Flour Mills of Nigeria Plc payment in advance on deposits for import and suppliers has spiked as rising interest payment on money borrowed from banks and sundry creditors squeeze profit.
The largest miller by market capitalisation, sales, and profit and market capitalisation saw prepayment and deposit for import surge by 170.65 percent to N149.63 billion as at December 2022 from N55.58 billion the previous year.
Import deposit is a sum of money paid to the government by importers of a specified good on arrival of the good in the country prior to its eventual sale. Import deposits are used primarily to discourage imports as a means of protecting a country’s balance of payment deficits.
Drilling down the above figures shows deposit for imports (letters of credit) jumped 38.46 percent to N37.76 billion in December 2022 from N27.27 billion the previous year. Deposit for FX relating to forward and futures contracts spiked by 449.29 percent to N50.59 billion while advance payment to suppliers surged by 308.59 percent to N57.98 billion as at December 2022.
Of course, Flour Mills has been flayed by the hike in interest rate by the central bank which led to elevated bond yields as the company is paying more on interest payment that erodes profitability.
To tame red-hot inflation, the Monetary Policy Committee of the Central Bank of Nigeria (CBN) increased the benchmark interest rate in the country by 100 basis points to 17.50 per cent from 16.50 per cent.
The company’s finance costs increased by 132.63 percent to N37.50 billion from N16.12 billion the previous year.
Rising finance costs are gradually making the balance sheet unhealthy as the consumer goods giant will soon be finding it difficult to pay interest on its outstanding loans as the interest coverage ratio of 1.38 is lower than the 1.50 acceptable benchmark.
Four Mills has total debt of N494.29 billion in the balance sheet, which is 59.75 percent higher than 2021’s N309.40 billion.
Of course, the proportion of debt in the capital structure of the company is high, which exposes it to financial risk when it no longer has enough earnings to absorb interest payment.
Debt to equity ratio increased to 2.49 in December 2022 from 1.57 percent the previous year.
A debt to equity ratio of 2.49 means total debt of N494.29 billion is 2.49 times total equity.
As a result of mounting obligations and continuous increment in cost of production, Flour Mills’ net income fell by 41.25 percent to N10.01 billion as at December 2021.
It is important to note that cost pressures from the pass-through impact of currency depreciation and the highly inflationary environment weighed on the margins of manufacturers.