Notes to the Consolidated Financial Statement

 

29. Management of financing risks  

 

Digia Plc's internal and external financing and the management of financing risks is concentrated in the finance function of the Group's parent company. The function is responsible for the Group's liquidity, sufficiency of financing, and the management of interest rate and currency risk. The Group is exposed to several financing risks in its normal course of business. The objective of the Group's risk management is to minimise the adverse effects of changes in the financial markets on the Group's earnings. The primary types of financing risks are interest rate risk, credit risk and funding risk. The general principles of risk management are approved by the Board of Directors, and the Group's finance function together with the business segments is responsible for their practical implementation.

Foreign exchange risks

 

The Group is not significantly exposed to foreign exchange risk in its operations. The Group's key foreign exchange risks involve the Swedish krona, Russian rouble and Chinese yuan. The Group has currency holdings of EUR 1.9 million through its Swedish, Russian and Chinese subsidiaries, which entails an exchange risk when the investments are converted into euro. The Group has not hedged these investments. The financial statements include foreign currency sales receivables of approximately EUR 0.3 million in Swedish kronas and Chinese yuan. Foreign currency accounts payable totalled approximately EUR 0.4 million, mainly being in Swedish kronas and Chinese yuan. The most significant currency risks relating to accounts receivable and accounts payable can be managed by means of forward foreign exchange contracts when necessary. At the end of the fiscal year 2009, the company had no such forward contract in force.

Interest rate risks

 

The Group's interest rate risk is primarily associated with a long-term bank loan that has an interest rate linked to Euribor rates. Changes in market interest rates have a direct effect on the Group's future interest payments. During the financial period 2010, the interest rate on the long-term bank loan varied between 2.3% and 2.9% (between 2.3% and 4.6% in 2009). The impact of a +/-1% change in the loan's interest rate is EUR 0.2 million per annum. The Group's money market investments are a source of interest rate risk, but the overall impact of these investments is negligible. Interest rate developments are monitored systematically in different bodies within the company, and possible interest rate hedges will be made with the appropriate instruments.

Credit risks

 

The Group's customers are mostly well-known Finnish and foreign companies with well-established credit, and thus the Group has no significant credit risks. The Group's policy defines creditworthiness requirements for customers, investment transactions and counterparties. Services and products are only sold to companies with a good credit rating. The counterparties in investment transactions are companies with a good credit rating. Credit risks associated with commercial operations are primarily the responsibility of operational units. The parent company's finance function provides customer financing services in a centralised manner and ensures that the principles of the financing policy are observed with regard to terms of payment and collateral required. At the end of the fiscal year 2010, credit loss provisions totalled EUR 0.1 million (EUR 0.1 million in 2009). The maturity analysis of accounts receivable for 2010 and 2009 is presented in Note 17.

Liquidity risk

 

The Group aims to continuously estimate and monitor the amount of financing required for business operations in order to maintain sufficient liquid funds for financing operations and repaying loans falling due. The availability and flexibility of financing is ensured by maintaining an unused credit facility and using several banks for financing. The amount of unwithdrawn standby credit on 31 December 2010 was EUR 5.0 million. The Group maintains its immediate liquidity with the help of cash management solutions such as Group accounts and credit facilities at banks. Cash and cash equivalents on 31 December 2010 totalled EUR 9.7 million. An agreement-based maturity analysis on discounted equity and interest payments for the reporting periods 2010 and 2009 is presented in Note 22.

Management of the capital structure

 

The Group's capital management aims at supporting company business by means of optimal management of the capital structure, ensuring normal operating conditions and increasing shareholder value with a view to achieve the best possible profit. The Group's interest-bearing net liabilities at the end of 2010 were EUR 10,634,000 (31 December 2009: EUR 19,960,000). When calculating gearing, the interest-bearing net liabilities are divided by shareholders' equity. Gearing includes interest-bearing net liabilities less cash and cash equivalents. Interest-bearing net liabilities have primarily been used for financing the Group's company acquisitions, and at the end of the reporting period, gearing stood at 20% (34% in 2009).

The share of liabilities of total shareholders' equity on 31 December 2010 and 31 December 2009 was as follows: 

€ 000

2010

2009

Interest-bearing liabilities

20,316

30,429

Cash and cash equivalents

9,682

10,469

Interest-bearing net liabilities

10,634

19,960

Total shareholders' equity

67,411

58,184

Net gearing, %

20%

34%