Project on Ratio analysis based on
Financial Report of Ericsson
SUB-Financial accounting

Submitted by

Submitted to

Neel...
Contents
Overview of the company
Performance in Year 2012
Income statement of last 5 years
Analysis of Ratios
Consolidated...
Overview of Ericsson
We are a world-leading provider of communications networks, telecom services and
support solutions.
C...
Global Reach
Consolidated Income Statement

*All figures reported in Swedish Currency SEK
Consolidated Balance Sheet

*All figures reported in Swedish Currency SEK
Analysis of Income Statement and Balance Sheet Ratios
Profitability Ratio:
A class of financial metrics that are used to a...
Liquidity Ratios:
Liquidity ratios are used to determine a company’s ability to meet its short-term debt obligations. Inve...
Solvency Ratios:
Solvency ratio is one of the various ratios used to measure the ability of a company to meet its long ter...
Du Pont Analysis:
DuPont formula (also known as the DuPont analysis, DuPont Model, DuPont equation or the DuPont method) i...
Share Performance Indicators
In 2012, Ericsson’s total market capitalization decreased by about 7% to SEK 215 billion, com...
Cash-Flow Statement
The statement of cash flow is prepared in accordance with the indirect method. Cash flows in foreign s...
Financial Terminology
REFERENCE: Ericsson Annual Report 2012
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Financial Accounting Project

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Financial Accounting Project

