Net cash flows from operations have declined for Nigerian businesses, raising the possibility of a cash crunch despite economic growth.
The combined net cash flow from operating activities of top firms across a variety of industries in Africa’s largest economy reduced by 19.36 percent to N547.47 billion in the first half of 2022 from N678.94 billion in the first half of 2021, according to data gathered by BusinessDay from the financial statements of the companies available on the Nigerian Exchange Group.
BusinessDay analysed seven industries, five of which reported a decline in cash flow from operations.
The laggards are palm oil makers, brewers, fast-moving consumer goods (FMCG) firms, conglomerates, and healthcare. The two sectors that experienced growth include the cement sector and the hotel industry.
A breakdown of companies in these sectors shows that 17 out of 26 companies across industries reported a decline in net operating cash flows in the first half of 2022.
Declining cash flows from operating activities across sectors “could indicate slower growth in the economy” said Olaolu Boboye, an analyst at Lagos-based investment bank, Cardinal Stone Ltd.
The problem is that despite these companies reporting record high revenues, very little cash inflow is realised, leaving them with a large account receivable as more clients fall late on their payments. As a result, firms will have to incur greater debt to fund their expansion plans.
Tajudeen Ibrahim, director of research and strategy, Chapel Hill Denham, said if absolute cash flow from operations is declining, it can mean that they aren’t generating much cash in terms of sales to customers, thereby being challenged by the broad weakness of the economy from the consumer spending side.
He also explained that these companies are making sales but allow too much credit, indicating that they need more stringent credit policies in place.
Combined trade receivables by these industries increased by 39.6 percent amounting to N450.52 billion in the first half of 2022 from N322.72 billion in the corresponding period of 2021.
Additionally, the pressure on consumer spending brought on by rising electricity costs, inflationary pressures, and high unemployment strengthens the case for a sluggish economic recovery.
Although the Nigerian economy grew by 3.54 percent in the second quarter (Q2) of 2022, headline inflation climbed to 19.64 percent in July 2022, from 18.60 percent in the previous month, and the unemployment rate in Nigeria was 33.3 percent as of the fourth quarter (Q4) 2020, according to data from the National Bureau of Statistics (NBS).
A source also stated that “system liquidity in the market is very tight, and as a result, there is some sort of liquidity crunch in the economy, with CBN trying to mop up all available liquidity to make sure the demand side inflation is maintained.”
Cash is the lifeblood of a business, and a business needs to generate enough cash from its activities so that it can meet its expenses and have enough left over to repay investors and grow the business.
Without generating adequate cash to meet its needs, a business will find it difficult to conduct routine activities such as paying suppliers, buying raw materials, and paying its employees, let alone making investments.
An operating cash flow ratio analysis conducted by BusinessDay to measure the number of times a company can pay off current debts with cash generated within the same period shows that most of these firms are not generating enough cash to cover their current liabilities.
A number greater than one indicates that a company has generated more cash in a period than what is needed to pay off its current liabilities.
An operating cash flow ratio of less than one, on the other hand, indicates that the firm has not generated enough cash to cover its current liabilities.
Amongst the companies analyzed, Okomu Oil Palm remained the only company with an operating cash flow ratio of 1.5, therefore, indicating that the company generates enough cash to cover its short-term obligations.