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Tuesday, March 21, 2023

Unilever’s Strong Liquidity Position Validates Financial Strength

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Unilever Nigeria Plc has maintained a strong liquidity position that validates its financial strength as a myriad of challenges has cast a pall over the future earnings of consumer goods firms.

The company has a cash ratio of 1.32 in March 2022, according to MoneyCentral calculations.

The cash ratio is one of three common methods to evaluate a company’s liquidity—its ability to pay off its short-term debt.

Liquidity measurements, such as the cash ratio, compare a company’s cash and other liquid assets to its current liabilities. This helps estimate its ability to pay off its short-term debt.

If the cash ratio is equal to or greater than one, the company is most likely in good health and not at risk of default — as the company has sufficient cash to cover its short-term liabilities.

But if the cash ratio is less than one, that means the cash and cash equivalents are not enough to cover upcoming cash outflows, which creates the need for easily liquidated assets (e.g. inventory, accounts).

A strong liquidity ratio was underpinned by Unilever’s stringent credit policy as receivables declined by 2.3 percent to N14.65 billion and analysts at Chapel Hill Denham in a recent note to client expect receivables to decline further by 4.4 percent  year on year to N14.27 billion in FY-22E.

The company recently released its first quarter financial results with net earnings surging to N1.79 billion from a loss of N491 million the previous year.

It is interesting to note that consumer goods firms in Africa’s largest economy do not have strong liquidity, but they are profitable and there is no threat to their going concerns.

Total current liabilities for them exceeds the cash generated because of mounting obligations to suppliers and difficulty in sourcing foreign currency to settle suppliers of raw materials.

Additionally, credit sales make up 70 percent of total sales as a harsh and unpredictable macroeconomic environment continues to undermine consumer spending. ‘

The average industry cash ratio stood at 0.47 in March 2022 from 0.44 percent the previous year, according to MoneyCentral calculations.

Drilling down the numbers shows the largest consumer goods firms incurred N2.04 trillion in total current liabilities as at March 2022, and that compares N597.49 billion combined cash and cash equivalent in the balance-sheet.

Cadbury has cash ratio of 79.84 percent; Vitafoam, 67.32 percent; Nestle, 51.75 percent; Northern Nigeria Flour Mills,9.84 percent; Flour Mills of Nigeria, 10.77 percent; Nigerian Breweries, 7.73 percent; Guinness Nigeria,  50.21 percent; International Breweries, 17.70 percent; Honey Flour Mills, 20.39 percent; PZ Cussons, 84.88 percent; Champions Breweries, 82.71 percent; Dangote Sugar, 52.24 percent; Nascon, 41 percent, and BUA Foods, 10.02 percent.

“We believe that FY-22E earnings and management’s progress at working capital management via credit tightening policy would continue to bode well for free cash flow to equity,” said analysts at Chapel Hill Denham.

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