  1. 1. Project on Ratio analysis based on Financial Report of Ericsson SUB-Financial accounting Submitted by Submitted to Neelutpal Saha (Roll no- 222012) Dr Himanshu Joshi Ankita Sharma (Roll no- 222005) WMG-22 Batch
  2. 2. Contents Overview of the company Performance in Year 2012 Income statement of last 5 years Analysis of Ratios Consolidated Balance Sheet Analysis of Ratios Valuation Ratios Share performance indicators Cash Flow Statement Financial Terminology reference
  3. 3. Overview of Ericsson We are a world-leading provider of communications networks, telecom services and support solutions. Communication is changing the way we live and work. When one person connects his or her world changes. With everything connected our world changes. Ericsson plays a key role in this evolution, using innovation to empower people, business and society. We are enabling the networked society with efficient real-time solutions that allow us all to study, work and live our lives more freely, in sustainable societies. Since the establishment of the Company in 1876, we are a leader in telecommunication and are now expanding our role into an ICT (Information and Communications Technology) solutions provider. Our research and solutions development has made mobile communications and broadband possible. When you make a call or browse the internet on your handset, tablet or mobile PC, you will likely use one of our solutions. Our offering comprises services, software and infrastructure, mainly for telecom operators.  40% of the world’s mobile traffic runs through networks that are supplied by us  We provide solutions and services to all major telecom operators in the world  The networks we manage for operators serve about 950 million subscribers  We have more than 33,000 granted patents, comprising one of the industry’s strongest patent portfolios. Our Portfolio We have the competence, the skills, and the solutions our customers need to tackle the challenges of today and tomorrow
  4. 4. Global Reach
  5. 5. Consolidated Income Statement *All figures reported in Swedish Currency SEK
  6. 6. Consolidated Balance Sheet *All figures reported in Swedish Currency SEK
  7. 7. Analysis of Income Statement and Balance Sheet Ratios Profitability Ratio: A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well Ratio Gross Profit Margin Operating Profit Margin Net Profit Margin Profitability Ratios Indicates How well a company controls the cost of its inventory and the manufacturing of its products and subsequently pass on the costs to its customers. Measure of overall operating efficiency, incorporating all of the expenses of ordinary, daily business activity. How much of each sales money shows up as net income after all expenses are paid. Formula (%) 2012 Calculation 2011 2010 (Gross Profit/Net Sales)*100 (72080/227779) *100 =31.64 (79721/226921) *100 =35.13 (74264/203348) *100 =36.52 (EBIT/Net Sales)*100 (10458/227779) *100 =4.5 (17900/226921) *100 =7.8 (16455/203348) *100 =8.1 (Net Profit/Net Sales)*100 (5938/227779)* 100 =2.6 (12569/226921) *100 =5.5 (11235/203348) *100 =5.5  Profit margins have declined. The decrease is due to increased share of Global Services sales, higher proportion of coverage than capacity projects and network modernization projects in Europe. Close to 50% of the gross margin decline is related to the increased services share. Return on Investment Ratios: Return on investment (ROI) is performance measure used to evaluate the efficiency of investment. It compares the magnitude and timing of gains from investment directly to the magnitude and timing of investment costs. Ratio RONW EPS Return on Investment Ratios Indicates Formula It measures the net profit earned on the equity shareholders' funds. It is (PAT-Preference measure of overall profitability after Dividend) discharging cost of borrowed capital /Net Worth and income tax It measures the overall profitability in (PAT-Preference terms of per equity share of capital Dividend) contributed by the owners /Avg no. of shares Calculation 2012 2011 5775/138483=0.04 12194/145270=0.08 5775/3216= 1.8 12194/3206 =3.8  We can see a substantial amount of decrease in the EPS of the company which is primarily due to the lower profits generated in 2012 compared to earlier year
  8. 8. Liquidity Ratios: Liquidity ratios are used to determine a company’s ability to meet its short-term debt obligations. Investors often take a close look at liquidity ratios when performing fundamental analysis on a firm. Ratio Current Ratio Quick Ratio Collection period to Customer s (Days) *Suppliers ’ Credit (Days) *Inventor y Holding Period (Days) Liquidity Ratios Indicates Formula The ability of a company to (Current Assets+Shortdischarge its day-to-day bills, term or current liabilities out of Investments)/(Current cash, near cash or current Liabilities+Short term assets debt) How quick is the ability of (Current Assets+Shortthe company to discharge its term Investmentscurrent liabilities net of Inventories)/(Current working capital limits. Liabilities+Short term debt Further refinement of of Working Capital) Current Ratio Credit Period allowed to customers on Credit Sales The average credit period availed by a company from its suppliers on credit purchases Period of inventory buildup or number of days that cash is blocked in inventory Calculation 2012 2011 193254/97404=1.98 198816/97029=2.04 (19325428802)/97404=1.69 (19881633070)/97029=1.70 (Receivables*365)/Credit Sales (63660*365)/227779 = 102 (64552*365)/226921 = 103.8 (Payables*365)/Credit Purchases (23100*365)/58856= 143 (25309*365)/59321= 155.7 (Inventory*365)/Cost of Goods Sold (28802*365)/58856= 178.6 (33070*365)/59321= 203.5 *Assuming Operating expenses as Purchases/COGS.  There has been a little change in the liquidity position of the company, but the inventories have reduced as well which is a good sign keeping quick ratios almost same. The collection period for Customers has decreased by a day which is good but the supplier’s credit period has reduced. The reduction in inventory holding period is a good sign
