Vitafoam Nigeria Plc has been hit by rising interest expense that ate deep into operating profit tipping the producer of foams in a loss position.
For the year ended 30 September 2017, the company posted a loss of N127.65 million as against a loss N32.03 million recorded the previous year.
While sales spiked by 30.56 percent to N17.65 billion in the period under review, rising interest expenses have prevented top line (sales) growth from trickling down to the bottom line (profit).
Huge finance cost could undermine earnings and impact negatively on shareholders’ return. A firm with huge interest expense may have to borrow further or dip into reserve, which could be used to finance future capital projects.
Vitafoam has an interest coverage ratio of 0.99 times earnings, which means it is not generating sufficient revenue to satisfy its interest expense.
When a company’s interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. 1.5 is generally considered to be a bare minimum acceptable ratio for a company and the tipping point below which lenders will likely refuse to lend the company more money, as the company’s risk for default may be perceived as too high.
Vitafoam is aggressive in the use of debt to finance investment opportunities and taking more debt than equity as debt to equity ratio as at September 2017 stood at 175.14 percent, though lower than the 195.35 percent recorded the previous year.
Total borrowings- long and short term- was N5.90 billion as at September 2017 while total trade payables was N3.17 billion in the same period.
The company said that the term loans represent the outstanding balances on two facilities – 4-year term loan of N450 million and 4 -year term loan of N240 million granted to the parent by a commercial bank in 2015.
Vitafoam added that both loans are secured by a negative pledge on the parent’s fixed and floating assets and are carried at fair values based on cash flows discounted using effective interest rate of 20 percent.
The Group obtained loan from International Finance Corporation to finance capital construction at the Sierra Leone Subsidiary. In 2013, the loan was bought over during the year by a local bank in Sierra leone with a tenor of 4 years denominated in leones, according to Vita foams.
Despite a high leverage ratio, Vitafoam is rewarding shareholders as its board has recommended a dividend of N156.30 million, representing N0.15 per share for the year ended September 30th 2017.
Further analysis of the financial statement of the company shows cost of sales spiked by 41.57 percent to N12.60 billion as at September 2017 from N8.90 billion the previous year.
Cost of sales ratios increased to 71.22 percent in the period under review from 65.63 percent as at September 2016. This means the firm has spent on input cost to produce each unit of product.
Vitafoam’s gross margins dipped to 28.71 percent as at September 2017 as against 34.31 percent the previous year.
The company’s share price closed at N3.09 as of 2:00 pm on the floor of the exchange, valuing it at N3.02 billion.
BALA AUGIE
