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Nokia Financial Analysis

INTRODUCTIONS:

 

Nokia is a global organization engaged in the business of manufacturing of telecommunication devices and networking. Nokia is the largest mobile phone manufacturing company around the globe headquartered in Finland, operating in more than 150 countries in the world. Nokia had global revenue of 5 billion in 2008 with the total assets of 3.9 billion in the same year.

 

 

This report is about the Nokia financial analyses during the period of two years from 2007 to 2008. This period includes the beginning of worldwide recession in 2007 and peak of recession in year 2008.This period had the worst financial crises since the great depression of 1930. This was the period when there were busted of investment bubbles in the different sector of the world economy. This was due to the over investment in stock exchanges, which crated an undue price hike in almost every industry stock price in the world; unnecessary, irrational & excessive issuance of loans by banks and irrational credit rating by the rating agencies.

 

It was the burst of the bubbles around the world when stock markets of every country around the globe showed serious collapse, real estate prices declined to 43% and suffered losses of $4.2 trillion in USA only, and commodity prices also experienced a huge decline in the era. This was the time when many banks and large corporation declared the bankruptcy or took over by governments for survival.  

 

This report makes an in-depth ratio analysis and shows that how did Nokia performed and tackled with this period of the economic downturn. In the end, it includes the analyses with the assumption that how it would have performed if the recession was not present in this era.

 

 

FINANCIAL ANALYSES

 

This section of the report analyzes the Nokia Corporation’s financial statement of year 2007 & 2008. The analyses are composed of five types of ratios includes, Solvency Ratios, Profitability Ratios, Liquidity Ratios, Valuation Ratios and Activity Ratios.

 

 

Solvency Ratios:

 

As we are analyzing the Nokia performance in the era of recession, we will start by the solvency ratios. This will evaluate the solvency position of Nokia Corporation in this time. This will investigate that whether or not the company is able to survive in the financial crises.

 

 

Debt to Total Assets Ratio:

 

Debt to Total Assets Ratio analyzes the proportion of long-term debt in the total assets. It let us know the percentage of total assets financed by the long-term debt. In year 2007, Total Asset Ratio is 3.39%. This is also not considerable to threaten the solvency position of Nokia Corporation. However, Nokia had only 0.54% total assets financed by the debt long-term debt which is almost equal to nothing and was not really going to have any impact on the solvency position of the company. In the year 2008, the company ratio increased to 13.58%. This was a considerable increased comparing to the last year, but still it does not have any value to harm the solvency position of Nokia corporation even in the time of a serious economic downturn because the proportion to long-term debt to total assets is only 2.18%. This is expected to be expensed within next year.

 

 

Debt to Total Capital Ratio:

 

The Ratio analyzes the proportion of dept in the total capital employed by the shareholders and debt providers. The capital includes both short and long term interest bearing liabilities and shareholders’ equity.       In 2007, Debt to Total Capital Ratio was 6.85% comparing to 24.56% in year 2008. This is not a very good sign to increase the debt position about 18% but again, if we go in the depth analyses. We will find that proportion of long-term debt is only 3.93%. This big increase in percentage of the ratio is derived by acquiring the short term debt which is obtained to meet the current increase in demand of company products and will be expensed soon. So, this ratio also doesn’t claim any solvency threat to the company.

 

 

Debt to Equity Ratio:

 

Due to acquiring a large amount of short-term equity in 2008, company’s Debt to Equity position has also changed considerably comparing year 2007 from            7.35%   to 32.56%. Company debt ha been increased in 2008 comparing to shareholders’ equity. It is better to keep the lowest amount of debt in the period of recession but still 32.56% is not a great amount of debt comparing shareholders’ equity.

So, company doesn’t have any serious solvency threat by any solvency ratio. It has a good solvency position, but it is better for the Nokia Corporation to expense the short-term debt soon.

 

 

Profitability Ratios:

 

Profitability ratios let us know about the company profitability position that about what extent company is enjoying profit or suffering losses. Following is some profitability ratios for the Nokia Corporation.

 

 

Gross Profit Ratio:

 

Despite the economic down turn and worsen economic condition company has enjoyed the profit of 33.84%in 2007 and the good new is that its profit increased slightly to 34.26%. The recession had almost no effect on the Nokia gross profits. Another good thing about the Nokia is that its sales also remained nearly the same in 2008 comparing 2007. So, company had a good profitability position according to G.P. ratio.

