The huge debt in the capital structure of Flour Mills Nigeria Plc could crimp the growth of future earnings.
The consumer goods giant had borrowed money to fund its expansion programme with a view to increasing market share.
Total debt in the balance sheet of the company was N169.20 billion in the latest period (March 2015), which represents an increase 35.30 percent from N125.05 billion the previous year.
The company’s balance sheets or operations are unfunded with lenders money as debt to equity ratio was as high as 193.57 percent, an increase from 150.20 percent recorded last year.
This means the company used N1.93 in debt for every N1 of equity. This signals a high gearing position.
The risk associated with high debt-to-equity ratio is the inability of the company in generating enough cash to satisfy its debt obligations.
Also, a 16.10 percent increase in Interest charges portends potential negative effects on Flour Mills profitability in the next few years.
The latest earnings report showed the company recorded a 57.80 percent increase in net income thanks to a N14.28 billion gain from the sale of investments in its subsidiary and tax savings.
Without the gains made on such disposals Flour Mills would have recorded a loss of N5.67 billion because the interest expense of N18.15 billion would have swallowed up operating income of N10.21 billion.
So the high debt ratio is not helping Flour Mills of Nigeria to support future growth.
The devaluation of the naira exposes the company to currency risk as the dollar denominated debt in its capital structure could spiral up.
Flour Mills Nigeria, being a capital intensive business, spent N56.48 billion in the purchase of property plant and equipment in the period.
Financial Highlight
- Sales reduced by 5.23 percent to N308.23 billion in the year ended March 2015, from N325.80 billion last year.
- Operating profits were down by 47.28 percent to N10.21 billion in 2015 compared with N19.37 billion in 2014.
- Cost of sales fell by 5.23 percent to N273.38 billion in 2015 as against N288.48 billion as at March 2014.
- Profit before tax dropped by 6.08 percent to N7.72 billion in 2015 as against N8.22 billion last year.
In as much as i agree with the fact that this high debt ratio will slow down future profit, don’t you think the money made from sales of one of its subsidiary can be used to offset some of these debt. You should also remember that they are about to raise 40billion naira via rights issue which i belief they already have investors ready to commit funds to. I belief if they can use part of these exceptional items to settle part of the debt we may experience a new flourmills.
The sale of a subsidiary is one off event that does not occur at all times. Are we saying FlourMills will keep selling subsidiaries to offset debt. On the proposed right issue slated for 2016 as the the company had said in one of its press release, what if the issue is under subscribed?