Ratios Analysis of Nokia & Motorolla

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Abstract

Motorola and Nokia are two major names in the Mobile Telephone industry. Nokia is currently the world leader in terms of market share while Motorola is near the bottom among international Mobile phone companies. This study will briefly cover the history and current standings of the two corporations before it delves into the numbers.

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Financial statements can be highly informative when the proper financial ratios are applied to them. This financial ratio analysis is written with a view of learning more about the Nokia and Motorola and uncovering why one is a market leader and the other is merely a peripheral player. Turnover Ratios, Profitability Ratios, and Liquidity ratios will be applied to the financial statements of both companies to uncover the underlying reasons as to why the companies are performing the way they are. These ratios will be analyzed and recommendations will be forwarded as per the findings.

Introduction

Motorola and Nokia are two major names in the Mobile Telephone industry. Nokia is currently the world leader in terms of market share while Motorola is near the bottom among international Mobile phone companies. This study will briefly cover the history and current standings of the two corporations before it delves into the numbers.

Both corporations, as will be discussed in the background section started not in the electronics industry but other fields. Only as the march of technology brought new devices such as mobile phones in to the world did Nokia and Motorola shift to this industry. Nokia is particularly noteworthy for having a near 40% market share in the industry today. Motorola on the other hand is doing poorly such that the Motorola board has decided to split the company between the more profitable businesses and the grossly unprofitable mobile phone division.

Financial statements can be highly informative when the proper financial ratios are applied to them. This financial ratio analysis is written with a view of learning more about the Nokia and Motorola and uncovering why one is a market leader and the other is merely a peripheral player. Turnover Ratios, Profitability Ratios, and Liquidity ratios will be applied to the financial statements of both companies to uncover the underlying reasons as to why the companies are performing the way they are. These ratios will be analyzed and recommendations will be forwarded as per the findings.

Background

Background of Nokia

The Nokia Corporation is a Finnish multinational corporation that specializes in communications equipment. It is headquartered in Kreilaniemi, Espoo near the Finnish capital of Helsinki. Nokia’s primary focus is on wireless and wired telecommunications and to this end it employs 112,262 people in over 120 countries while it markets its products to over 150 countries. Based on the most current sales figures Nokia’s 2007 sales revenues totaled 51.1 billion euros with an operating profit of 8 billion euros. Nokia is the current world’s largest manufacturer of cellular telephones. Nokia had a 38% market share in the world’s mobile phone market in the third quarter of 2008. Even this kingly figure was already a decline from its 39% market share in the previous year’s same quarter.

History of Nokia

The company that would become Nokia had humble beginnings. In 1865 it was no more than a mere wood-pulp mill on the banks of the Tammerkoski river in the town of Tampere in the country of Finland. It was owned by Fredrik Idestam. Later on the company would move to a new location the town of Nokia which was along the Nokianvirta river. The reason for this move was because that river provided hydropower production which the expanding business would need. It was the relocation is the primary reason for the name (Nokia) that the company uses to this day. Nokianvirta is the name of the river. Nokiavirta is an old Finnish word that means a dark, furry animal that was known as the Nokia.

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When the Finnish Rubber Works built their factories at Nokia at the beginning of the 20th Century they began to use the brand name Nokia. Their factory was in the vicinity of the Nokianvirta river. Following a merger with Shwere the new firm would be known as Nokia Corporation in 1967. The new company’s principal involvements were paper products, bicycle and car tires, foot ware, personal computers, communications cables, televisions, electricity generation machinery, capacitors, and aluminum.

Nokia would become the Telecommunications giant it is today following the foundation of its electronics section in the 1960s. Owing to the 1967 merger, the electronics section became a separate and distinct division which began to manufacture telecommunications equipment. Nokia would move on to develop the Very High Frequency radio in collaboration with the Salora Oy firm in 1964. This would prove to be a successful enterprise and led to further collaborations. Seven years later Nokia developed the ARP-phone. In 1979 Salora Oy and Nokia merged and a new firm Mobira Oy was established. This company began developing cellular phones for Nordic Mobile Technology (NMT). In 1982 the Mobira Senator would be unveiled by Nokia would introduce the Mobira Senator, its first car phone.