 

 

 

Net Profit Margin:

 

Company had a net profit margin of 14.11% in 2007, but it decreased to 7.86% in the next year. This decease indicates towards the general, selling and administrative expenses in the year 2008. However, if we go in detail, we find that this is not due to any expenses but the reason is higher other incomes in 2007. It means that company had not increased any advertisement expenses in the recession but this was some profit real estate sale in 2007, which caused to increased net profit margin in that year.

 

 

Return on capital employed:

 

Return on capital employed is higher 1.47% in the year 2008 comparing 0.40% in 2007. As net profit margin in year 2007 is higher but profitability is lower in this ratio. This is because we add the tax adjusted interest to the net income and interest on the year 2008 was higher due to which company had the higher profitability in 2008 comparing 2007. 1.47% is not a very good percentage for the ratio but it is good enough in the time of recession. Lenders should not worry about it.

 

 

Return on Total Assets

 

This ratio also shows higher profitability position in year 2008 of 0.81% comparing 0.20% in 2007.  The reason of increase in again the same, the tax adjusted interest. 0.81% profits on the total assets not a very good profitability position for the company but still this is good enough in the time of recession.

 

Over all position of profitability for the company is fairly good enough.

Liquidity Ratios:

 

Liquidity ratios show the liquidity position of the company, which analyzes that whether the company is able to meet its current liabilities from its current assets.

 

 

Current Ratio:

          

According to current ratio company liquidity position has decreased to some extent from 1.54 in 2007 to 1.20 2008. This is mainly due to the increase in short-term borrowing in the year 2008. But still the company is very much liquid. It is nothing to worry about t the decrease in ratio because the ratio 1.2 means that company still able to meet its current liabilities 1.2 times from its current assets. Company still has a fair liquidity position.

 

 

Acid Test Ratio:

 

Some conservative investors don’t consider inventory as a liquid assets. So, they eliminate the inventory from current assets to check the liquidity position of company. According to this ratio company Acid test ratio has deceased significantly form 1.39 to 1.08 in a year in 2008. But company has still a just enough liquidity position. As, shown by the ratio that company sill can meet its current liabilities more than form it current assets.

 

Despite a huge increase in short term borrowing by the company. Nokia has retained a fair liquidity position. Its overall liquidity position is just fair.

 

 

Valuation Ratios:

 

These ratios are valuation with the investment perspective. Investors make a decision on the basis these ratios for investing or not investing the company stocks.

 

 

Dividend Cover

 

Ratio has decreased during the one year period from 1.95 to 4.09. These are two reasons for this decrease. One that the net income of the company has decreased, which mentioned above is due to increase in other operation incomes rather than company operation’s activity. The second factor is the increase in the dividend by company. This is a good sign from investment perspective.

 

 

P/E Ratio

 

P/E Ratio is used the most in investor analyses. This ratio let us know that how much an investor in Nokia stock is paid per Euro in a particular year earnings.  In year 2007, Nokia P/E was 13.32 which reduced to 10.73. The major reason for this reduction is serious setback of recession to the Nokia market stock price per share. The Ratio doesn’t completely represent the recession effect because devisor of the ratio EPS also reduced significantly. Thankfully, Nokia EPS had not gone negative like most companies round the globe. In this way, we are able to have a meaningful positive P/E Ratio. Reduction in the P/E is not good a sign for investment perspective because this is happened due to price and earning decrease not because of increase in Nokia EPS.

 

 

 

Activity Ratios:

 

These ratios analyze the different activities of Nokia Corporation and tell about the company efficiency in different ways.

 

 

Days of Inventory in hand (DOH):

 

This ratio for the company has decreased over a year from 27.73 to           31.07. This is because of reduction in inventory when CGS is almost standing the same; identify the efficiency of the company.   

 

Days of Sales Outstanding

 

There is also a considerable reduction from 80.07 to 67.98 over a year in 2008. The deduction is because of inventory decrease with the sales almost standing the same is the positive sign for efficient management in inventory.

 

Fixed Assets Turnover

 

Nokia relates manufacturing sector and having the ratio of 24.26 and 26.70 in 2007 & 2008. This is an exceptional ratio for a manufacturing company.

