After tapping the bond market at a record shattering pace in recent years, Notore Chemical Industries Plc is reeling with huge debt and spiraling interest paying that threatens its financial wellbeing.
While debt can often be used to boost capital expenses which impacts earnings per share, it doesn’t increase the value of a business. And in the period of economic crises as it is today, obligations are pretty much radioactive.
Perhaps more worrisome is that Notore Chemical has been hard hit by the pandemic, foreign currency volatility, and a difficult environment that its earnings or cash-flows are not enough to cover interest expenses on loans.
The company coverage ratio, which is used to see how well a firm can pay interest on outstanding debt, is 0.411 times, below the 1.5 times internationally accepted standards.
What this means is that an operating profit of N9.33 billion as at September 2020 can’t cover finance cost of N22.70 billion, and it isn’t surprising that the company recorded a loss after tax of N13.31 billion in the period under review.
Accumulated losses have hit N37.25 billion as at September 2020, what this means is the firm has recorded more losses than profit throughout its existence.
Indeed, Notore Chemical finances its operations or balance sheet through debt rather than equity, which raises the possibility of a default on debts especially now that profit and cash flow positions are increasingly deteriorating.
Notably, the company has a debt to equity ratio of 1.91 or 191 percent, which means it uses N1.91 in debt for every N1 of equity. Total debt stood at N107.63 billion as at September 2020, which is a 33.80 percent increase compared to 2019’s N79.97 billion.
Simply put, debt is 191 percent of equity, which makes the company high risk to creditors who will fret that the entity could renege on debt covenants.
The producer of fertilizer finds it difficult to meet its short term obligations to suppliers to suppliers and creditors as current liabilities are high.
In 2012, Notore Chemical raised $300 million in an initial public offering to finance its expansion, and it plans to raise N30 billion fresh capital to boost working capital and finance the completion of the ongoing Turn Around Maintainance (TAM) of its plants.
Spiking debt and falling revenue amid the pandemic and economic crisis is a triple whammy for the producer of fertilizer.
Nigeria’s economy officially entered into recession as real gross domestic product (GDP) contracted for the second consecutive quarter by 3.62 percent year on year (YoY) in the third quarter (Q3) of 2020, according to recent data from the National Bureau of Statistics (NBS)
The contraction follows a 6.10 percent YoY contraction in the second quarter, the agency adds.