NMT was the first mobile telephony standard that was capable of International Roaming. The experience provided by this shift to International Roaming would be invaluable for Nokia when it collaborated to develop the Global System for Mobile Communications, better known as (GSM). The GSM standard would become the digital standard which would dominate the world of cellular telephony in the 90s. In 2006 GSM mobile phones accounted for almost two billion cellular phone subscribers in the world.

Other Businesses

Nokia also participated in the networking equipment business. It did so in the 1970s when it began R&D on a digital switchboard. Nokia developed the Nokia DX200, a digital switchboard for the telephone exchanges. Previous to this telephone exchanges were manual, crumble some affairs that required operators to do the actual switching. The DX200 was the first ever digital telephone switch to be put to operational use. The Nokia network equipment division was symbolized by the successful DX200.

Nokia also manufactured a series of personal computers called the MikroMikko. However, the PC division was short-lived, it was sold to what later became Fujitsu and that company later transferred PC manufacturing to Fujitsu Siemens Computers, which later shut down it PC factory in Finland. Nokia also manufactures CRT displays but this business was sold to Viewsonic in 2000.

Nokia was the first corporation to avail of a Top Level Domain or TLD exclusively for the Mobile Web. The launch of the instrumental TLD.mobi domain name extension in September 2006 was the result of this acquisition. The launch resulted in the creation of web portal Nokia.mobi. The web portal Nokia.mobi receives about 100 million visits a month.

Nokia announced on August 29, 2007 that the designation of its “umbrella concept” known as Ovi.com, was to be marketed as a “personal dashboard”. Using Ovi.com users can share photos with friends, download music, games and maps straight to their mobile phone as well as have access to third-party services such as the Yahoo Flickr Photo Site. Ovi has helped make Nokia more visible in the field of Internet Services.

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Given the popularity of social networks, In August 2007, Nokia launched its unique brand of social network. Known as MOSH it is the first ever social utility built by a mobile phone provider. MOSH was designed to bring social networking into the mobile environment. Just like other social networks, MOSH users can upload, download, share and bookmark a variety of media.

Current Status

On February 2006, Nokia and Sanyo announced that they had concluded a memorandum of understanding to create a joint venture to address the CDMA handset business. However, by June of that year the negotiations ended without any conclusive agreement. Nokia has since chosen to pull withdraw from CDMA research and development but will retain CDMA business in existing markets

Nokia and Siemens AG announced on 19 June 2006 that the two companies will merge their mobile phone and fix-line network equipment business to create one of the world’s largest network firms. The two companies will have a 50% share in the infrastructure of the company and the firm will be headquartered in the Helsinki area. The new firm will be named Nokia Siemens Networks and it predicts annual sales at 16 billion euros by 2010.

Nokia acquired the services of online music distributor Loudeye Corp for $60M. Nokia purchased Loudeye with a view of developing an online music service that would rival iTunes and boost sales of its handsets.

In December 2007, Nokia unveiled its “Comes With Music” Program at the Nokia World Conference. The program is implemented by giving buyers of Nokia devices one year of complimentary access to music downloads. “Comes With Music” became available in the second half of 2008.

Pursuant to its belief in Connecting People, in April 2008 Nokia rolled out a program where they asked the audience to use their creativity and their mobile phones to become Nokia’s production company. The audience was to take part in the filming, acting, editing and producing of collaborative films. Nokia productions were Spike Lee’s first mobile filmmaking project.

Corporate Structure

Nokia is currently divided into three business sectors; Devices, Services and Software and Markets.

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Devices

The Devices division combines its existing mainline mobile phones department with the separate subdivisions involved in the manufacturing of its Multimedia N-series and Enterprise E-series phones. This division also integrates the core devices R&D known as Technology Platforms.

The devices division is the division that manufactures the mobile voice and data products sold to the general public. These include the expensive N-series and E-series models. Nokia devices are based on the following cellular network standards; GSM/EDGE, 3G/WCDMA. The Nokia N-series exclusively uses only the Symbian OS.

