International Breweries Plc is not finding it paying interest on money borrowed from financial institutions as rising debt costs tipped the company into a loss position, which jeopardizes shareholders’ returns.
The interest coverage ratio for the brewer 0.163 stood in the nine-month to September 2022, substantially lower than (0.385) as at September 2021, according to data from MoneyCentral.
The figure is a measure of a company’s ability to repay its debts, with a ratio of at least 2 generally considered the minimum acceptable amount for a company with solid revenues. Analysts typically prefer a coverage ratio of 3 or higher.
Finance cost or interest expense surged by 273.68 percent to N7.10 billion in the period under review from N1.90 billion the previous year.
As a result of rising interest payment obligations, International Breweries posted a loss after tax of N 2.80 billion in September 2022 from a loss of N14.0 billion as at September 2021.
Of course, some Nigerian firms are feeling the pinch of an aggressive monetary stance by the central bank government that has balloon borrowing costs, which means they will be paying more to service debts that were borrowed to strengthen their balance sheet and fund future expansion plans.
It must be noted that a high interest rate environment leads to poor stock valuation as investors dump equity for bonds because of fear of losing out on bumper dividends due to a squeeze in profit.
The Central Bank of Nigeria has increased interest rates to 15.5 per cent, the highest in 20 years.
The inflation rate in Nigeria continued on an upward trend as it surged to 20.77% in September 2022, up from 20.52% recorded in August.
International Breweries and peer rivals are also reeling from foreign exchange scarcity, volatility in currency, decrepit infrastructure, while the Russia and Ukraine war has added another layer of concern to rising cost of production.
However, the gradual reopening of the economy and hike in the price of key products underpinned International Breweries’ topline growth as sales was up 24.94 percent to N160.43 billion as at September 2022.