Total Asset Turnover                       

 

Nokia is more than fully utilizing the total assets of company 1.28            in 2008 & 1.36 in year 2007. Reduction is due to increase in total assets but 1.28 is still an exceptional figure for the ATA ratio of Nokia.

 

NOKIA IN RECESSION

 

As it is discussed several times, in the first part of the report that analyses of Nokia Corporation are done for the era of recession of last two years. In this time of recession not a single company was able to survive from recession. Where there were price declines in the stock markets and lack of money available to the consumer created the decline in demand of every good or service including the mobile devices. Globally, the market fell 12.6% only in the last quarter of year 2008. According to IDC reports, for the duration of the last quarter of 2008, about 289 million handsets were shipped around the globe, whereas, in the final quarter 2007, there were 330.8 million handsets sold.

 

 

Nokia did not suffer as much as the market. It sales remain the constant from 2007 to 2008, but it lost the market share. Its market share was declined to 45.2% form 46.7% with the decline of almost 1.5% form ear 2007 to 2008 of first quarter comparison. Although, Nokia had lost a bit in the market shares and without any doubt the price of fluctuated with the stock markets slumps but internally Nokia performed well. Stock price in the end of December was 35.98 almost on it peak but with the downturn in the stock markets around the globe it fell down to 15.98. It was a 56% of price fall, which was all because of worst performing markets rather than the company bad performance.

 

 

Nokia did well to tackle the financial crises. It did lose some market share, but it tried to maintain its sales rather than trying to do too much to capture more market share. Nokia Corporation also did well by keeping the lowest possible amount of long-term debt. It was only about 2.18% of long-term debt and 3.93% of long-term debt in its total capital structure. Without any doubt Nokia Corporation solvency ratios increased, which is sign of decreasing solvency in the recession time but this increase was due to the increase in the short term debt. It is to be said that Cash is King in the recession. Nokia had already an excellent liquidity position. It increased the sort-term debt to increase the cash to handle the crises when cash is said to be king.

 

It is another tactic to handle the crises to decease the inventory in your liquid assets. We can see that Nokia inventory turnover ratio decease from 31 days to 27 days from the 2007 to 2008 respectively. In the recession, it is expected that one or few of your debtors or suppliers may default or block your money for longer periods, which can affect the liquidity position of the company. In this way, another thing done well by the Nokia was to reduce the receivable turnover in days. We have seen in the above section that it reduced form 80 to 68 days in the year which is due to the better management of receivables.    

 

One prime reason from doing well in recession is the leadership of Nokia. In a common organization only CEO plan and predict for the company and future economic conditions with the consultation of other executives. But, in Nokia the whole management has the right to consult, meet and communicate around the worldwide network. This thing helped the Nokia Corporation for predicting and planning for recession. Due to this, Nokia Corporation also made scenario analyses by analyzing the different scenarios and making different models to predict and plan for the recession and economic downturn situation.

 

Nokia also did well by keeping the Smart phone's market best-performing segment of the mobile phone's market in the year 2008, and it was the only segment which showed a revenue growth in the second half of the year as the world economy entered the recession. Nokia also targeted the recession effected people to generate revenue from those customers who expected to be a dead segment. This phone contributed a lot to maintain the sales in the economic downturn.

 

SCENARIO ANALYSES

 

This section of the report goes for the analyses of Nokia Corporation in a specific scenario. The scenario is composed of some assumptions. First of an assumption is that Nokia is operating in the global market where, economic conditions are absolutely normal. Secondly, it assumes that what it would have happened if there was no setback of recession, not only on the company but also the global economy. As we have known that Nokia Corporation had not been affected very seriously by the recession but only two ways it had some moderate effects of the economic downturn. The first was obvious that its stock price fell down to a great deal. The second effect was that it had lost the market share. It is mentioned in the second part of the report that it had lost only 1.5% of market share comparing the first quarter of 2007 and 2008 from 46.7% to 45.2%.

