27. Management of financing risks

Notes to the Consolidated Financial Statements

27. 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 exposed to foreign exchange risks in its operations. The Group’s key foreign exchange risks involve the US dollar, Swedish krona, Norwegian krone, Russian rouble, South Korean won and Chinese yuan. The financial statements include foreign currency sales receivables of approx. EUR 3.1 million in Swedish kronas, US dollars, Norwegian krones and Russian roubles. Foreign currency accounts payable totalled approx. EUR 0.4 million, mainly being in Swedish kronas, Norwegian krones and US dollars. 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 2014, the company had no such forward contract in force.

Interest rate risk

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 2015, the interest rate on the long-term bank loan varied between 1.7% and 2.7% (2.0% – 2.6% in 2014). The impact of a +/-1% change in the loan’s interest rate is EUR 0.1 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 risk

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 2015, credit losses totalled EUR 0.2 million (EUR 0.1 million in 2014). The maturity analysis of accounts receivable for 2015 and 2014 is presented in Note 16.

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 two major banks for financing. The amount of unused standby credit facility on 31 December 2015 was EUR 4.0 million, and the company has the ability to take out EUR 7 million in new loans.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 31/12/2015 totalled EUR 6.7 million. An agreement-based maturity analysis on discounted equity and interest payments for the reporting periods 2015 and 2014 is presented in Note 21.

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 2015, the Group’s interest-bearing net liabilities were EUR 13.5 million (31 Dec 2014: EUR 11.1 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 liabilities have mainly been used to finance the company’s business acquisitions. Net gearing at the year-end 2015 was 17% (2014: 30%).

The share of liabilities of total shareholders’ equity on 31 December 2015 and 31 Cecember 2014 was as follows:

€ 000

2015

2014

Interest-bearing liabilities

13,513 16,245

Cash and cash equivalents

6,710 5,132

Interest-bearing net liabilities

6,803 11,113

Total shareholders' equity

40,887 36,719

Net gearing

17% 30%