Flour Mills Vulnerable to Economic Downturn as Debt-Equity Ratio Rises

Flour Mills of Nigeria Plc rising borrowing costs cast a pall over the company’s ability to service its debt and meet financial obligations while a high debt to equity ratio means it is vulnerable to an economic downturn.

The largest miller by market capitalisation posted a profit after tax (PAT) of N8.52 billion for the six months ended September of 2023, brought on by a foreign exchange revaluation loss of N51.21 billion as the abrupt devaluation of the currency by the regulator catapulted dollar denominated liabilities in the books of consumer goods firms who are owing their foreign suppliers.

A spiraling cost of imported raw materials, rising finance costs on the back of the central bank’s aggressive tightening, combined with foreign exchange losses squeezes Flourmills’ operating income that makes it difficult for the company to pay interest on money borrowed from banks.

For instance, interest coverage ratio stood at 0.71 at the end of 2021, substantially lower than 2022’s 1.06, according to MoneyCentral calculations. The figure is a measure of a company’s ability to repay its debts, with a ratio of at least 2 generally considered the minimum acceptable amount for a company with solid revenues.

Analysts typically prefer a coverage ratio of 3 or higher.

The deteriorating financial health of Flourmills is also laid bare by a high debt-to-equity ratio that means there are more debts (financial obligations) than equity (owners’ money) in its balance sheet, which makes it vulnerable to a recession.

Debt-to-equity ratio stood at 2.15 as at the six month ended September 2023, from a ratio of 2.35 in 2o22, according to MoneyCentral calculations. Simply put, the company’s debts are 2.15 times equity.

Flourmills and peer rivals are the worst hit from geopolitical tensions, slow consumer spending, currency devaluation, rising inflation, and scorching reforms by the new administration that eliminated subsidies on fuel and unified foreign exchange market.

It is noteworthy that local wheat production remains abysmal due to climate change, insecurities in cultivation area, unavailability of improved seeds, and lack of modern agronomic practices.

Furthermore, wheat production is threatened by the Russian-Ukraine crisis as both countries are the largest producer of the grain.

Further analysis of the financial statement of Flourmills shows revenue was up 33.87 percent to N964.64 billion while gross profit rose 53.40 percent to N105.51 billion.