Financial Performance of the Nokia Corporation Finance Essay

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.

Gross Margin:

The gross margin of a company is theA percent ofA total sales revenueA 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. 

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.

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.  The percentage of net margin shows how much of each Euro earned by the company is translated into profits.A 

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.

Return on Equity:

Return on Equity is the amount of net incomeA returnedA as a percentageA of shareholders equity. It measures the company's profitabilityA by revealing how muchA profit a company generatesA with the money shareholders have invested.

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.

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 rateA at whichA the company borrows, otherwise any increase in borrowing will reduce shareholders' earnings.

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.

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 of Fixed Assets:

The turnover of fixed assets is the measure of a company's ability to generate net sales from fixed-asset investments -A 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.

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.

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.; toA measure a company's ability to meet long-term obligations. It measuresA the size ofA 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 probabilityA 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

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.

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.

DEBTORS COLLECTION PERIOD

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)

Cite this page