Research Article Volume 6 Issue No. 5

Transcription

1 DOI / ISSN IJESC Research Article Volume 6 Issue No. 5 The Effect of Working Capital Management in the Liquidity of Nokia Corporation: A Study with Special Reference to the Period Ms. Roshini Vinod 1, Ms. Elsa George 2 Faculty 1, 2 Department of Commerce Rajagiri College of Social Sciences, Kerala, India roshinivinod@rajagiri.edu 1, elsageorge@rajagiri.edu 2 Abstract: Fixed assets and current assets play a vital role for the successful working of any business organisation. Working capital management is crucial as it has a direct impact on profitability and liquidity of the organisation. An effort has been made in this paper to study the working capital components and the impact of working capital management on the liquidity of Nokia group. The paper also makes an attempt to study the correlation between liquidity and working capital of Nokia Corporation. The study is based on secondary data collected from annual reports of Nokia for the study period 2012 to The ratio analysis, percentage method and coefficient of correlation have been used to analyse the data. Keyword: Profitability, Working capital, Liquidity, Nokia 1. Introduction Working capital management involves planning and controlling current assets and current liabilities in a manner that eliminates the risk of inability to meet short term obligations on the one hand and avoid excessive investment in these assets on the other hand (Eljelly, 2004). The concept of working capital involves managing of the companies short-term capital and the goal of management of working capital is to promote a satisfying liquidity, profitability and shareholders value. The short-term capital refers to the capital that companies use in their daily operations and it consists of companies current assets and current liabilities. A well-managed working capital promotes a company s well-being on the market in terms of liquidity and it also acts in favour for the growth of shareholders value (Jeng-Ren, Li & Han-Wen, 2006). This paper looks into the working capital position of the Nokia Corporation. The Nokia group is a Finnish multinational communications and information technology company, founded in Nokia is a public limited liability company and was ranked the world s 274 th largest company measured by 2013 revenues according to the Fortune Global 500. The company currently focuses on largescale telecommunications infrastructure and technology development and licensing marked the 150-th anniversary of the Nokia Corporation and this study marks the effect of its working capital management in the liquidity and profitability of the company over the past four years. Working capital analysis is of great practical importance as it covers a vast area. This topic helps us in judging the short term liquidity position of this organization as well as it helps in indicating the optimum utilization of the current assets, working capital as well as the growth of the organization (Arickal, 2016). 2. Review of Literature Management of working capital was found to have a major impact on both solvency and profitability in different studies. Many previous researchers have indicated this relationship is briefly summarised in the following section: Sagan (1955) perhaps was one for the first papers published on working capital management, and has explained the need for working capital management and how its absence could vitally affect the health and existence of the company. Chen-Yuan Chen (2013) stated that Nokia s collaboration with Microsoft is expected to bring an explosive change to the existing mobile phone market. Future trend will be a situation of three kingdom, windows phone, android phone and IOS and three platforms. Fatemeh Baghiyan (2014) says that working capital management and performance management is a meaningful relationship and selection policy aggressively financing and investment in working capital will lead to improved management companies. Gamze Vural, Ahmet Gokhan Sokmen And Emin Huseyin Cetenak (2012) states that working capital management has a high significance on the performance of firms. There is a positive relationship between cash conversion cycle and firm value while there is a negative relationship between leverage and firm value. This means, extending the cash conversion cycle will increase the firm value and lower leverage will lead to increasing of the firm value. 3. Objectives The study is based on the following objectives: i. To analyse the current assets, current liabilities, and liquid assets of Nokia Corporation for its working capital analysis ii. To examine the growth percentage and average annual growth of Nokia over the period International Journal of Engineering Science and Computing, May