Services and Software

The services and Software division is a fusion of the existing Enterprise and Consumer driver services business previously found in the Multimedia and Enterprise division along with its new acquisitions such as Loudeye, Gate 5, Enpocket, Intellisync, Avvenu and OZ. This group transcends the telecommunications industry to make advances in technology and deliver new applications and possibilities in areas such as online services, optics, music synchronization and streaming media.

Markets

The Markets division used to be known as the Customer and Market Operations Division. It represents the sales, marketing and manufacturing functions of the company.

Challenges to Growth

It was during the reign of CEO Kari Kairamo in the 1980s that Nokia expanded into many new fields by means of acquisitions. Unfortunately in the late 1980s and early 1990s, Nokia encountered serious financial difficulties because of heavy losses in a television manufacturing venture. In response to such setbacks, Nokia streamlined its telecommunications divisions and divested itself of its television and PC divisions. Since then Nokia’s main focus was its telecommunications business continuously divesting itself of non-telecommunications related business.

As a result of this focus and the explosion of worldwide demand for mobile phone, Nokia suffered a logistics crisis by the mid-1990s. This resulted in a complete overhaul of its entire logistics operation. Due to this overhaul Nokia gained a significant competitive advantage over its rivals because of its economies of scale.

Background of Motorola

Motorola Incorporated is a U.S. based, multinational firm that is in the Fortune 100 (Fortune 500 at http://money.cnn.com/magazines/fortune/fortune500/2008/snapshots/288.html). They are based in Schaumburg, Illinois. Motorola manufactures telephone handsets. It also designs and sells wireless network infrastructure equipment. Examples of these are the cellular transmission base stations and signal amplifiers which are used to establish a cellular network. Motorola also manufactures home and broadcast network devices such as set-top boxes, digital video recorders and network equipment used to enable video broadcasting, internet teleconferencing and HD TV.

History

In 1928 Motorola started in Chicago, Illinois as the Galvin Manufacturing Corporation, a firm that produced battery eliminators. It was not until 1930 that the name Motorola was adapted and eventually used as its worldwide trademark. The founders were Paul and Joseph Gavin.

Many of Motorola’s initial products were radio-related, beginning with its battery eliminator product for radios, then they developed the first walkie-talkie in the world. Motorola also ventured into defense electronics, cellular infrastructure equipment as well as mobile phones.

Motorola went public 1943 and changed its name to Motorola in 1947. The present logo came into existence in 1955 and at the time the main concern of Motorola was the production and sale of televisions and radios.

Motorola opened an international subsidiary in city of Toronto in Canada in 1952. The subsidiary was to manufacture radios and televisions. Motorola established the Motorola Foundation which aims to provide scholarships to leading universities in the United States.

Motorola made history when the FCC approved its DynaTAC 8000X mobile phone. In September 1983 it was the world’s first commercial mobile phone. Around this time Motorola was also dominant in the semiconductor industry with products that included integrated circuits. Motorola was the main supplier of microprocessors early computers. Among Motorola’s customers were the Commodore Amiga, Atari ST, the Apple Macintosh and the Color Computer.

The Six Sigma quality improvement process was developed by Motorola in 1986. Since then Six Sigma has become the global standard. A Motorola acquisition known as General Instrument Corporation was the first to propose the all-digital HD TV standard in 1990 the same year that Motorola introduced the Bravo Numeric Pager.

Motorola was the first to demonstrate a working-prototype digital cellular system and mobile phone using the GSM standard in 1991. in 1994 the company rolled out the first digital radio system that combined data, cellular communication, voice dispatch and paging in a single radio network and mobile phone. In 1995, Motorola introduced the first two-way pager which allowed the used to send and receive text messages.

Motorola Products

Motorola was introduced the first handset to combine the Linux operating system and Java technology in 2003. Motorola currently produces numerous products for the government, public safety officials, business installments, and the general public. Such products include cellular phones, laptops, CPUs, and radios.

Enterprise Mobility Solutions: This Motorola Division develops analog and digital two-way radios, voice-data communicators, mobile computers, advance data capture systems, wireless infrastructure and RFID solutions to customers worldwide.

The Home and Networks Mobility division produces end-to-end systems that are designed to allow uninterrupted access to digital entertainment, information and communications services using wired or wireless systems. This is the division develops digital video systems solutions. It also develops interactive set-top devices as well as voice and data modems for digital line. Other products it also has cable networks, broadband access systems for cable and satellite television operators. Finally it also has wireline carriers and wireless service providers.

