Financial Accounting Project

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

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

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

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 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

Profitability Ratios Calculation

Ratio Indicates Formula (%) 2012 2011 2010

Gross Profit

Margin

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.

(Gross Profit/Net Sales)*100

(72080/227779)*100

=31.64

(79721/226921)*100

=35.13

(74264/203348)*100

=36.52

Operating Profit

Margin

Measure of overall operating efficiency, incorporating all of the expenses of ordinary, daily business activity.

(EBIT/Net Sales)*100

(10458/227779)*100 =4.5

(17900/226921)*100 =7.8

(16455/203348)*100 =8.1

Net Profit Margin

How much of each sales money shows up as net income after all expenses are paid.

(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.

Return on Investment Ratios Calculation

Ratio Indicates Formula 2012 2011

RONW

It measures the net profit earned on the equity shareholders' funds. It is measure of overall profitability after discharging cost of borrowed capital and income tax

(PAT-Preference Dividend)

/Net Worth 5775/138483=0.04 12194/145270=0.08

EPS It measures the overall profitability in terms of per equity share of capital contributed by the owners

(PAT-Preference Dividend)

/Avg no. of shares 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

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.

Liquidity Ratios Calculation

Ratio Indicates Formula 2012 2011

Current Ratio

The ability of a company to discharge its day-to-day bills, or current liabilities out of cash, near cash or current assets

(Current Assets+Short-term

Investments)/(Current Liabilities+Short term

debt)

193254/97404=1.98 198816/97029=2.04

Quick Ratio

How quick is the ability of the company to discharge its current liabilities net of working capital limits. Further refinement of Current Ratio

(Current Assets+Short-term Investments-

Inventories)/(Current Liabilities+Short term debt

of Working Capital)

(193254-28802)/97404=1.69

(198816-33070)/97029=1.70

Collection period to Customers (Days)

Credit Period allowed to customers on Credit Sales

(Receivables*365)/Credit Sales

(63660*365)/227779= 102

(64552*365)/226921= 103.8

*Suppliers’ Credit (Days)

The average credit period availed by a company from its suppliers on credit purchases

(Payables*365)/Credit Purchases

(23100*365)/58856= 143

(25309*365)/59321= 155.7

*Inventory Holding

Period (Days)

Period of inventory buildup or number of days that cash is blocked in inventory

(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

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 Calculation

Ratio Indicates Formula 2012(in millions) 2011(in millions)

NAV The net worth or net assets value per equity share

Equity Shareholders’ Fund/No. of equity shares

138483/3216=43.06 145270/3206 =45.31

*Debt Equity

Proportion of debt and capital both equity and preference, in the capital structure of company

Long-Term Debt/Total Net Worth

23898/274996=0.08 23256/280349=0.08

*Interest Cover

Capacity of a company to pay the interest liability it has incurred on its long term borrowings, out of its cash profits

(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:

Turnover Ratios Calculation

Ratio Indicates Formula 2012 2011

Fixed Asset

Turnover

The extent of turnover or volume of gross income generated by fixed assets of a company

Net Sales/Net Block of Fixed Assets

227779/81742 =2.78

226921/81553 =2.78

Net Worth

Turnover

The extent of turnover or volume of gross income generated by net worth of a company

Net Sales/Net Worth 227779/274996

=0.82 226921/280349

=0.80

*Debtors Turnover

The extent of turnover or volume of gross income generated by debtors

Net Sales/Debtors 227779/8427

=26.88 226921/5985

=37.91

Inventory Turnover

The extent of turnover or volume of gross income generated by inventory of a company

Net Sales/Inventory 227779/28802

=7.9 226921/33070

=6.9

*Current liabilities are being assumed as debtors

The debtor turnover ratio has decreased which is good as well as the increase in inventory turnover

shows effective utilization of resources.

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 Calculation

Indicates Year Net Profit Margin X Asset Turnover X Financial Leverage

(Assets/NW)

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;

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:

Valuation Ratios Calculation

Ratio Indicates Formula 2012

*P/E (times) How many times an equity share is priced in the stock market in relation to its EPS

Market price of Equity Share/EPS 87.3/1.8=48.5

*Market Price to NAV

Market Price of a share vis-a vis its NAV Market price of Equity

Share/NAV 87.3/43.06=2.02

*Market Capitalization

Total market value of the number of equity shares of a company

No. of Equity Shares*Market price

3216*10^6*87.3 =280,756 million

SEK

*Yield to Investors (%)

Total gain or loss to investors over a given time span in relation to their investment in equity shares.

(Dividend Received+Market Appreciation)/Initial

Investment { (8632/3216)+(87.3-1.8)}/1.8=48.99

*Market Price per share is taken as per share price on 27th September listed on Stockholm

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.

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%.

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.

Financial Terminology

REFERENCE: Ericsson Annual Report 2012