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Cadbury Nigeria Plc has become the first major firm to capitulate to the currency devaluation as its total equity turned negative for the June 2023 period.
The total equity of a company, also known as the shareholders’ equity, is the difference between the company’s assets and its liabilities.
Cadbury Nigeria Plc, one of the largest consumer goods firms in Africa’s most populous nation, is technically insolvent, which indicates the need for recapitalisation as currency devaluation stoked unprecedented foreign exchange losses.
The company’s total liabilities of N76.19 billion as at June 2023, exceeded total assets of N74.65 billion as at June 2022, resulting in a negative shareholders’ equity of N1.42 billion.
If a company (or person) is technically insolvent that merely means that it has a negative net asset value; its liabilities are greater than its assets. The significance of technical insolvency depends on circumstances: it may be an indicator of serious problems that may lead to actual insolvency, or it may be perfectly acceptable.
The company booked or incurred foreign exchange losses of N20.61 billion, which caused retained earnings to fall to a negative of -N6.06 billion for the first six months of the year.
Of course, currency depreciation that gathered storm since June 14, 2023, when the central bank began allowing banks to freely trade Foreign Exchange (FX) on the Investors and Exporters FX Window, by removing the previous cap, to spur foreign direct investment led to increased foreign denominated finance obligations and lease expenses for firms.
This resulted in a 63 percent slump in the value of the Naira that trades between the bands of N791 and N795 against the dollar.
Cadbury posted a loss after tax of N14.54 billion as at June 2023, from profit of N2.34 billion the previous year; that was the first loss since 2018.
A negative net income and unfavorable working capital change resulted in the reduction in free cash flow to a negative figure of N13.42 billion, which significantly undermines dividend payment.
However, the company’s performance is impressive at the operating level as it guarantees money from core activities.
Operating profit surged by 113.73 percent to N6.07 billion as at June 2023, thanks to cost containment and increases in revenue.
There is light at the end of the tunnel because foreign exchange losses are one off events, which do not recur at all times. However, analysts say the volatility in currency will extend till next year.
The market reacted negatively to the results as the consumer goods giant’s share price declined by 10.00 percent to N15.3/share from N17.00/share as at the close of market yesterday. It is currently trading at EV/EBITDA of 2.88x.