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Home | Finance | Buy & Sell It is however essential that certain rules are followed in its formulation. IAS 1 states that the financial statements shall present fairly the financial position, financial performance and cash flow of an entity. A proper presentation and formulation of the figures are mandatory as it may bring forth new tax regulations, employees demand for better pay structure and investors decision to hold on to their investments. To see how these figures influence, 3 important ratios have been chosen each having direct influence over its end-users. The 3 groups of entities chosen are creditors, shareholders and the employees. The 4th Quarter report of 2005 and 2006 financial statements of Nokia Group have been used to study the relationship between the financial statements and the stakeholders. The 3 important ratios chosen include (i) Interests Cover, (ii) Diluted EPS and (iii) Acid Test Ratio. Companies often rely on external borrowing to finance its financial obligations. Of all borrowings, the short-term loans and the terms associated with it make repayment a complex task. The companies that are heavily geared or those that are heavily depended on loans for its immediate needs suffer from creditworthiness. Creditors are particularly interested in the company’s ability to meets it payment obligations on time and its “ability” to meet those obligations. The Interest Cover, which is the ratio between Earnings before Interest and Tax (EbIT) and Interest Payable, shows by how far the company can meet those obligations. Looking at the audited Profit and Loss statements, the interest cover ratio as on 10/12/2005 and 10/12/2006 is 3.8 and 4.2 respectively. It can very well be noted that audited operational profits have seen a 15 percent increase over the previous year figures. It is also interesting to note that as a group, the overall tax liabilities have increased by 76 million euros for the period as compared to the figures for the same period last year. The group’s increase in operational profits of 15 percent over the previous year’s can be seen as a significant growth pattern. Also the fact that the group is able to cover the interest payable by 4.2 times cannot be ignored. Although these figures may look attractive, it would be naïve to ignore the liquidity positioning of the group. For that, we need to look at the assets that can be readily converted into liquid form to meet its current liabilities. The ratio often used to assess liquidity is called Acid Test Ratio. Acid test ratio looks at the relationship between current assets and current liabilities. According to IFRS, current liabilities cover all creditors amount falling due within one year. From the shareholder’s perspective, investment returns are of prime significance. Investors tend to focus more on how much they can earn by investing significant portion of their wealth. We shall look at one important ratio called the Diluted Earnings per Share. Diluted Earning per Share shows the relationship between the net profits and average of adjusted number of shares. It is adjusted primarily for the fact that simple EPS takes into account only the number of outstanding shares. It can be misleading largely because it ignores stock options, warrants, preferred stocks and convertible bonds and that the number of outstanding shares can change over time. From the figures obtained from Nokia’s financial statement we can see that Diluted EPS stands at 0.32 euros for the 4th Quarter as compared to 0.25 euros for the same period pervious year. The Diluted EPS for the 3rd Quarter for 2005 and 2006 stands at 0.20 euros and 0.21 euros respectively. It is a sensible assessment of the company’s shareholding status as possibilities for stock options; issuance of warrants and convertibility of bonds can be exercised anytime during financial year. Such issuances of new stock options and warrants can completely change the composition and net worth of the overall share holdings. Article Source: http://www.articlewheel.com
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