Nestle Nigeria Plc, the largest consumer goods firm listed on the Nigerian Stock Exchange (NSE), demonstrated greater solvency in the first half of 2019 on the back of reduced debt profile.
This implies the firm was better positioned to settle its long-term obligations. However, if Nestle’s short-term debts were all due at once, the firm cannot covert all its financial resources to pay off the commitments.
This implies for the company to pay its debt due within a year, despite a 22 percent growth its post-tax profit to N26.25 billion in the first half of 2019, it would have to sell an asset, raise more capital through long-term debt or most likely go bankrupt.
Checks on Nestle Nigeria’s balance sheet in its unaudited financial results for the half-year 2019 show the company’s debt-to-equity ratio, a financial metric that measures the ability of shareholders’ fund to cover all liabilities, fell to 2.56x in the review period when all liabilities are considered, but stood at 0.14x when its debt is considered.
These are lower values when compared to 2.57x and 0.39x recorded in the first half of 2018, respectively.
Nestle Nigeria ensured it lower external funding and increase internal financing. This became evident after the debt-to-assets ratio was used to gauge the company’s financial leverage and the percentage of its assets that were financed by creditors.
In the first half of 2019, Nestle’s debt-to-assets ratio fell marginally to 0.71x from 0.72x recorded in the same period of 2018, this shows that 71 percent of the company’s assets was funded by its owners’ fund. This signals lower risks when compared with the previous year.
Further findings revealed that both short and long-term debts have been declining in the last three years. Long-term debt halved in the first half of 2019 to N5.48 billion compared with N10.98 billion achieved in the same period of 2018, and N15.8 billion in 2017.
Short-term debt fell off the billion-naira threshold in the review period to N933 million, bringing both debt obligations to N6.41 billion, the lowest since 2013, according to available data.
While it remained solvent to meet its long-term obligations, the company could not sustain its impressive liquidity performance for the half-year 2018 in the review period on the back of waned near-cash assets.
An acid test ratio conducted on Nestle’s financials shows a significant portion of its current asset was trapped in lesser liquid assets like inventory and prepayment as the ratio stood at 0.59x in the first six months of 2019 as against 0.69x a year earlier.
Acid test ratio, also known as quick ratio, is a liquidity ratio that measures of the ability of a company to translate its assets into cash within a year to meet its current liabilities. The higher the better for the company.
A company’s currents assets include its cash and cash equivalents, receivables, inventories, are other assets that can easily be turned into cash within a year, while its current liabilities include payables and other short-term obligations.
When its current ratio, a liquidity ratio which measures a company’s short-term liquidity position and ability to pay obligations due within a year using its current assets, was examined, it was discovered that the ratio fell to 0.86x, the lowest level in three years.
This indicates the firm would only be able to cover 86 percent of its current liabilities with its near-cash assets as against a 100 percent current ratio recorded in the corresponding period of 2018.
Meanwhile, Nestle Nigeria continued to maintain steady growth in its top line since 2015 largely driven by sales recorded from the Nigerian market. Revenue grew 4.89 percent to N141.9 billion as against N135.3 billion.
“The principal activities of the company continue to be the manufacturing, marketing and distribution of food products including purified water throughout the country,” the company said in its financial results for the period. “The company also exports some of its products to other countries within and outside Africa.”
Nestle demonstrated improved efficiency in turning every naira generated from sales to higher profits as margins rose to new highs triggered by its cost-cutting strategies.
Cost of goods sold fell some 4.88 percent to N75.8 billion from N79.7 billion, pushing its gross margin to 46.6 percent from 41.1 percent. Operating margin, a profitability measure that gauges the return on sales generated for a business, rose to 18.5 percent from 15.9 percent.
Also, Nestle recorded its first positive H1 net finance cost of N2.42 million since 2012, contributing to a 26.87 pre-tax growth.
Shares of Nestle closed unchanged at N1,300 per share on the Nigerian Stock Exchange (NSE) on Friday. The stock lost 12.46 percent off its market value year-to-date.
OLUWASEGUN OLAKOYENIKAN
