnover of Fixed Assets
Stock Turnover
Days of Stock Held

2.1 TURNOVER OF ASSETS:

Turnover of assets is the efficient use of assets for the profitable operation of the
business. It is a consistent reliable indicator of managerial skills in generating sales
volume on a base of the total assets employed by the company.

Turnover assets = Turnover


Assets
(2009 = 40984/35738 = 1.14)
Year
Turnover
Assets
Turnover of Assets
2009
40984
35738
1.14
2008
50710
39582
1.28
2007
51058
37599

1.35
2006
41121
22617
1.81
2005
34191
22452
1.52
(All the figures in the table above are in Euro m)
2.2 TURNOVER OF FIXED ASSETS:
The turnover of fixed assets is the measure of a company's ability to generate net
sales from fixed-asset investments - specifically with regard to property, plant and
equipment etc. The higher the fixed-asset turnover ratio the more effective the
company has been using the investment in fixed assets to generate revenues.

Turnover of Fixed Assets = Turnover


Fixed Assets
(2009 = 40984/12125 = 3.38)
Year
Turnover
Fixed Assets
Turnover of Fixed Assets

2009
40984
12125
3.38
2008
50710
15112
3.35
2007
51058
8305
6.14
2006
41121
4031
10.20
2005
34191
3347
1021.54

(All the figures in the table above are in Euro m)


2.3 STOCK TURNOVER:
The Stock Turnover is the total value of stock sold in a year divided by the average
value of goods held in stock. This makes sure that the cash is not tied up in stock for
too long, so as to lose its value over time. It measures sales turnover as a ratio of
stocks, and is intended to show how fast stock is moved. The higher the score, the
more liquid is the position and lower the investment in stock the better it is.

Stock Turnover = Cost of Sales


Average Stock
(2009 = 27720/2199 = 12.60)
Year
Cost of Sales
Average Stock
Stock Turnover
2009
27720
2199
12.60
2008
33337
2704.5
12.32

2007
33781
2215
15.25
2006
27742
1611
17.22
2005
22209
1486.5
14.94
(All the figures in the table above are in Euro m)
2.4 DAYS OF STOCK HELD:
The number of days the stock is held is the ratio that measures the average number
of days' stock held by an organization.

Days of Stock held = Average Stock X 365


Cost of sales
(2009 = 2199///227720*365 = 28.95)
Year
Average Stock

Cost of sales
Days of Stock Held
2009
2199
27720
28.95
2008
2704.5
33337
29.61
2007
2215
33781
23.93
2006
1611
27742
21.195
2005
1486.5

22209
24.43
(All the figures in the table above are in Euro m)
SOLVENCY ANALYSIS:
Solvency ratios is the ratio that measures the relationship between debts and owners
equity and examine the proportion of debt the company is using i.e.; to measure a
company's ability to meet long-term obligations. It measures the size of a
company's after-tax income, excluding non-cash depreciation expenses, as compared
to the firm's total debt obligations. It provides a measurement of how likely a
company will be able to continue meeting its debt obligations. Acceptable solvency
ratios will vary from industry to industry, but as a general rule of thumb, a solvency
ratio of greater than 20% is considered financially healthy. Generally speaking, the
lower a company's solvency ratio, the greater the probability that the company will
default on its debt obligations. The different solvency ratios are:
Current Ratio
Quick Assets
Debtors Collection Period
Creditors Payment Period
Speed of cash flow

3.1 CURRENT RATIO:


Current ratio is the most popular measure of short term solvency. It indicates the
extend to which the claims of short-term creditors are covered by comparative liquid
assets. [6] Current ratio is calculated simply dividing the current assets to the current
liabilities.

Current Ratio = Current Assets


Current Liabilities

(2009 = 23613/15188 = 1.55)


Year
Current Assets
Current Liability
Current Ratio
2009
23613
15188
1.55
2008
24470
20355
1.2
2007
29294
18976
1.54
2006
18586
10161

1.82
2005
18951
9670
1.96
Nokia Corp.'s current ratio deteriorated from 2007 to 2008 but then improved from
2008 to 2009 but however the ratios still remain below the 2007 levels.

3.2 QUICK ASSETS:


Quick assets is the cash and other assets that can or will be converted into cash fairly
soon. This includes accounts receivable, marketable securities etc. A measure of the
company's quick assets helps in determining the company's liquidity and its ability to
meet its obligations. The ratio used for this purpose is called as the quick ratio or acid
test ratio. It compliments the current ratio. Its purpose is to compares the 'near cash
assets' with maturing creditors' claims.

Quick Assets = Current Assets - Stock


Current Liability
(2009 = 23613-1865/15188 = 1.43)
Year
Current Assets
Stock
Current Liability
Quick assets

2009
23613
1865
15188
1.43
2008
24470
2533
20355
1.07
2007
29294
2876
18976
1.39
2006
18586
1554
10161
1.67

2005
18951
1668
9670
1.78
The Nokia Corp.'s quick ratio deteriorated from 2007 to 2008 but then improved
from 2008 to 2009.

