Financial Accounting Project

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. 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. 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. Global Reach

5. Consolidated Income Statement
*All figures reported in Swedish Currency SEK

6. Consolidated Balance Sheet
*All figures reported in Swedish Currency SEK

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. 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. 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. 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. 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. 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. Financial Terminology

14. REFERENCE: Ericsson Annual Report 2012