Mobile Devices is the least profitable arm of the Motorola. It designs the wireless handsets and licenses its intellectual properties. Some of it products include Bluetooth connectivity accessories and integrated applications.

The Motorola Handset division recorded a loss of 1.2 billion dollars in the fourth quarter of 2007. By comparison Motorola Inc. earned $100 million during that same quarter. Its global market share has been on the decline; from 18.4% of the market in 2007, it had a share of just 9.7% by 2008.

Split

On March 26, 2008, Motorola’s board of directors approved of a plant to split into two different publicly traded companies. This is the aftermath of talk that involved selling the handset division to another corporation. These new companies are Motorola Mobile Devices and the separate Motorola Broadband & Mobility Solutions. This move was spurred by the fact that the mobile device business of Motorola is unprofitable. It is expected that this action will be approved by regulatory bodies and will be complete by mid-2009.

Conclusion

Motorola and Nokia come from divergent backgrounds. Both have come a long way from their initial starts. Nokia has chosen to focus on its mobile phone business with expansions into the internet. Motorola on the other hand ventured into mobile phones and is now planning to divest its mobile phone holdings due to its unprofitability.

Despite the seeming failure of Motorola in the mobile phone industry, both Motorola and Nokia have gained considerable exposure as mobile phone providers. Their products are available in Europe, Asia, Africa, America and Oceania. Nokia is a firm that has successfully survived the technology race in the mobile phone market and dominated this rapidly expanding market. Motorola on the other hand failed to capitalize on its initial lead in the technology race and is no longer considered a major player in the mobile phones industry. Instead it has chosen to focus into its core competencies.

Analysis

Nokia

Nokia is a Finnish multinational corporation. Established long before the existence of electronics it was not originally a mobile phone manufacturer. Yet today it has cornered 38% of the mobile phone market with an operating profit of some 8 Billion Euros.

The company was originally a wood-pulp mill which was eventually located in Nokia on the banks Nokianvirta river. Nokia would become its trade name later in its history. It was not until the 1960s that Nokia would begin to venture into electronics and telecommunications. Nokia’s initial forays began with the development of VHF-radios which would later mature into the Mobira Senator the first mobile phone, although it first did this Nordic Mobile Technology.

Due to its partnership with Nordic Mobile Technology, Nokia gained considerable experience Global System for Mobile Communications (GSM) when NMT began its International Roaming Service. GSM would become the digital cellular standard for many countries around the world. GSM mobile phones account for almost two billion cellular phone subscribers around the world.

Aside from its mobile phone business, Nokia also participated in the networking equipment business when it developed the Nokia DX200. This digital switchboard greatly simplified telephony operations since it greatly reduced the strain on telephone service providers who previously needed operators to handle call volume manually. Nokia also had a short-lived personal computer line known as MikroMikko and an interest in the manufacture of CRT monitors.

In the interest of furthering its lead in the hi-tech industry, Nokia acquired Top Level Domain or TLD.mobi for exclusive use by the Mobile Web. The.mobi TLD would later be used for its Nokia web portal which received an average of 100 million visits a month. Ovi.com, the umbrella concept of internet services designed to be a personal dashboard was launched to bring Nokia closer to its objective of having a stronger presence on the web.

Given the popularity of social networks, In August 2007, Nokia launched its unique brand of social network. Known as MOSH it is the first ever social utility built by a mobile phone provider. MOSH was designed to bring social networking into the mobile environment. Like most social networks, MOSH users can upload, download, share and bookmark a variety of media.

The merger with Siemens AG in 2006 merged their mobile phone and fixed line network equipment business to create one of the world’s largest network firms. The new firm is expected to have annual sales of €16 bn by 2010.

After several setbacks in the 1980s and 1990s, Nokia streamlined its telecommunications divisions and divested itself of its television and PC divisions. Since then Nokia’s main focus was its telecommunications business continuously divesting itself of non-telecommunications related business. As a result of this focus and the explosion of worldwide demand for mobile phone, Nokia suffered a logistics crisis by the mid-1990s. This resulted in a complete overhaul of its entire logistics operation. Due to this overhaul Nokia gained a significant competitive advantage over its rivals because of its economies of scale.