2 iii. To study the reasons of change in working capital and its effect on absolute liquidity ratio 4. Hypothesis For the purpose of achieving the above objectives, the following null hypothesis is considered: Ho: There is no significant difference in the Working capital position of Nokia Corporation during the period 2012 to Limitations Following were the limitations for the study: i. Secondary data was used for the study ii. The analysis is based on financial data only which was collected from the annual reports of the company iii. Sufficient data and literature was not available 6. Methodology The sample is based on secondary data collected from the financial statements of Nokia Corporation for the years 2012, 2013, 2014 and Statistical techniques such as percentages, averages, coefficient of correlation, coefficient of variation and T-test have been applied. 7. Working Capital analysis of Nokia Corporation i. ratio The current ratio is a liquidity and efficiency ratio that measures a firm s ability to pay-off its shortterm liabilities with its current assets. Generally, a current ratio of 2:1 is considered to be acceptable. A higher current ratio means the company is more capable to pay its obligations. ratio = Assets/ Liabilities Table no. 1: Statement showing Ratio (EUR in Millions) Assets Liabilities Ratio 20, , As of , , As of , , As of , , Mean 16, , Std deviation CV Growth % Annual average growth rate The ideal current ratio is 2:1. The short term solvency position of the company is improving. Initially, as of 2012 it was 1.51:1. Later in 2014, it has increased to 1.88:1 and further to 2.48:1 in The mean was 1.83:1, while the coefficient of variance stands at 49.89%. At growth percentage of 63.65, annual average growth rate is 18.99%. measure the ability of a company to pay off its short-term liabilities when they fall due. The ideal liquid ratio is 1:1. If the value is greater than 1, it means the short term obligations are fully covered. Liquid ratio = Liquid Assets/ Liabilities where, Liquid Assets = Assets (Inventory + Prepaid expenses) ii. Liquid Ratio Liquidity ratios are the ratios that measure the ability of a company to meet its short term debt obligations. These ratios Table no. 2: Statement showing Liquid Ratio (EUR in Millions) Liquid Assets Liabilities Liquid Ratio 16, , As of , , As of , , As of , , Mean 15, , Std deviation CV Growth % Average annual growth rate International Journal of Engineering Science and Computing, May

3 The ideal current ratio is 1:1. The liquidity position of the company is improving and above the standard ratio. As of 2012 it was 1.20:1 and it has further increased to 2.27:1 in The mean was 1.73:1, while the coefficient of variance stands at 50.04%. At growth percentage of 88.18, annual average growth rate is 27.59%. iii. Absolute Liquid Ratio In addition to computing current and quick ratio, some analysts also compute absolute liquid ratio to test the liquidity of the business. Absolute liquid ratio is computed by dividing the absolute liquid assets by current liabilities. This ratio is calculated to find out the firms capacity to pay current obligations very immediately. The ideal norm for this ratio is 0.5:1. Absolute Liquid Ratio = Absolute Liquid Assets/ Liabilities where, Absolute Liquid Assets = Cash in Hand + Cash at Bank + Marketable Securities Table no. 3: Statement showing Absolute Liquid Ratio (EUR in Millions) Absolute Liquid Assets Liabilities Absolute Liquid Ratio 17, , As of , , As of , , As of , , Mean 14, , Std deviation CV Growth % Average annual growth rate The acceptable norm for this ratio is 0.5:1. In 2012, the ratio is 1.26:1 which further increased to 2.02:1 in The mean was 1.67:1, while the coefficient of variance stands at 47.91%. At growth % of 60.32, annual average growth rate is 17.20%. iv. Working Capital Turnover Ratio The working capital turnover ratio measures how efficiently a business uses its working capital to produce sales. A higher ratio indicates greater efficiency. In general, a high ratio can help your company s operations run more smoothly and limit the need for additional funding. Working Capital Turnover Ratio = Cost of Goods Sold/Working Capital Table no. 4: Statement showing Absolute Liquid Ratio (EUR in Millions) Cost of goods sold Working capital Working turnover ratio 9, , As of , , As of , , As of , , Mean 7, , Std deviation CV Growth % Average annual growth rate capital The acceptable norm of this ratio is The working capital turnover ratio for the year 2012 stands at 1.40:1 and it has declined to 0.75:1 in The mean was 1.22:1, while the coefficient of variance stands at 52.77%. At a negative growth of 46.83, annual average growth rate was at %. v. Changes in Working Capital The information relating to the changes in current natured accounts between specific periods of time presented in the form of a statement is what we call the schedule/statement of changes in working capital. International Journal of Engineering Science and Computing, May

