Nigerian consumer goods firms are finding it difficult to earn cash from their main business operations due to growing inflation, declining consumer purchasing power, and the devaluation of the naira.
As a result, amidst a high-interest rate environment, these firms have increased their overall borrowings order to finance their working capital (a measure of a company’s liquidity and short-term financial health) obligations.
Data gathered by BusinessDay on Dangote Sugar Refinery Plc, BUA Foods Plc, Nestle Nigeria Plc, Cadbury Nigeria Plc, Nigerian Breweries Plc, and NASCON Allied Industries Plc reveal that total borrowings by these firms were up 38.63 percent in 2022 while total cash from operations (with the exclusion of BUA Foods who reported a 14,117 percent increase) was down by 32.01 percent during the period.
Furthermore, the data reveals that five (5) of these six (6) firms increased their short-term borrowings while having reported a decline or no increase in long-term borrowings during the period.
According to Ayodeji Ajilore, an investment research analyst at ARM Securities Limited, “if they are borrowing more for short term, it would be attributed to the elevated cost of production which ordinarily would encourage increased working capital requirements. On the other hand, long-term borrowing suggests a business expansion drive.”
“For instance, Dangote is keen on expanding in Africa, and leveraging the debt market for such activity is not out of place. In summary, we credit the recent surge to elevated working capital requirements which has led most firms to the debt capital market,” he added.
Working capital financing is when a business borrows money to cover day-to-day operations and payroll rather than purchasing equipment or investment.
Company Analysis
Nigerian Breweries
Nigerian Breweries reported a 337 percent surge in loans and borrowing for the period ending December 2022 amounting to N112.25 billion from N27.99 billion in the previous year, causing net debt to spike by 788 percent N100.07 billion in 2022 from N11.26 billion in 2021.
Data shows that the company borrowed more for working capital than for expansion, as short-term borrowings reported by Nigerian Breweries increased by 401.55 percent in 2022, while long-term borrowings declined by 40.59 percent.
This is evident given that total cash from operations generated after working capital changes was severely constrained by the difficult economic conditions, growing by 0.17 percent to N59.74 billion in 2022, largely due to the increase in trade receivables and inventories reported during the period.
Net cash from financing activities for the period amounted to N82.06 billion in 2022 due to the proceeds from new loans and borrowings received during the period which totaled N161.05 billion.
Nigerian Breweries, as part of financing activities, spent N66.78 billion repaying loans and borrowings, N4.65 billion paying interests, and N7.59 paying dividends during the period.
Read also: Bua Cement’s profit wilts on High OPEX, finance costs
Cadbury Nigeria Plc
Having reported a negative cash flow from operating activities after working capital changes due to the cash outflow from the increase in inventories, trade and other receivables, and prepayments, Cadbury Nigeria Plc reported a 127 percent increase in total loans and borrowings in 2022.
Its total loans and borrowings increased to N23.81 billion in 2022 from N10.48 billion in 2021, while cash flow from operations for the period was N-507.78 million.
The FMCG increased both its short-term and long-term loans during the period by 318 percent and 65.36 percent respectively during the period, indicating that it took out more loans to cater to its day-to-day operations.
However, data from its cash flow from investing activities shows that it acquired new property, plants, and equipment during the period amounting to N2.4 billion, thereby bringing net cash flow from investing activities to N-694 million.
Net cash flow from financing activities amounted to N12.64 billion in 2022 due to the additions to import finance facilities totaling N14.2 billion during the period. It also repaid import finance facilities of N1.88 billion during the period.
Nestle Nigeria Plc
Nestle’s borrowings were up 102 percent to N155.3 billion in 2022 from N76.86 billion in 2022, with short-term borrowings accounting for the rise in total borrowings.
The firm’s short-term borrowings were up 1,819 percent to N8.29 billion in 2022 from N432 million in 2021, while its long-term borrowings were up 92 percent to N147.01 billion in 2022 from N76.43 billion in 2021.
Cash from core business operations of Nestle declined by 79.76 percent to N18.18 billion in 2022 from N89.84 billion in 2021 due to the cash outflow from the increase in inventories, trade and other receivables, and prepayments.
Nestle acquired right-of-use assets, and property, plant, and equipment during the period amounting to N27.72 billion, and received finance income and proceeds from the sale of old property, plant, and equipment amounting to N4.78 billion and N78 million respectively during the period, thereby bringing net cash flow from investing activities to N-22.87 billion.
Net cash flow from financing activities for the period was N44.24 billion due to proceeds from obtained intercompany and bank loans amounting to N51.57 billion and N50.44 billion. It also repaid bank loans totaling N42.91 billion and paid dividends of N14.03 billion in 2022.
NASCON Allied Industries
Borrowings reported by NASCON increased by 12,284 percent to N4.83 billion in 2022 from N38.57 million in 2021.
Data from the Nigerian Exchange Group shows that the FMCG reported short-term borrowings of N4.79 billion in 2022 having reported none in 2022, while long-term borrowings grew flat at N38.57 billion in 2022, indicating that it borrowed more money to finance its working capital needs.
Cash flow from operations after working capital changes declined by 16 percent to N4.87 billion in 2022 from N5.79 billion in 2021 due to the increase in inventory, trade and other receivables, and prepayments during the period.
NASCON received borrowings of N4.79 billion, while it paid dividends and lease liabilities amounting to N1.06 billion and N375 million in 2022 bringing net cash flow from financing activities to N3.36 billion.
OUTLIERS
BUA Foods Plc
BUA Foods’ borrowings declined by 20.57 percent to N195.43 billion in 2022 from N246.05 billion in 2021, with short-term borrowings accounting for the decline.
Its short-term borrowings declined by 20.96 percent to N190.62 billion in 2022, while long-term borrowings declined by 1.64 percent to N4.81 billion in 2022.
Cash flow from operations after working capital changes spiked by 14,117 percent to N133.92 billion in 2022 from N942 million in 2021 indicating that it grew its ability to generate more cash from its core business activities during the period.
BUA Foods acquired property, plant, and equipment totaling N10.18 billion, and biological assets of N161 million, bringing negative net cash flow from investing activities to N10.30 in 2022.
It received proceeds from new borrowings amounting to N56 billion, repaid borrowings of N106.7 billion, paid dividends and finance costs totaling N63 billion and N7.88 billion respectively in 2022, bringing net cash flow from financing activities to N-121.78 billion in 2022.
Dangote Sugar Refinery Plc
Total borrowings reported by Dangote Sugar Refinery dipped by 21.24 percent to N775 million in 2022 from N984 million in 2021, on the back of a 30 percent decline in long-term borrowings during the period.
Short-term borrowings, on the other hand, increased by 10.91 percent to N244 million in 2022 from N220 million in 2021.
Due to an N75.77 billion increase in trade payable, an N11.74 billion decrease in inventory, an N57.22 billion decrease in trade receivables, and an N1.6 billion increase in other liabilities, cash from operations declined by 11.21 percent to N115.05 billion in 2022 from N129.57 billion in 2021.
As part of financing activities, Dangote Sugar Refinery repaid borrowings, dividends, and interests during the period, bringing the net cash flow from financing activities to N-13.97 billion in 2022.
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