34.2 C
Lagos
Thursday, March 28, 2024

Manufacturers Falling Cash Margins Validates Ineffectual Earnings Quality

Must read

spot_img
- Advertisement -
Listen now

Investors who have invested their money in industrials in the equity market should be wary as the manufacturers in Africa’s largest economy are not efficient in converting sales into cash, which validates poor earnings quality.

The deteriorating ratio laid bare that most firms have declared paper profit.

For instance, the average industry operating cash flow margin of the largest and most liquid firms reduced to 18.42 percent in December 2022 from 23.78 percent as at December 2021, according to MoneyCentral calculation.

The cash flow margin is one of the more important profitability ratios for a company.

It tells how well the company converts sales to cash—and cash is of critical importance because it’s required to pay expenses. The conversion of sales naira to cash is vital. A higher ratio is always better, as it indicates that a greater proportion of revenues are being turned into cash flows.

Of course, the ratio is pivotal in analysing firms because it is not easy to manipulate cash; in short, profit margins are susceptible to window dressing and accounting shenanigans.

Data compiled by MoneyCentral shows the cumulative cash flow from operating activities of listed manufacturers stood at N1.55 trillion as at December 2022, which is 7 percent lower than 2021’s N1.65 trillion.

Analysts say it is important for firms to pay attention to working capital management and ensure that they collect money owed to them on time, turn inventories to revenue, and if possible, delay payment of creditors.

“Some firms may be growing sales due to the relaxation of credit and such revenue might not be included in the operating cash cycle,” said Rasaq Abiola, former investor relation manager at United Bank for Africa (UBA).

“And if a firm does not have adequate cash, it may soon need to borrow more working capital to finance its operations,” said Abiola.

Of course, company executives have attributed the improvement in sales that led to an increase in profit to the hike in the price of key products to compensate for rising input costs brought on by red-hot inflation and severe foreign exchange scarcity.

However, there are concerns that manufacturers who operate in a challenging environment may not be able to further pass on costs to consumers in the form of higher prices in a country where over 50 percent of a population of 200 million live on less than $1.98 a day.

KPMG, multinational consulting firm, has stated that the Nigerian unemployment rate had increased to 37.7per cent in 2022 and will further rise to 40.6per cent, due to the continuing inflow of job seekers into the job market.

The country’s inflation, which has been rising since the first quarter of last tear hit 21.91 percent in annual terms from 21.82 percent in January, according to the National Bureau of Statistics (NBS).

The average industry cash margin for consumer goods firms fell to 14.98 percent in the period under review from 21.65 percent the previous year.

However, BUA Foods Plc bucked the trend as cash margin increased to 28.43 percent in December 2022 from 26.04 percent the previous year.

BUA Cement, Dangote Cement, and Lafarge Africa, the largest producer of the building materials, saw cash margin reduced to 37.41 percent in December 2022 from 50.92 percent the previous year.

Most firms burned cash stock piling imported raw materials as they were ramping up production to hedge against foreign currency risk, exchange scarcity and concerns over elections.

The outlook for the economy remains bleak with economists seeing a slowdown in productivity and GDP on the back of the cash carnage that crippled small business activities as 40 percent of traders are in the informal sector.

Private sector productivity in Nigeria experienced a downturn due to the country’s recent cash crunch as Stanbic IBTC Bank Purchasing Managers’ Index (PMI) dropped to 42.3 points in March, 2023.

The headline figure derived from the survey is the Purchasing Managers’ Index (PMI). Readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show a deterioration.

“Companies reduced staffing levels slightly for the second month running, in part reflecting lower workloads but also due to difficulties paying wages. Lower workforce numbers limited the pace of staff cost inflation, which eased to a marginal rate that was the slowest since January 2021,” said Stanbic IBTC.

- Advertisement -

More articles

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.

- Advertisement -spot_img

Latest article