Consumer firms current debt level doesn’t call for deleveraging

Consumer firms current debt level doesn’t call for deleveraging

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Total debts in the balance sheet of Fast Moving Consumer Goods Firms (FMCGs) in Africa’s largest economy have inched up slightly, but the current levels may not call for another round of deleveraging exercise.

Deleveraging is when a company or individual attempts to decrease its total financial leverage. In other words, it is the reduction of debt.

The most direct way for an entity to deleverage is to immediately pay off any existing debts and obligations on its balance sheet.

Consumer goods firms saw huge debt in their books after a devaluation of the currency of 2014 and 2016 balloon dollar denominated debt their capital structure. However, the introduction of the a new foreign exchange policy by the central bank in 2017 gave firms the leeway to tap the equity market and raise capital inform of Rights issue to reduce the debt obligations to both short and long term creditors.

For the first three months through March 2019, the largest firms incurred total debt (long and short) of N269.89 billion, this represents a 1.97 percent increase from N264.67 recorded the previous year.

That compares with a 20.57 percent increase recorded in the period corresponding period of 2017 and 2016.

The average industry debt to equity ratio increased to 32.15 percent in the period under review from 29.12 percent as at March 2017.

A debt to equity ratio0 shows in the proportion of debt to equity in the balance sheet of a firm.

Companies finance their operations with a combination of money they borrow from financial institutions, which is called by debt, or raise money from owners, which is called equity.

It is generally prudent for a company to curtail the debt in its books because too much obligation could expose it to financial risk, the risk that interest payment could erode earnings. Put in another way, a company with protracted huge obligations is susceptible to bankruptcy.

The combined total finance cost or interest expense of these firms dipped by 39.53 percent to N21.56 billion in the period under review from N36.65 billion the previous year.

Obligations to short term suppliers have reduced as total payables reduced by 19.31 percent to N381.94 billion in the period under from N 473.37 billion the previous year.

A breadown of the figures show 50 percent of companies have not debt in their capital structure, which means they can tap into the bond market to fund future expansion plans with a view to increasing their share of the market.

Firms that fall into the above catergories are Dangote Sugar, Nascon Allied Industries, Cadbury, and Unilever.

However, Dangote Flour Mills has a debt to equity ratio of 171 percent as at March 2019, as against 130.15 percent recorded the previous year. Flour Mills Nigeria’s debt to equity ratio fell to 98.15 percent in the period under review from 100.15 percent the previous year.

But the improvement in leverage has no impact on profit margins as decrepit infrastructure, low consumer purchasing power, and double taxation continues to undermine growth of the industry.

 

BALA AUGIE



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