 

If we look at the first quarter of the year 2007 and last quarter of 2008, the situation is very different. Nokia had lost a considerable market share in this two year period, which is 9.7% from first quarter of year 2007 46.7% and last quarter of 2008 as 37%. We also know that despite losing the market share Nokia sale had not been declined, but it remained constant. All this means to say that market for the mobile phone had been grown. Considering all this we make another assumption that Nokia would not have lost its market share, but it would have been still operating with the 46.7% of market share.

 

Base on the above assumption we adjust the market share of Nokia Corporation with the year 2008 revenues:

 

(Revenues/Current Market share) x Assumed or previous Market share:

 

(50710/37) x 46.7 = 64004.24 Euros in Million

 

To evaluate the Nokia performance basing on the newly derived sale value, we multiply each item of consolidated income statement of year 2008’s vertical analyses, which are based on the actual sales of the company. We get a new performance of Nokia unaffected by the loss of market share due to economic recession. While analyzing the new financial performance of the company, we have kept the same tax rate as before which is 21.75%. We also have kept the fixed charges of interest income the same as before which are 2 million Euros. The new income statement based on the above income statement is given in the Appendix B in the end of the report.

 

Projected Income statement shows the sales 64004.24m Euros which is 26% higher than the previous 50710 m Euros. Nokia Corporation gross profit increased from 17373 to 21927.55. Operating profit increased from 4966 to 6267.90. The company recession free gross profit and operating profit both increased by the same percentage of 26.22%. Net income increased from 3988 to 5033.92 by 22.23%. If the Nokia would not have dropped the market share, the company share price was not expected to be declined to $15.98 only. But it would have increased way above comparing year 2007 price of $35.98. The Basic EPS would have been increased from Euro 1.07 to1.34 by 25.67% and Dilutive EPS formed 1.05 to 1.33 by 26.82%.

 

Basing on the same assumptions made above, we also analyze that how much improvement or decline the Nokia Corporation would have faced in sales in comparing the projected income statement figures of 2008 (Which are recession free or no market decline figures) with the actual income statement figure of previous year income statement, which is the consolidated income statement of year 2007.

 

When we get the results of analyses mentioned above, we find that Nokia would have increased the sales of 12946.24 million Euros in only a year difference from 2007 to 2008. This increase is 25.36%, which would have been a huge increase in year duration. We move on to the next item which is cost of goods sold (CGS). Pertaining our assumptions we made before, CGS is also increased by almost the same percentage as the sales. It is incased 8295.70 m Euros by 24.56% in the assumed period. Gross profit change is 4650.54 million by 26.92% in the period under the assumption. Change of about 27 percent in a year is a big change.

 

Unlike the 2008 comparison of actual and projected Income statements, this comparison shows that operating expenses individually have been increased in a quite diverse way. First we take an example of Research and development expenses, which are increased 1896.58 million by 33.65% over a year. Selling and marketing expenses have been increased differently 9907.27million by 226.25%. This percentage increase is gigantic for which we can say that this is the reason why the sales were boosted by 25%. Other incomes would have been declined about by 1781.89 millions by 77.07% and other expenses would have been increased about 1084.28 million Euros and 255.73%.

 

We have a huge change in the operating expenses and decline in the other income. This is reason why the operating income has declined by 1717.10 million Euros by 21.50%. This negative change is not good for the company performance company had to reduce the operating expenses because of which it faced declined in the operating income despite having a good positive change in the gross profits. In the similar way we go on, we find that Nokia net income decline about 2171.50 by 30.13% percent.

 

SUMMERY AND CONCLUSION

 

It was almost the second quarter of the yea 2007 when the whole world economy had suffered from a serious economic setback. It was a start of long lasting recession, which resulted into the economic downturn by seriously striking the stock market, financial institution, real estate sector and almost every sector or industry around the world. No economy or even company was recession proof. It was the fate of survival for the fittest. This report covers the recession until 2008 for the Nokia Corporation, the market leader in the mobile device manufacturer around the globe.

 

Nokia Corporation is one of those few companies which were not seriously affected by this recession form year 2007 and year 2008. It did well by keep a very low level of debt comparing it total assets, equity or capital, as required in recession time. Nokia had the good gross profit during both years but lower net profit in 2008 comparing to the constant return of about 10% from 2002-2006 and 14% of 2007. Nokia liquidity position declined significantly, but it is still maintaining a good liquidity position. Nokia stock share price declined to more than half of 2007’s stock price, but it maintained a fair dividend policy to benefit the shareholders. It also did well by reducing the inventory and receivable turnover in days, as required in the recession. It did utilize its assets more than their book value.  

