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Huge working capital deficiency, a threat to Oando despite profit position

Nairametrics by Nairametrics
April 1, 2016
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Oando Energy Resources (OER) may have defiled all odds by reverting to profitability after posting the highest losses (in third quarter of 2015) by any company on the floor of the bourse. However, the oil giant is not efficient and its ability to meet obligations or pay creditors in the short term is in jeopardy.

This is because low oil price has dampened cash flows hence making it practically difficult for OER to settle loans borrowed from banks to finance its business expansion and acquisition of assets.  

As at December 31, 2015, the Corporation had a working capital deficit of N167.16 billion ($835.8 million), a 47.37 percent increase from the N113.44 billion ($567.2 million) deficits recorded as at December 2014.

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There is also an accumulated deficit of N124.24 billion ($621.2 million) at December 2014- N127.62 billion ($638.1 billion).

A working capital deficiency or negative working capital, which can threaten the existence of a firm, is when current liabilities exceed current assets.

It means OER’s  working capital ratio is too low, less than 1, and below the industry standard of 2.1 times.

Analysts prefer to see a working capital ratio of 1 to 1.5 times, which means there is at least one N1 of current assets for every naira of current liabilities.

A buyer usually considers negative working capital in a target as detrimental because it signifies additional capital that will be required to run the business after closing.

 

Oando must secure sufficient funding to fund ongoing operations and commitments and repay at least N29.29 billion ($149.9 million) in loan principal, as set out by loan repayment schedules.

It should be noted that an additional N71.34 billion ($356.7 million) of borrowings was reclassified to current borrowings as a result of debt defaults.  

With lenders lurking around the corner to demand payment of their loans (may exercise accelerated rights), and lower oil prices that will impact future revenues and operational cash flows, OER ability to continue as a business entity in the foreseeable future is under threat.

Tags: Oando Plc
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Nairametrics

Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

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