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Consumer Goods Firms Face Liquidity Crisis After Earnings Bloodbath

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Consumer goods firms are running low on cash to repay their short term debts and face an uphill struggle to raise fresh funds in the face of rising borrowing costs as their earnings have disappeared in a puff of smoke.

The average industry cash ratio stood at 0.45 as at September 2023, which makes them a short term risk for creditors, investors, and banks who might be reluctant to lend them money unless they shore up capital or embark on a working management strategy.

The cash ratio is a liquidity measure that shows a company’s ability to cover its short-term obligations using only cash and cash equivalents. The cash ratio is more conservative than other liquidity ratios because it only considers a company’s most liquid resources.

A calculation greater than 1 means a company has more cash on hand than current debts, while a calculation less than 1 means a company has more short-term debt than cash.

Firms need cash to settle suppliers of raw materials, pay dividends and fund future expansions.

The total current liabilities of listed consumer goods firms stood at N3.1 trillion as at September 2023, which is higher than the cash and cash equivalent of N986.21 billion, according to data gathered by MoneyCentral.

“Given the elevated interest rate environment, companies are generally more disciplined with their cash management and many manufacturing companies would also seek to partly finance their working capital through trade credits with suppliers, by elongation their invoicing policies and overall days of payables,” said Abiola Rasaq, former Economist and Head, Investor Relations for United Bank for Africa (UBA).

“Whilst changes in payment terms with suppliers of raw materials and service vendors may sometimes mean paying slightly higher price, such premium pricing would likely be cheaper than the current cost of debt capital in Nigeria, given the unduly prolonged monetary policy tightening,” said Abiola.

It is noteworthy that most firms may not be paying dividends to their owners as they posted net losses on the back of foreign exchange losses brought on by the unexpected devaluation of the currency by the central bank that ballooned dollar denominated liabilities.

The largest consumer goods firms posted a loss after tax of N57.12 billion as at September 2023, from a profit of N152.64 billion the previous year. However, BUA Foods, Unilever, and Guinness, and Nason Allied, bucked the trend as they posted profit of N105.61 billion, N1.66 billion, and N2.56 billion, and 11 billion respectively.

 “With N41.13 billion negative retained earnings, Nestlé is in need of recapitalization in order to continue to sustain activities,’’ said analysts at Chapell Hill Denham Limited in a recent report.

There are concerns that rising interest rates that have led to spiraling bond yields makes it difficult for companies to raise new capital to pay existing debt and fund expansion plans. And most of them are seeing a rise in finance costs which further cast a pall on future earnings growth.

Consumer goods firms are struggling with sticky inflation, slow consumer spending and currency volatility and a myriad of challenges.

Nigeria’s inflation rate jumped for a ninth straight month in September on rising transport and food prices, and may prompt policymakers at the central bank to hike borrowing costs at its next meeting.

Consumer prices rose 26.70 percent year-on-year, compared with 25.8 percent in August, according to recent data published by the  National Bureau of Statistics (NBS).

The Monetary Policy Committee (MPC) of the Apex Bank has increased its benchmark interest rate (MPR) for the third time this year by 50 basis points to 18.5 percent in its recently concluded MPC meeting.

The Nigeria 10 year government bond has a 15.307 percent yield, according to data from World Government Bond.

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