 

In the year 2008, global market for mobile devices declined to 12% and Nokia just lost 1.5% of market share, but it lost 9.6% market share in the two-year period. If we have to take one of the above two analyses we should consider the first one of 2008 actual and projected comparison. The second are not very handy. Nokia leadership did well by reducing the communication gap of management, increasing the coordination in planning and prediction for recession. Nokia would have done an exceptional job if, it would not have been affected by the recession by losing thee market share. It’s Revenue, operating profit, gross profit and net profit all would have been increased by more than 25%. In conclusive remarks, we can say that Nokia had done a good job in the recession, it was well prepared, and it tackled well to the economic downturn of year 2007 to 2008.

 

 

 

 

 

Appendix A

Ratio Analyses

 

 

2008 EUR m

2007 EUR m

Solvency Ratios:

 

 

 

 

 

861

 

 

Current portion of long-term loans

13

173

 

Other financial liabilities

924

184

 

Short-term borrowings

3578

714

 

Short term debt

4515

1071

 

Total Debt

5376

1274

 

Total Assets

39582

37599

Debt to Total Assets Ratio

 

13.58%

3.39%

 

Total Debt

5376

1274

 

Total shareholders' Equity

16510

17338

 

Total Capital

21886

18612

Debt to Total Capital Ratio

 

24.56%

6.85%

 

Total Debt

5376

1274

 

Total shareholders' Equity

16510

17338

Debt to Equity Ratio

 

32.56%

7.35%

Profitability Ratios:

 

 

 

 

Gross Profit

17373

17277

 

Net Revenue

50710

51058

Gross Profit Ratio

 

34.26%

33.84%

 

Net Profit

3988

7205

 

Net Revenue

50710

51058

Net Profit Margin

 

7.86%

14.11%

 

Net Profit

3988

7205

 

Interest Expense

185

43

 

Tax Adjustment =Int*(1-26%tax rate)

136.9

31.82

 

Interest Adjusted Net Profit

321.9

74.82

 

Total Long term Debt

861

203

 

Current portion of long-term loans

13

173

 

Short-term borrowings

3578

714

 

Other financial liabilities

924

184

 

Short term debt

4515

1071

 

Total shareholders' Equity

16510

17338

 

Total Capital

21886

18612

Return on capital employed

 

1.47%

0.40%

 

Interest Adjusted Net Profit

321.9

74.82

 

Total Assets

39582

37599

Return on Total Assets

 

0.81%

0.20%

Liquidity Ratios:

 

 

 

 

Current Assets

24470

29294

 

Current Liabilities

20355

18976

Current Ratio

 

1.20

1.54

 

Current Assets

24470

29294

 

Inventory

2533

2876

 

Current Assets less Inventory

21937

26418

 

Current Liabilities

20355

18976

Acid Test Ratio

 

1.08

1.39

Valuation Ratios

 

 

 

 

Net income

3988

7205

 

Dividend

2048

1760

Dividend Cover

 

1.95

4.09

http://www.google.com/finance?q=NYSE:NOK

Share Price $

15.98

35.98

 

Exchange Rate

1.39

1.46

 

Currency Adjusted share price to €

11.48

24.64

Nokia Corporation (ADR) (Public, NYSE:NOK)

EPS

1.07

1.85

P/E Ratio

 

10.73

13.32

Activity Ratios

Cost of Goods Sold

33337

33781

 

Inventory

2533

2876

 

Inventory Turnover

13.16

11.75

 

Number of days in the period

365

365

Days of Inventory in hand (DOH)

 

27.73

31.07

 

Revenue

50710

51058

 

Receivables

9444

11200

 

Receivable Turnover

5.37

4.56

 

Number of days in the period

365

365

Days of Sales Outstanding

 

67.98

80.07

 

Net Revenue

50710

51058

 

Fixed Assets

2090

1912

Fixed Assets Turnover

 

24.26

26.70

 

Net Revenue

50710

51058

 

Total Assets

39582

37599

Total Asset Turnover

 

1.28

1.36

 

 

Appendix B

 

