Financial ratio comparison in mobile phone manufacturers

With the recent issues at Nokia concerning their profits warning and share price plummet http://mobilebeacon.com/blog/2011/06/02/nokias-troubles-and-a-lesson-on-software/ , I wanted to do some financial ratio comparison between Nokia and HTC, one of their leading competitors in the fast growing Smartphone segment. I was interested to see what the ratios look like when comparing an established market leader such as Nokia with a smaller more focussed company such as HTC.

The 2010 annual reports show the following key data

Nokia (Devices & Services Division)*

Net Sales -€29,134m  / $38,165m  **

Operating Profit – €3,299 / $4,321m

HTC

Net Sales – $9,569m

Operating Profit – $1,515m

So we have the following ratios

Operating Profit Margin

Nokia 11.3%     HTC 15.5%

Gross Profit Margin***

Nokia 30%     HTC 30%

Return on capital employed ***

Nokia 10.5%     HTC 59%

Return on Shareholders fund***

Nokia 8.6%     HTC 56%

Sales Revenue to capital employed***

Nokia 2.15     HTC 3.73

Sales Revenue per Employee

Nokia $429k     HTC $1.33m

Analysis

These figures certainly suggest HTC is a healthier business.

HTC Operating profit margins and revenue per employee are significantly higher. Interestingly gross profit margins are identical, so this suggests R&D, sales and marketing, and admin expenses within Nokia are proportionately higher.

Return on capital employed and return on shareholders fund are far higher in HTC’s case. A close look at the balance sheet shows Nokia has long term liabilities of over $5b, HTC has very little. Also Nokia has retained earning of over $13b. Cash in the bank effectively, which is not being used as efficiently as HTC uses its cash. Sales revenue to capital employed ratio bears this out.

So Nokia needs to improve its internal efficiency and use its cash pile to generate more business. Probably familiar issues for all large market leading companies.

Where Nokia is especially vulnerable is the fast moving nature of the high-tech industry it serves. Competitors can come up quickly and bad investment decisions can set you back considerably. This is the reason for Nokia’s recent decision to end investment in its own software platform Symbian and partner with Microsoft. By doing this it will reduce its R&D expenditure and hopefully become more efficient internally.

*Nokia additionally has its Nokia Siemens network division plus Navteq maps division. Total sales across the company was $55,604m. So Devices & Services makes up 70% of the total company sales.

** Converted into dollars for comparison using the exchange rate at the end of 2010 as noted in Nokia accounts.

*** calculated based on all Nokia divisions as a consolidated Income statement and balance sheet was used.