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Appraising Nigeria’s foam industry: Vitafoam as a case study

There has been growing interest in the nation’s foam industry, due to the massive housing needs of the populace, which cannot be met without items such as beds, furniture made of foam materials. The housing deficit in Nigeria is put about 21 million units, and this goes to show that the market for foam and other bedded materials is huge.

There are many players in this sector such as Vitafoam, Mouka foam, Vono foam, Sara foam, and a whole lot of unbranded foams. This analysis is based on Vitafoam Nigeria Plc because it is listed on the Nigerian Stock Exchange, meaning that information on its financials and board membership is readily available to analysts and other stakeholders.

Vitafoam is one of the producers of polyurethane products in the country. It is listed on the Nigerian Stock Exchange (NSE) with a market capitalization of N5.4 billion early September. Its operations cover four main business units: flexible foam, rigid foam, technical products, and adhesives.

The analysis has as its reference period from 2013 to 2018. We adopted key financial metrics such as solvency ratios, efficiency ratios and profitability ratios. Interestingly, revenue grew in 2018 when compared with the preceding years. In 2016, turnover as N13.6 billion and it grew by 30 percent to N17.7 billion in 2017 and by additional 10 percent to N19.5 billion in 2018. The growth in revenue within the period was higher than the GDP growth rate of the manufacturing sector which hovered around 2 percent during the period.

The growth in turnover was in spite of the preponderance of low-income earners that constitute over half of the people living within the Nigerian economy and amidst stiff competitions from close rivals in the same industry.

However, liquidity position of the foam industry is put at 200 percent for current ratio and 100 percent for acidic ratio, based on available data. Current ratio averaged 1.39 times over the past five years between 2013 and

2018. Put differently, this means, its current assets cover its short-term obligations by 139 per cent; this figure is below the bench mark of 200 per cent. Current ratio, however, showed a 3-year downward trend in its growth pattern between 2016 and 2018. This suggests that the company needs to improve on its liquid assets when measured up with the industry average.

In the same way, acid test ratio, a more pertinent measure of the ability of a business to meet up liabilities as they fall due, showed a five-year average of 0.27 times (this is below the bench mark of 100 per cent). Conversely, this means only 27 per cent of the company’s short term obligations are covered by its liquid assets.

Acidic ratio for the past five years displayed a downward trend. In 2018, this index stood at 0.20 times; the value declined by 16 per cent from 0.24 times when compared with preceding year (YOY). The company recorded an all-time high value of 0.40 times in 2015; this upward trend is attributed to decline in inventory by7 per cent from 15 per cent in 2014.

During the same period, inventory management indices show an average holding period of 149 days. While inventory turnover declined slightly from 2.6 times in 2017 to 2.5 times in 2018. These observations therefore suggest the company has somewhat improved in its efficient inventory holding management when compared with preceding years.

Operating margin as a percentage of the total revenue revealed a fluctuating trend pattern. The margin, with a five-year average of 8 per cent up from 9 cent in 2013 to 11 per cent in 2018. This improvement was as a result of the reduction in the following cost – administrative expenses and distribution cost whose percentage growth on the average is lower than growth in gross profit over the five years under consideration.

Again, profit margin has been flat; however, there is a noticeable fluctuation trend in the growth rate which suggests a downward trend over the past five years, which is as a result of increasing production costs evidenced in the upward trends in the cost of sales to turnover. Profit margin has been flat for two successive financial periods 2016 and 2017 respectively, comparatively; no growth wasrecordedwithinthereviewperiod,butin2018 profit margin up by 6 per cent.

Similarly, net income margin leapt by 2 per cent from a negative value of 1 per cent in 2017 to 3 per cent in 2018, the slight rise in net income margin in 2018 was due to an increase in sales which by geographical segmentation; Nigerian market contributed 99.9 per cent of total sales revenue.

Return on Average Assets (ROAA) and Return on Average Equity (ROAE) – these ratios analyse the returns on total investment made in the company as a percentage of the value of its total assets and how well a company uses investments to generate earnings. Growth in ROAA has been consistent for the past 3 years with an average growth rate of 10 per cent within the considered period, the margin rose from 10 per cent in 2017 to 13 per cent in 2018. Similarly, ROAE recorded a resurgent growth in 2018 when compared with previous financial years.

Dividend pay-out ratio, represents the percentage of net income that is distributed to shareholders in the form of dividends during the year. Investors are particularly interested on this ratio, so as to ascertain if the company is paying out a reasonable portion of its net income to investor. At N601.9 million net incomes for FY2018; Vitafoam Nigeria paid out 29 per cent of its dividend to investor while 71 per cent was retained as earnings.

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