  9. 9. Solvency Ratios: Solvency ratio is one of the various ratios used to measure the ability of a company to meet its long term debts. Moreover, the solvency ratio quantifies the size of a company’s after tax income, not counting non-cash depreciation expenses, as contrasted to the total debt obligations of the firm. Solvency Ratios Indicates Ratio NAV *Debt Equity *Interest Cover The net worth or net assets value per equity share Proportion of debt and capital both equity and preference, in the capital structure of company Capacity of a company to pay the interest liability it has incurred on its long term borrowings, out of its cash profits Formula Calculation 2012(in millions) 2011(in millions) Equity Shareholders’ Fund/No. of equity shares 138483/3216=43.06 145270/3206 =45.31 Long-Term Debt/Total Net Worth 23898/274996=0.08 23256/280349=0.08 (PAT+Interest on Long term Debt+Non-cash Charges)/Interest on Long term Debt (5938+1984)/1984= 3.99 (12569+2661)/2661 =5.72 *Non-Current borrowings are assumed as long term debt and financial expenses as interest paid for them.  There has not been much change in the solvency of the company, but the interest cover has decreased which is due to low profit margins Turnover Ratios: Ratio Fixed Asset Turnover Net Worth Turnover *Debtors Turnover Turnover Ratios Indicates The extent of turnover or volume of gross income generated by fixed assets of a company The extent of turnover or volume of gross income generated by net worth of a company The extent of turnover or volume of gross income generated by debtors Calculation Formula 2012 2011 Net Sales/Net Block of Fixed Assets 227779/81742 =2.78 226921/81553 =2.78 Net Sales/Net Worth 227779/274996 =0.82 226921/280349 =0.80 Net Sales/Debtors 227779/8427 =26.88 226921/5985 =37.91 227779/28802 =7.9 226921/33070 =6.9 The extent of turnover or volume of gross income Net Sales/Inventory generated by inventory of a company *Current liabilities are being assumed as debtors Inventory Turnover  The debtor turnover ratio has decreased which is good as well as the increase in inventory turnover shows effective utilization of resources.
  10. 10. Du Pont Analysis: DuPont formula (also known as the DuPont analysis, DuPont Model, DuPont equation or the DuPont method) is a method for assessing a company's return on equity (ROE) breaking its into three parts. The name comes from the DuPont Corporation that started using this formula in the 1920s. Du Pont Analysis Indicates DuPont model tells that RONW is affected by three things: Operating efficiency, which is measured by net profit margin; Asset use efficiency, which is measured by total asset turnover; Financial leverage, which is measured by the equity multiplier; Calculation Year Net Profit Margin X Asset Turnover X Financial Leverage (Assets/NW) 2012 2.6 0.82 138483/274996=0.50 2011 5.5 0.80 145270/280349=0.51  From the Du Pont analysis we can find out that the cause of decreasing RONW has been lower profit margin only since other ratios are almost same. Valuation Ratios: Ratio *P/E (times) *Market Price to NAV Valuation Ratios Indicates How many times an equity share is priced in the stock market in relation to its EPS Market Price of a share vis-a vis its NAV *Market Total market value of the number of equity shares of Capitalization a company Formula Market price of Equity Share/EPS Market price of Equity Share/NAV No. of Equity Shares*Market price (Dividend Received+Market Appreciation)/Initial Investment th *Market Price per share is taken as per share price on 27 September listed on Stockholm *Yield to Investors (%) Total gain or loss to investors over a given time span in relation to their investment in equity shares. Calculation 2012 87.3/1.8=48.5 87.3/43.06=2.02 3216*10^6*87.3 =280,756 million SEK { (8632/3216)+(87.31.8)}/1.8=48.99  In accordance with recently published financial statements Ericsson has Current Valuation of 26.5 B. This is 2.35% higher than that of Technology sector and 5.44% lower than that of Communication Equipment industry, The Current Valuation for all stocks is 3.6% lower than the firm.
  11. 11. Share Performance Indicators In 2012, Ericsson’s total market capitalization decreased by about 7% to SEK 215 billion, compared to a decrease by 10% reaching SEK 230 billion in 2011. The OMX Stockholm Index on NASDAQ OMX Stockholm increased by 12% and the NASDAQ composite index increased by 16%. The S&P 500 Index increased by 13%.
  12. 12. Cash-Flow Statement The statement of cash flow is prepared in accordance with the indirect method. Cash flows in foreign subsidiaries are translated at the average exchange rate during the period. Payments for subsidiaries acquired or divested are reported as cash flow from investing activities, net of cash and cash equivalents acquired or disposed of, respectively. Cash and cash equivalents consist of cash, bank, and short-term investments that are highly liquid monetary financial instruments with a remaining maturity of three months or less at the date of acquisition. *All figures reported in Swedish Currency SEK Interest paid in 2012 was SEK 1,650 million (SEK 1,422 million in 2011, SEK 977 million in 2010) and interest received was SEK 1,883 million (SEK 2,632 million in 2011, SEK 1,083 million in 2010). Taxes paid, including withholding tax, were SEK 5,750 million (SEK 4,393 million in 2011, SEK 4,808 million in 2010). Cash and cash equivalents include cash of SEK 30,358 (29,471) million and temporary investments of SEK 14,324 (9,205) million.
  13. 13. Financial Terminology
  14. 14. REFERENCE: Ericsson Annual Report 2012

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