While Nigerian companies have a combined N4.18trn cash and cash equivalents in their books as at June 2024, they are not liquid enough to meet short term obligations.
These firms have generated a combined cash and cash equivalent of N4.18 trillion, which is lower than N15.11 trillion total current liabilities, which indicates the need for them to restructure their credit policy and generate higher earnings.
“There are few possible explanations to rising current liabilities viz a viz cash and cash equivalent. First, given the high-interest rate environment, companies would seek to reduce interest bearing debt and find ways of optimizing their cash utilization. This may mean extending their invoice payment policies with suppliers/vendors and deferring some payments to manage liquidity and reduce the pressure for borrowing given the high cost of capital at this time,” Abiola Rasaq, financial analyst and former head, Investor Relations at UBA Plc, told MoneyCentral.
“A number of the non-financials booked losses on the back of their FX exposures, thus distorting their financials. Such may also reflect in higher liabilities, with attendant implications for liquidity pressure, as they fleece more Naira liquidity to meet the foreign currency obligation,’’ said Rasaq.
The rising interest rates brought on by stubborn inflation as well as currency risk due to a sudden devaluation has a dealt a great blow on companies who don’t have enough cash to meet their day-to-day operations.
The average cash ratio of non-financial firms dipped to 33.56 percent as at June 2024 according to MoneyCentral calculations.
The cash ratio is a liquidity measure that shows a company’s ability to cover its short-term obligations using only cash and cash equivalents. The cash ratio is derived by adding a company’s total reserves of cash and near-cash securities and dividing that sum by its total current liabilities.
A calculation that’s greater than one means that a company has more cash on hand than current debts. A calculation of less than one means that a company has more short-term debt than cash.
The naira has depreciated against the US dollar by 69.47 percent under the current administration led by President Bola Ahmed Tinubu amid the implementation of foreign exchange reforms.
Consumer prices rose 34.2 percent in June from 34 percent a month earlier, according to data published on the website of the National Bureau of Statistics. The median estimate of eight economists in a Bloomberg survey was 34 percent.
Nigeria’s central bank has increased its benchmark lending rate by 150 basis points to 26.25 percent, up from 24.75 percent. This marks the third rate hike in 2024, following significant increases in February and March of 400 and 200 basis points respectively.
The average cash ratio of consumer goods firms stood at 0.36 percent in June 2024 from 40 percent the previous year as the sector is the hardest hit from the currency devaluation, rising inflation, and decrepit infrastructure.
Companies may have to adjust to a new credit policy with their distributors to sustain sales and support distributors, who may find it more challenging to access credit at the elevated rate environment, according to Rasaq.
“In such instances, the cash conversion cycle of companies increases and puts pressure on their liquidity, and would reflect on their current liabilities, as they seek to finance their higher receivables with some form of current (short term) liabilities as well,” Rasaq said.
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