International breweries piles debt
Total debt of International Breweries Nigeria Plc has risen to a level that represents 84.15 percent of its enterprise value.
A company finances its operations with a combination of debt (money borrowed from financial institutions) and equity (money it raises from shareholders).
While debt is cheaper to borrow due to the benefits of tax shield, too much of it most times result in deteriorating margins as huge interest expense or finance cost erodes operating profit. What this means is that a loss is inevitable as sales continue to grow at snail pace.
International Breweries’ capitalization ratio stood at 22.22 times or 2,222 percent as at December 2019, which implies for every N1 in equity there are 22.22 in debt on the books.
The company’s capitalization ratio was 41.09 percent or 0.41 in 2014, and then it jumped to 7.74 times or 774 percent in 2018.
The capitalization ratio compares total debt to total capitalization (capital structure). The capitalization ratio reflects the extent to which a company is operating on its equity.
This ratio helps in the assessment of risk. The companies with high capitalization ratio are considered to be risky because they are at a risk of insolvency if they fail to repay their debt on time. Companies with a high capitalization ratio may also find it difficult to get more loans in the future.
International Breweries’ total liabilities to total asset ratio (another capitalization ratio) stood at 0.97 times or 97 percent, and a ratio above 50 percent means there are more debt than equity in the balance sheet of an entity.
The company recorded as loss of N9.13 billion to end 2019 financial year as sales reduced by 5.26 percent, the first drop at the top lines (revenue) in 5 years.
The brewer’s total equity or shareholders’ fund dipped by 72.61 percent to N9.57 billion as at December 2019, while it has a negative retained earnings of N686.15 million.
A negative retained earnings means a company has been recording recurring losses.
Analysts say the brewer will have to grow sales and beer volumes in order to cover all its obligations, but the current economic macroeconomic environment has not been supporting growth.
Weak consumption spending as a result of slow wage growth, poor job creation, and eroding impact of double digit inflation has hindered a lot Nigerians from hitting the bars.
According data from Fitch solutions, household income is estimated to have grown by 8.8 percent year on year y/y to $4,252 in 2019 from US $3,908 in 2018 .2019’s 8.8 percent year on year growth is lower than the 10 .7 percent year on year (y/y) growth in 2018.
However, double digit inflation continues to hurt consumers’ ability to increase expenditure which in turn continues pressure consumer companies’ revenue.
The year 2019 marked the 7th consecutive year of inflation growing faster than income growth.
High unemployment rate at 23 percent as at the third quarter of 2019 continues to hurt consumer ability to increase expenditure which in turn continues to pressure brewers.
However, there is light at the end of the tunnel for International Breweries as parent company, Anheuser-Busch InBev, world’s largest brewer, plans to inject capital into its Nigeria’s operations via a rights issue of N165 billion.