Some consumer goods firms have seen finance cost or interest expense go down the most in three years as repayment period on some of their loans have lapsed. This means these firms could see profit growth in the future, thanks to reduced expenses as they continue to raise capital to reduce the debt burden.
Measures of corporate leverage such as debt to EBITDA ratio, debt to equity ratio and debt to asset ratios have reduced in the period under review. Investors do worry about the corporate leverage because huge interest costs could eat deep into profit hence exposing firms to financial risk and bankruptcy costs.
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The cumulative finance costs or interest expense of 13 largest consumer good firms quoted on the floor of the bourse fell by 4.25 per cent to N57.71 billion while total loans (long and short term) fell by 18.56 per cent to N341.44 billion as at September 2017. This compares with a 25.25 per cent increase in interest expense recorded in the previous period of September 2016.
The firms are Unilever Nigeria Plc, Cadbury Nigeria Plc, Nestle Nigeria Plc, Seven-Up Nigeria Plc, Flour Mills Nigeria Plc, Nigerian Breweries Plc, Guinness Nigeria Plc, International Breweries Plc, Honeywell Nigeria Plc, PZ Cussons Nigeria Plc, Dangote Sugar Nigeria Plc, Dangote Flour Nigeria Plc and Nascon Allied Nigeria Plc.
Combined interest coverage ratios, a measure of corporate leverage, for the 13 firms increased to 3.29 times earnings in September 2017 from 1.87 times earnings the previous year. The lower a company’s interest coverage ratio is the more its debt expense burden. When a company’s interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable.
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“Nestle had borrowed money from the parent company in 2010. These loans have matured. Finance cost will continue to dip unless they borrow more to finance future expansion plans,” said Tajudeen Ibrahim, head of research at Chapel Hill Denham Limited. “Flour Mills may still borrow more money. They have put on the NSE that they want to borrow money. You will see lower interest expense that will boost profitability. It is in the initial stage they obtained those loans that they have a high-interest expense,” said Ibrahim.
The partial devaluation of the currency as a result of the adoption of a flexible exchange rate last year balloon the dollar-denominated debt in the capital structure of consumer goods firms. Nestle Nigeria’s finance costs reduced by 32.28 per cent to N14.88 billion in the period under review while interest coverage ratio stood at 2.89 times earnings the same period.
Flour Mills Nigeria Plc has an interest coverage ratio of 1.87 times earnings while total debt in the balance sheet fell by 23.54 per cent to N147 billion The Nigerian millers’ estimated weighted average cost of borrowing is 2.53 per cent on the N147 billion total loans in the balance sheet.
Flour Mills had unsecured borrowing amortised costs of 8.50 per cent, 9 per cent and 9 per cent for loans received from the Bank of Industry (BOI) Central Bank of Nigeria (CBN) Commercial Agriculture Credit Scheme (CACS) and Real Sector Support Facility (RSSF), which are cheaper than commercial bank facilities.
BALA AUGIE
