Financial risks include risks related to adequate capitalisation level and financing, currency, interest rate and credit risk. Financial risks are managed through accounting and finance rules, as well as audit. The group’s finance department is ultimately responsible for forecasting the cash flows of Merko Ehitus, continuously monitoring various subsidiaries’ cash positions and forecasts. The group has enacted a regular budgeting procedure whereby the group’s annual forecasts are updated as a minimum four times per year.
In its daily activities, the group needs to consider various financial risks. The key risks include: market risk (incl. interest rate risk and foreign currency risk), credit risk, liquidity risk and equity risk. Based on the group’s balance sheet structure and position in the market, none of these risks have a significant impact as at the date of preparation of the financial statements. The group’s risk management is based on laws, regulations, requirements and regulations arising from International Financial Reporting Standards, as well as the group’s internal regulations and good business practices. The group’s finance department is responsible for management of financial risks.
Credit risk relates to a potential damage which would occur if the parties to the contract are unable to fulfil their contractual obligations. For mitigating credit risk, the payment behaviour of clients is constantly monitored, their financial position is analysed and if necessary, third persons are engaged as a guarantor in transactions. Construction activities are partially financed by customer prepayments. As a rule, a precondition for receiving a prepayment is a bank guarantee for the prepayment submitted to the customer. Free cash is mostly held in overnight deposits or term deposits at Swedbank, LHV, SEB, Nordea and DnB bank groups. Swedbank AS, AS LHV Pank and SEB Pank AS do not have separate ratings by Moody’s. The parent company of Swedbank AS – Swedbank AB, the parent company of SEB Pank AS – Skandinaviska Enskilda Banken AB and Nordea Bank AB all have a long-term rating Aa3 by Moody’s. DnB Bank ASA had a long-term credit rating Aa2 by Moody’s. The management estimates that the group is not exposed to significant credit risk.
The group’s customers are primarily large local entities or public sector entities (as at 31.12.2016, the public sector proportion in accounts receivable amounted to 20.8%) with well-known and sufficient creditworthiness.
As at the balance sheet date, the amount of overdue short-term receivables was EUR 4,590 thousand (31.12.2015: EUR 2,126 thousand), of which EUR 2,441 thousand has been collected by 12 March 2017. In a year, the share of overdue short-term receivables in total receivables increased from 14.0% to 14.6%. The group keeps running track of payment history for all customers separately for each receivable. The management estimates that there are sufficient reasons to conclude that the receivables reported in the financial statement will be paid off by the buyers. Trade receivables and receivables from customers of construction works under the stage of completion method have not been guaranteed with additional collateral as is customary in the industry.
As at balance sheet date, the loans granted to joint ventures, the economic activities of which the group has a good overview of, totalled EUR 3,952 thousand (31.12.2015: 3,888 thousand) and therefore, no additional collateral is required. As at 31.12.2016, loans granted to unrelated legal entities amounted to EUR 1,560 thousand (Note 16) (31.12.2015: 1,500 thousand), which in management’s opinion is not exposed to material credit risk. As at the year-end, the management expects to collect these loans on time.
The group’s liquidity or solvency represents its ability to settle its liabilities to creditors on time. As at 31.12.2016, the group´s current ratio was 2.9 (31.12.2015: 3.2) and the quick ratio 1.1 (31.12.2015: 1.2). In addition to available current assets, and to ensure liquidity and better management of cash flows, the group has concluded overdraft agreements with banks. As at end of the year, the group entities had concluded overdraft contracts with banks and other unrelated third parties in the total amount of EUR 11,198 thousand, of which EUR 8,198 thousand was unused, (31.12.2015: EUR 9,401 thousand, of which EUR 8,636 thousand was unused). In addition to the overdraft facility, the Company has a current loan facility with the limit of EUR 3,500 thousand (31.12.2015: EUR 3,500 thousand) from AS Riverito, which had not been withdrawn in full as at the end of current and previous financial years.
The management estimates that the group’s capital structure – equity at 51.6% (31.12.2015: 59.5%) of the balance sheet total and a moderate proportion of interest bearing liabilities at 19.3% (31.12.2015: 14.8%) of the balance sheet total – ensures the group’s trustworthiness for creditors in the changing economic climate and significantly improves the feasibility of the extension of existing financial liabilities and raising of additional debt.