Cash is king” and a company that does not generate cash over the long term is on its deathbed. That means it could be placed on a life support machine, and the doctor may have to pull the plunge, which means the company has seized to exist in the foreseeable future.
A company uses cash to honour obligations, pay dividend, and fund future expansion.
The sharp decline in the purchasing power of consumer is undermining the revenues and cash flow flows of consumer goods firms, raising concerns about the working capital position of companies that need cash to run their business.
Nigerian consumer goods firm are not generating enough cash compared to net income, as their cash conversion ratio (CCR) are in the negative territory, which means they have liquidity challenges.
For instance, the average industry CCR is -1.80, with major laggards being Unilever, Honeywell, and Nascon Allied Industries.
The Cash Conversion Ratio (CCR), also known as cash conversion rate, is a financial management tool used to determine the ratio of the cash flows of a company to its net profit
The resulting ratio from this calculation can be either a positive value or a negative value.
This can be summarized as: if the ratio is anything above 1, it means that the company possesses excellent liquidity, while anything below 1 implies it’s a weak CCR. Anything negative suggests the company is incurring losses.
“Cadbury had some challenges with its intermediate Cocoa product, snd that would have flowed into its cash flows. Dangote Sugar had disappointing results this quarter, which would have also flowed into its cash flows,” said Omotola Abimbola, Macro and Fixed Income analyst with Chapel Hill Denham Limited.
A breakdown of the figures showed some firms bucked the trend, Nestle Nigeria, Flour Mills, and Nigerian Breweries, recorded CRR of 1.26, 1.63, and 2.0.
Companies are operating in harsh operating environment, while a hike in fuel price, devaluation of the currency, and inflationary pressures have squeezed consumer wallets.
Nigeria’s economy has been growing sluggishly since the country exited a recession in 2016, while over 50 percent of a population of 200 million live on less than $1.29 a day.
According to a recent report by the National Bureau of Statistics (NBS), Nigeria’s gross domestic product (GDP) expanded by 1.94 percent in the second quarter of (Q2-2019), from the revised first quarter (Q1-2019) print of 2.10 percent.
The trade sector which comprises of whole and retail trade contracted by 0.25 percent in the second quarter (Q2) of 2019, after recording three positive growth rates since the third quarter of (Q3 2018).
More worrying, manufacturing sector contracted by 0.13 percent from the 0.81 percent expansion in Q1-2019. The contraction contradicts evidence from manufacturing PMI data published by the CBN in the period which suggested that activities continued to expand, albeit at a weaker pace.
Companies are not utilizing cash in generating enough profit and revenue, raising concerns about their ability to breakeven.
The cumulative operating cash flow from operations for the 10 largest firms quoted on the floor of the bourse fell by 24.63 percent to N82.43 billion in June 2019 from N109.38 billion the previous year.
The major laggards are: Unilever with negative cash flow from activity of 11.79 billion; Honeywell (1.09 billion); and Nascon Allied, -N309.12 million.
Companies are struggling with deteriorating margins, which hinders them from delivering higher returns on shareholders return in form of higher dividend and share appreciation.
Analysts see an improvement in economic activities if Federal Government implements structural reforms, but the Buhari led administration seems not to be nimble enough to break the shackle of poverty.
During economic boom, people open their purse spring, while manufacturers and retail record increased sales and cash flow, paving the way for them to acquire more assets to fund future expansion plans.
Consumer goods firms will continue to be ensnared in a dungeon, so long as the country is bedevilled with infrastructure deficit.
The Apapa grid lock has been a tsunami, disrupting production as raw materials are trapped at the ports.
BALA AUGIE
