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 US dollar, Swedish krona, Norwegian krone, Russian rouble and Chinese yuan. The financial statements include foreign currency sales receivables of approx. EUR 2.3 million in Swedish kronas, US dollars, Russian roubles and Chinese yuan. Foreign currency accounts payable totalled approx. EUR 0.8 million, mainly being in Swedish kronas, Norwegian krones, US dollars, Russian roubles 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 2011, the interest rate on the long-term bank loan varied between 2.8% and 3.7% (2.3%–2.9% in 2010). 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 2011, credit loss provisions totalled EUR 0.02 (EUR 0.1) million. The maturity analysis of accounts receivable for 2011 and 2010 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 2011 was EUR 4.0 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 2011 totalled EUR 8.2 million. An agreement-based maturity analysis on discounted equity and interest payments for the fiscal years 2011 and 2010 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 achieving the best possible profit. At the end of the period, the Group’s interest-bearing net liabilities were EUR 13.7 (13.6) million. 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 fiscal year, gearing stood at 34% (20%).

The share of liabilities of total shareholders’ equity on 31 December 2011 and 31 December 2010 was as follows:

€ 000

2011

2010

Interest-bearing liabilities

21,872

23,316

Cash and cash equivalents

8,170

9,682

Interest-bearing net liabilities

13,702

13,634

Total shareholders' equity

39,753

67,411

Gearing,%

34%

20%