By choosing to remain focused in the telecommunications industry, specifically the mobile phone industry Nokia successfully cornered a large share of the world mobile phone market. Expansions and diversification into other industries have since been phased out in favor of maintaining the company’s core competency in mobile phones.

Nokia is attempting to stay abreast of technological developments by increasingly shifting focus towards the internet and online applications. As the availability and affordability of 3G and other high speed wireless internet technologies increases, Nokia will find itself in an ideal position to take advantage of this growth.

Motorola

The U.S. based multinational firm Motorola manufactures mobile phone handsets that directly compete with those manufactured by Nokia. However, Motorola also designs and sells wireless network infrastructure equipment. Examples of which include cellular transmission base stations and signal amplifiers.

Originally a battery eliminator manufacturer, Motorola diversified into other radio-related products beginning with its battery eliminator product for radios, then they developed the first walkie-talkie in the world. Motorola also ventured into defense electronics, cellular infrastructure equipment as well as mobile phones.

Motorola is a pioneer in mobile phones with its DynaTAC 8000X mobile phone it was the first commercial mobile phone. Around the time the DynaTAC came out, Motorola was also involved in the semiconductor industry with products that included integrated circuits. Motorola was the main supplier of microprocessors for the central processing units of some early computers such as the Atari ST, Color Computer, and the Apple Macintosh personal computers.

Motorola was also a pioneer in GSM technology. It was the first to demonstrate a working-prototype digital cellular system and mobile phone using GSM. Another first for Motorola was when it was the first t to demonstrate a working-prototype digital cellular system and mobile phone using the GSM standard in 1991. Three years later, in 1994 the company rolled out the first digital radio system that combined data, cellular communication, voice dispatch and paging in a single radio network and mobile phone. In 1995, Motorola introduced the first two-way pager which allowed the used to send and receive text messages.

Despite being a pioneer in the mobile phone industry, Motorola’s mobile phone division is grossly unprofitable and has become a liability to the rest of the corporation. The mobile phone division is unable to profitably compete with other providers such as Nokia. There are even plans of divesting the corporation of this drain on corporate resources. Instead Motorola intends to focus on its other departments.

Methods

For a proper comparative analysis of the two company’s financials to be performed the following ratios will be computed and analyzed;

Liquidity Ratios

Current Ratio – The current ratio is an indicator of a firm’s liquidity and its ability to meet creditor’s demand for payment. A very low current ratio would indicate that a corporation does not have enough current assets to meet its obligations. A very high current ratio would indicate that a corporation has too much liquidity and is not investing its resources well. The acceptable average for current ratio will vary from business to business.

Quick Ratio – Similar to the Current ratio, the quick ratio is an even more restrictive measure of financial health. Only cash and like-cash assets are counted as against current liabilities. Like the Current ratio, a low quick ratios are an indication of poor financial health while a high quick ratio is indicative of poor management.

Leverage Ratios

Total Debt Ratio – this ratio measures the total debt versus total assets of a corporation. This ratio will indicate how much of the corporation is being financed by debt. Ideally this should be kept low as high debt suggests high interest payments.

Debt – to- Equity Ratio – The ratio of total debt to total equity reveals whether the corporation is funded mostly with debt or with capital. The ideal scenario is that debt should be kept low as a corporation should be capitalized by investments and not borrowing.

Times Interest Earned Ratio – The times interest earned ratio indicated the level of earnings that are available to meet interest payments. A lower times interest earned ratio means less money is available to meet interest payments and that the business is more vulnerable if increases in interest rates. Conversely, a high times interest earned ratio means that the corporation is more resilient to changes in interest rate.

Turnover Ratios

Inventory Turnover is a ratio that indicates how many times a company’s inventory is sold and replaced over a given period of time. A love turnover ratio suggests that the corporation has poor sales while a high turnover ratio indicates either high sales or ineffective inventory management.

Day’s Sales in Inventory is a financial measure that indicates how long a company takes to turn its inventory into sales. A low DSI indicates a rapid turnover of product.