3.3 DEBTORS COLLECTION PERIOD(not


edited )
The period, on average, that a business takes to collect the money owed to it by its
trade debtors. If a company gives one month's credit then, on average, it should
collect its debts within 45 days. The debtor. he term Debtor Collection Period
indicates the average time taken to collect trade debts. In other words, a reducing
period of time is an indicator of increasing efficiency. it enables the enterprise to
compare the real collection period with the granted/theoretical credit period.
Debtor Collection Period = (Average Debtors / Credit Sales) x 365 ( = No. of days)
(average debtors = debtors at the beginning of the year + debtors at the end of the
year, divided by 2)

Debtors Collection Period = Debtors X 365


Sales
(2009 = 7981/40984*365 = 71.08)
Year
Debtor
Sales
Debtors Collection Period

2009
7981
40984
71.08
2008
9444
50710
67.97
2007
11200
51058
80.06
2006
5888
41121
52.26
2005
5346
34191
57.07

(All the figures in the table above are in Euro m)


3.4 CREDITORS PAYMENT PERIOD:
Creditors Payment Period is the ratio that relates the amount owed to trade creditors
by a company at the end of a specified period in relation to the cost of purchases
bought on credit during that period i.e.; it is the total number of days that a company
will take to settle the amounts it owes to its creditors.

Creditors Payment Period = Creditors


Purchase
Year
Creditors
Purchase
Creditors Payment Period
2009
4950
2008
5225
2007
7074
2006
3732
2005
3494

3.5 SPEED OF CASH FLOW:


Speed of Cash Flow = Turnover - Debtors
365
(2009 = 40984-7981/365 = 90.42)
Year
Turnover
Debtors
Speed of Cash Flow
2009
40984
7981
90.42
2008
50710
9444
113.05
2007
51058
11200
109.2

2006
41121
5888
96.52
2005
34191
5346
79.02
FINANCIAL STRUCTURE: (not edited)
Financial Structure is the framework of the various types of financings employed by a
firm to acquire and support resources necessary for its operations. Commonly, it
comprises of stockholders' (shareholders'), investments (equity capital), long-term
loans (loan capital), short-term loans (such as overdraft), and short-term liabilities
(such as trade credit) as reflected on the right-hand side of the firm's balance sheet.
Capital structure, in comparison, does not include short-term liabilities. [7]

4.1 CAPITAL GEARING RATIO:


Capital Gearing Ratio is the analyzes of the capital structure of a company. It is the
measure of the percentage that the owner funds as opposed to the percentage the
outsiders' funds. If more capital is invested by the owners than the amount
borrowed, the risk decreases. This is known as low gearing. If outside interest
exceeds the owners interest, the risk increases. This is known as high gearing.

Capital Gearing Ratio = Debt


Debt +Equity
(2009 = 20989/35738 = 0.59)
Year

Debt
Equity
Capital Gearing
2009
20989
35738
0.59
2008
23072
39582
0.58
2007
20261
37599
0.54
2006
10557
22617
0.47
2005

9938
22452
0.44
(All the figures in the table above are in Euro m)
4.2 INTEREST COVER: (not edited)
Interest cover is a measure of the adequacy of a company's profits relative to interest
payments on its debt. The lower the interest cover, the greater the risk that profit
(before interest) will become insufficient to cover interest payments. It is:
EBIT net interest paid
A value of more than 2 is normally considered reasonably safe, but companies with
very volatile earnings may require an even higher level, whereas companies that have
very stable earnings, such as utilities, may well be very safe at a lower level. Similarly,
cyclical companies at the bottom of their cycle may well have a low interest cover but
investors who are confident of recovery may not be overly concerned by the apparent
risk.

Interest Cover = Gross Profit (Operational


profit)
Interest Payable
(2009 = 13264/1661 = 7.99)
Year
Gross Profit
Interest Payable
Interest Cover
2009

13264
1661
7.99
2008
17373
2302
7.54
2007
17277
2565
6.73
2006
13379
92
145.42
2005
11982
205
58.45
(All the figures in the table above are in Euro m)

5 STOCK MARKET MEASURES:


5.1 PRICE PER EARNINGS:
It is the valuation ratio of a company's current share price compared to its per-share
earnings.

Price Per Earnings Ratio = Market Price of


Shares
Earnings per Share
(2009 = 8.88/0.24 = 37)
Year
Market Price of Share
Earnings Per Share
Price Per Earnings
2009
8.88
0.24
37
2008
20.04
1.07
18.73
2007

16.98
1.85
9.18
2006
17.08
1.06
16.11
2005
11.96
0.83
14.41
(All the share prices mentioned above has been
calculated taking the date as 31st Mar for every
five years)
5.2 EARNINGS PER SHARE:
It is the portion of a company's profit allocated to each outstanding share of common
stock. Earnings per share serve as an indicator of a company's profitability.

Earnings Per Share: Profit after Tax


No: of Shares
(it is given in d annual report)
Year
Earnings Per Share

2009
0.24
2008
1.07
2007
1.85
2006
1.06
2005
0.83
5.3 DIVIDEND YIELD
Dividend yield = Dividend per share
Market value per share
(2009 = 0.40/8.88 = 0.045)
Year
Dividend Per Share
Market Value Per Share
Dividend Yield
200.9
0.40

8.88
0.045
2008
0.40
20.04
0.0199
2007
0.53
16.98
0.031
2006
0.43
17.08
0.025
2005
0.37
11.96
0.031

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