Nokia Corporation and Subsidiaries Projected Consolidated Income Statement For the Year ending, 31 December 2008

 

2008

Vertical Analyses

Percentage to sale

What If

Financial year ended December 31 Notes

EUR m

 

 

EUR m

Net sales

50710

100.00%

64004.24324

64004.24

Cost of sales

-33337

-65.74%

-42076.69787

-42076.70

Gross profit

17373

34.26%

21927.54213

21927.55

Research and development expenses

-5968

-11.77%

-7532.583402

-7532.58

Selling and marketing expenses

-4380

-8.64%

-5528.26999

-5528.27

Administrative and general expenses

-1284

-2.53%

-1620.616134

-1620.62

Other income

420

0.83%

530.1080812

530.11

Other expenses

-1195

-2.36%

-1508.283707

-1508.28

Net Operating Expenses

 

 

 

-15659.65

Operating profit

4966

9.79%

6267.89698

6267.90

Share of results of associated companies 14,

6

0.01%

7.572972589

7.57

Financial income and expenses 10 –

-2

0.00%

-2.524324196

-2.52

Profit before tax

4970

9.80%

6272.945628

6272.95

Tax

-1081

-2.13%

-1364.397228

-1364.40

Profit before minority interests

3889

7.67%

4908.5484

4908.55

Minority interests

99

0.20%

124.9540477

124.95

Profit attributable to equity holders of the parent

3988

7.86%

5033.502448

5033.50

Earnings per share

2008

 

 

 

(for profit attributable to the equity holders of the parent)

EUR

 

 

EUR

Basic EPS

1.07

3743622000

Basic Shares

 

1.34

Diluted EPS

1.05

3885408000

Dilutive Shares

 

1.33

 

 

 

 

2008

Vertical Analyses

Percentage to sale

What If

2007

Percentage Change

Difference

207 to projected

Percentage Difference

Financial year ended December 31 Notes

EUR in million

 

 

EUR in million

EUR in million

 

EUR in million

 

Net sales

50710

100.00%

64004.24

64004.24

51058

26.22%

12946.24

25.36%

Cost of sales

-33337

-65.74%

-42076.7

-42076.70

-33781

 

-8295.70

24.56%

Gross profit

17373

34.26%

21927.54

21927.55

17277

26.22%

4650.54

26.92%

Research and development expenses

-5968

-11.77%

-7532.58

-7532.58

-5636

 

-1896.58

33.65%

Selling and marketing expenses

-4380

-8.64%

-5528.27

-5528.27

4379

 

-9907.27

-226.25%

Administrative and general expenses

-1284

-2.53%

-1620.62

-1620.62

-1165

 

-455.62

39.11%

Other income

420

0.83%

530.1081

530.11

2312

 

-1781.89

-77.07%

Other expenses

-1195

-2.36%

-1508.28

-1508.28

-424

 

-1084.28

255.73%

Net Operating Expenses

 

 

 

-15659.65

 

 

0.00

 

Operating profit

4966

9.79%

6267.897

6267.90

7985

26.22%

-1717.10

-21.50%

Share of results of associated companies 14,

6

0.01%

7.572973

7.57

44

 

-36.43

-82.79%

Financial income and expenses 10 –

-2

0.00%

-2.52432

-2.00

239

 

-241.52

-100.84%

Profit before tax

4970

9.80%

6272.946

6273.47

8268

26.23%

-1995.05

-24.12%

Tax

-1081

-2.13%

-1364.4

-1364.51

-1522

 

157.60

-10.35%

Profit before minority interests

3889

7.67%

4908.548

4908.96

6746

26.23%

-1837.45

-27.23%

Minority interests

99

0.20%

124.954

124.95

459

 

-334.05

-72.78%

Profit attributable to equity holders of the parent

3988

7.86%

5033.502

5033.92

7205

26.23%

-2171.50

-30.13%

Earnings per share

2008

 

 

 

2007

 

 

 

(for profit attributable to the equity holders of the parent)

EUR

 

 

EUR

EUR

 

 

 

Basic

1.07

 

 

1.34

1.85

25.67%

 

-27.32%

Diluted

1.05

 

 

1.33

1.83

26.82%

 

-27.24%

Average number of shares (1 000 shares)

2008

 

 

 

2007

 

 

 

 

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