Receivable Turnover is the accounting ratio that quantifies a firm’s ability to extend credit and collect debts. It also shows how effective the firm is in utilizing its assets. A low Receivable Turnover has a negative connotation because it would appear that the corporation is giving interest-free loans to its buyers by not collecting on its accounts receivables.

Day’s Sales in Receivables – Similar to the Receivable Turnover, the Day’s Sales in Receivables is a financial indicator which represents how many days it takes for customers on average to settle their accounts with the corporation. A high number would show that the corporation is giving free loans to its customers.

Total Assets Turnover is the amount of sales generated for every dollar in assets. A high value indicated efficient use of available assets while a low value would indicate a poor use of assets.

Profitability Ratios

Gross Profit Margin is revenue less cost of goods sold (COGS) divided by revenue again. This measure is an indicator of the profitability of the product being sold.

Operating Profit Margin is similar to the Gross Profit Margin except that other ordinary operating expenses are added to the amount deducted from revenue.

The Net Profit Margin is the net income divided by revenue. It is the smallest of the three profit margins because it uses the net income after all the operating expenses, interest expenses and taxes have been taken. In layman’s terms this is actually how much per dollar of revenue will end up being available to the corporation for use.

Return on Assets (ROA) is company’s net income divided by Total Assets. This measure is also called return on investment or ROI. It indicated how good the corporation is at generating profits using its available assets.

Return on Equity is the net income divided by Share holder’s equity. This is a measure of the profits earned by a corporation relative to its total equity.

Extended ROE (DuPont) is a method of performance measurement that measures the assets at their gross book value rather than net book value to generate a higher ROE figure.

Price to earnings ratio or P/E is a measure of how much stockholders are willing to pay for shares relative to the amount of earnings each stock gives. A high figure would indicate that shareholders expect the company to grow while a low figure would show that the investors have a negative outlook on that stock.

Price to Book Ratio or P/B is the ratio used to compare a stock’s market value to its book value. The Price to Book ratio is calculated by dividing the current closing price of a share of stock by the latest quarter’s book value per share.

Results

Liquidity Ratios Motorola Nokia
Current Ratio 1.77776 1.543739461
Quick Ratio 1.55088 1.392179608

The Liquidity ratios of the two corporations indicate that Motorola has a higher level of current assets as opposed to Nokia. Motorola has a slightly higher quick ratio relative to it current ratio than Nokia.

Both Nokia and Motorola have Liquidity Ratios well above the 1.0 mark. They are not in danger of going bankrupt if their current creditors declare them default because they have more than enough ‘quick’ assets to cover their immediate debts. Let alone current assets.

The overall difference would show that in the event of extreme financial hardship Motorola would have a better capability to absorb losses and if necessary pay off loans if the creditors default.

Neither firm shows overly high ratios that would indicate mismanagement of current assets.

Leverage Ratios Motorola Nokia
Total Debt Ratio 0.556273699 0.607090626
Debt – to- Equity Ratio 1.253641484 1.545116167
Times Interest Earned Ratio 1.340206186 193.2781558

Both firms show a high level of debt to total assets. For every dollar of assets Motorola has it 55 cents is funded with debt. Nokia’s total debt ratio is even higher with 60 cents of debt for every one dollar of assets. While such number may appear high they are not abnormally high such that the TDR is alarming. Especially when taking into consideration with the fact that both firms have more than enough to pay for their current and maturing debt. Most debt is long term and will not cause serious harm to the either.

The Debt to equity ratio of Nokia is much higher than Motorola with $1.54 of debt for every $1 of equity versus just $1.25 to the dollar for Motorola. This is in part a function of the higher total debt ratio of Nokia, as more assets are funded with debt naturally equity is proportionately smaller than debt.

The grossly higher Times Interest Earned Ratio of Nokia is a function of the fact that Nokia is operating at a profit while Motorola is operating at a loss. Nokia is in considerably better position to pay off its interest payments using profits than Motorola. Conversely the earnings of Motorola are barely sufficient to make its interest payments.

