Nestle Nigeria Plc has taken on loads of debt to fund future expansion plans as the consumer goods giant recorded earnings growth that is enough to cover interest expense.
The company that engages in the manufacturing, marketing, and distribution of food products, including purified water throughout the country, has total debt of N155.30 billion in its balance sheet as at December 2022, which is 102.05 percent higher than 2021’s N76.86 billion.
Debt to equity ratio increased to 512.68 percent in the period under review from 359.19 percent the previous year, according to MoneyCentral calculations.
A high debt to equity ratio means the company finances its operations with borrowed money than equity capital provided by the owners, and it is gradually being considered by lenders as a risky business.
Of course, Nigerian companies who had taken advantage of a low interest rate environment between 2019-2021 to tape the fixed income market are now seeing debt balloon due to the aggressive monetary stance of a central bank that seeks to tame red-hot inflation that was exacerbated by rising war between Russia and Ukraine war, insecurity in food producing regions, and foreign exchange scarcity.
Nigeria 10 year bond yield was 14.23 percent on Monday February 27, according to over-the-counter interbank yield quotes for this government bond maturity.
A higher bond yield which stokes borrowing costs makes it difficult for firms to raise debt capital to expand their business as they will be paying more interest on existing debt.
The Monetary Policy Committee of the central bank had voted to increase the benchmark interest rate by 100 basis points to 17.5 per cent.
Nigeria’s inflation rate resumed its upward trend in January 2023, hitting a record high of 21.83 percent.
Despite a challenging operating environment, Nestle Nigeria’s net income grew by 22.30 percent to N48.96 billion as at December 2022 from N40.03 billion as at December 2021.
Revenues were up 27 percent to N446.81 percent as at December 2022, thanks to a hike in key products that help compensate for rising input cost.
However, there are concerns that consumer-goods companies face the challenge of raising prices without driving shoppers away.
This is because over 50 percent of a population of 200 million people live on less than $1.98 a day as inflation continues to erode the purchasing power of consumers who are also reeling from higher utility bills.
The country has an unemployment rate of about 33%, which means that about one in four Nigerians is unemployed.