4 Table no. 4: Statement showing Statement of Changes in Working Capital (EUR in Millions) PARTICULARS BALANCE AS ON WORKING CAPITAL CHANGE CURRENT ASSETS Inventories Receivables Prepaid expenses Income Tax assets portion of long-term loans receivable Other financial assets Investments at fair value through profit and loss, liquid assets Available-for-sale investments, liquid asset Cash and cash equivalents TOTAL CURRENT LIABILITIES portion of long-term interestbearing liabilities Short-term borrowings Other financial liabilities income tax liabilities Accounts payable Accrued expenses, deferred revenue and other liabilities Provisions TOTAL WORKING - CAPITAL TOTAL NET CHANGE IN WC From the above statement it is identified that the net working capital is fluctuating over the years. It can be identified that there was a steady decline in all current assets and current liabilities except for Investments at fair value through profit and loss, liquid assets and Available-for-sale investments, liquid asset. 8. Testing of Hypothesis In this study the hypothesis has been analyzed by T- test as the significance of data can be analyzed by means of statistical tools. Hence correlation & T- test have been applied in this study. Ho: There is no significant difference in the Working capital position of Nokia Corporation during the period of study. International Journal of Engineering Science and Computing, May

5 Paired Samples Statistics Mean N Std. Deviation Std. Error Mean Pair 1 asset liability Pair 1 asset & liability Paired Samples Correlations N Correlation Sig Pair 1 asset - liability Mean Std. Deviation Paired Samples Test Paired Differences Std. Error Mean 95% Confidence Interval of the Difference Lower Upper t df Sig. (2- tailed) t = 6.506, t 0.05 = t > t 0.05 At 5% level of significance with 3 as degree of freedom, the critical value of t 0.05 is The calculated value of t is which are more than the critical value and therefore, the null hypothesis is rejected. Hence, it can be included that there is significant difference in the working capital position of Nokia Corporation during the period of study. 9. Suggestions The company has an increasing trend in its current ratio. Even though it was below the standard ratio of 2:1 during the company has improved over the period and cross the standards by The company has a high liquid ratio with high growth rate. This shows that the company is experiencing a solid-top line growth and is easily able to cover its financial obligations. The absolute liquid ratio of the company is increasing over the years and is always above the standards. This shows that the company has a good portion of its funds blocked in Cash and Marketable securities which are very low or no income to the company. This also signifies lack of efficiency in management of working capital by the company. 10. References Chen, C.-Y. (2013). Nokia and strategic agility. African Journal of Business Management. Chiou, J.-R. L.-W. (2006). The determinants of working capital management. Journal of American Academy of Business, Cambridge., Vol.10, Iss.1, Hollywood. pp Eljelly. (2004). Liquidity profitability tradeoff: An empirical investigation in an emerging market". International Journal of Commerce and Management, Vol. 14 Iss: 2;pp Gamze Vural, A. G. (2012). Affects of Working Capital Management on Firm s Performance:. International Journal of Economics and Financial Issues. Sagan, J. (May 1955). Towards a Theory of Working Capital. The Journal of Finance, pp Arickal, D. A. (2016). A Study Of Working Capital Management Through Ratio Analysis With Reference To Bharat Heavy Electricals Limited. International Research Journal of Management and Commerce, Vol. 3, Issue 4, Pg Baghiyan, F. (2014). The Impact of Working Capital Management on Management Performance. Science and Education Publishing. International Journal of Engineering Science and Computing, May