Turnover Ratios Motorola Nokia
Inventory Turnover 2.505641749 11.73644047
Day’s Sales in Inventory 145.6712637 31.09971895
Receivable Turnover 1.051908397 4.496125492
Day’s Sales in Receivables 346.988389 81.18100811
Total Assts Turnover 0.27708836 1.357961647

The low Inventory Turnover and high Day’s Sales in Inventory of Motorola indicate that it has slow sales volume. Especially when compared to Nokia. Nokia needs only 31 days to eliminate its entire inventory. Motorola needs almost 5 times that much time, 145.67 days to be exact, to eliminate its inventory. Nokia refills its inventory 11.73 times a year versus 2.5 times for Motorola. When all of this is taken into consideration the conclusion is that Nokia’s sales volume is simply better than Motorola’s.

The Day’s Sales receivables is another indicator of the poor financial status of Motorola. It takes them almost 1 year to collect their receivables as opposed to 81 days for Nokia. Motorola also shows a poor ability to convert its assets into sales. Motorola’s Total Asset Turnover of.27 is bare 1/5th that of Nokia.

The receivables turnover of Nokia is four times higher than Motorola’s.

When all the turnover ratios are taken into consideration three conclusions become apparent. First, Nokia’s sales volume is significantly faster than Motorola’s its sales volume is almost five times faster. Nokia either keeps a smaller inventory, unlikely, or its sales are just that much faster because it takes them only 31 days to sell out their inventory versus 145 days for Motorola. Finally, not only is Motorola unable to sell in proportional volume to Nokia, they also take much longer to convert their receivables into cash.

Profitability Ratios Motorola Nokia
Gross Profit Margin 26.3322% 33.8909%
Operating Profit Margin 1.3477% 16.2776%
Net Profit Margin 1.0367% 14.1114%
ROA 0.2873% 19.1627%
ROE 0.6474% 48.7714%

The Turnover ratios indicate that Motorola is not doing well compared to Nokia. Both are in the electronics business as shown by their GPMs, which are relatively equal their production costs are largely equal. However when it comes to their operating profit Motorola pales by comparison. The OPM shows that the operating costs of Motorola are significantly higher relative to sales than Nokia since their Cost of Goods sold appears to be largely equal.

The jump from Net Profit Margin from Operating Profit Margin is not surprising the numbers are already highly disparate at the OPM level and they remain disparate at the NPM level. The NPM shows that Motorola makes barely 1 cent in net income for every $1 in sales. Nokia has a healthier 14 cents per dollar net income.

The ROA shows that Motorola has a very lackluster ability to make money from its assets especially when compared to Nokia which is also in the same industry. The very low ROE, like the low ROA is a result of the lackluster sales of Motorola which in turn results in a lackluster income and earnings at all levels.

Market Value Ratios Motorola Nokia
P/E -21.36363636 8.742857143
P/B 2.066576034 0.254775331

Both the P/E and P/B ratings show that there is very little investor confidence in Motorola. Such lack of faith is founded on the fact that Motorola is operating with very little profit. To make matters worse the main problem of Motorola is directly attributable to its lack sales. A lack of sales for a company known for its innovative and leading edge products is a blow to Motorola’s reputation.

Recommendation

Motorola’s financial ratios and their current profile both reveal the same conclusion. Motorola is no longer relevant to the world of mobile telephone. When compared to Nokia, Motorola is left in the sidelines while Nokia takes everything under the sun. It has to either come up with new and exciting products and aggressively promote them or Motorola will simply have to close down its mobile phone division and concentrate on its core competencies.

Since this is a financial comparison the recommendation will focus on the financial aspects of Motorola’s plight. Nokia is already doing well enough on its own without need for further intervention. There is already little that can be done to improve the balance sheet aspect of Motorola. The equity and debt ratios are already at reasonably good levels. What the company can choose to improve is the income statement aspect.

Sales are the driving force of any business. Motorola’s sales are simply too low. The company needs to sell more product and sell it faster than it currently does. Inventory remains stagnant and unsold. Inventory left unsold become opportunity cost because the money used to manufacture those goods could have been used in other aspects of the company.

In addition to hastening the rate at which products are sold, the Motorola needs to be able to quickly convert sales in to cash. As indicated by its Day’s sales in receivables it needs to be more aggressive in collecting from its debtors.

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