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Manufacturers who are beset by foreign exchange losses may have to sell or liquidate other assets if forced to pay all liabilities or debt as a higher interest rate forces them to adopt a more cautious cash management strategy.
The average cash ratio of manufacturers who are members of the NGX ASI index stood at .47 in June 2o23, from 0.51 as at June 2022, according to MoneyCentral calculations.
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.
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.
There are concerns in the near term, firms could face a liquidity crunch with banks hesitating to loan them money to fund their operations.
It is important to note that manufacturers sit on a combined cash pile of N1.47 trillion in their balance sheet as at June 2023, but that is lower than the cumulative current liabilities of N4.52 trillion, according to data gathered by MoneyCentral.
“I think a number of factors are important to consider in drawing a conclusion from such observation, including consideration of the trend and overall changes in the structure of the balance sheet,” said Abiola Rasaq, former economist and Head Investor Relations for United Bank for Africa (UBA).
“That being said, 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 elongating their invoicing policies and overall days of payables,” said Rasaq.
Firms need cash to buy tangible assets, inventories of raw materials, meet financial obligations, and pay dividends to shareholders.
However, some of the big ones have a strong free cash flow and a healthy balance sheet to weather any macroeconomic shocks.
Dangote Cement Plc, the most capitalised firm and largest producer of the building materials in Nigeria, has cash and cash equivalent of N320.71 billion as at June 2023, which is lower than N1.31 billion total current liabilities.
Nigerian Breweries Plc sits on N34.11 billion cash that is lower than N518.37 billion current liabilities.
Fidson Healthcare Plc has cash and cash equivalent of N2.91 billion at June 2023, lower than N19.77 billion current liabilities.
Notore Chemicals Industries Plc has cash and cash equivalent of N3.36 billion that is lower than N100.14 billion current liabilities.
It is worrisome that manufactures are the hardest hit from decrepit infrastructure, supply chain bottlenecks, rising interest rate, high inflation, multiple taxation, and volatile foreign currency as they are still reeling from foreign exchange scarcity threatening to tip the industry over the edge.
Nigeria’s inflation surged to 24.08 percent in the month of July 2023, a 129 basis-point increase compared to 22.79 percent recorded in the previous month.
Frank Onyebu, Chairman, MAN, Apapa branch, Onyebu said the industry is beset by record-high inflationary pressure, high interest rates foreign exchange , multiple taxation, high energy costs, forex illiquidity, shortage of raw materials, among others.
He added that supply shortages, surging material prices and difficulty in hiring qualified staff stalled the growth of the manufacturing sector.
“The increase in the local raw materials utilisation in the sector during the period is due to increased difficulty in sourcing forex, which compelled manufacturers to look more inward for raw materials notwithstanding the associated huge cost,” said Frank Onyebu, Chairman, MAN, Apapa branch, Onyebu.