BUA CEMENT Plc has more debt financing obligations than its main rivals in the cement industry, analysis by The ICIR on the companies’ debt-to-equity ratio has shown.
A debt-to-equity ratio, also known as a risk ratio, shows a company’s relative amount of debt and estimates how well it can service its long-term debts and other obligations.
It is widely considered as one of the most essential corporate valuation metrics, highlighting a company’s dependence on borrowed funds and ability to meet those financial obligations.
In the Nigerian cement industry, BUA Cement’s main rivals are Dangote Cement Plc and Lafarge Africa Plc.
Checks by The ICIR on the companies’ financial statements for the nine months ended September 2023 showed that BUA Cement had 1.59 debt-to-equity ratio compared to Dangote Cement, which had 1.45, and Lafarge Africa, 0.52, respectively.
It, therefore, means that BUA Cement had N1.59 of debt for every N1 of equity relative to N1.45 and 0.52 kobo; Dangote Cement and Lafarge Africa had for every N1 of equity.
According to the statements, BUA Cement had total liabilities of N624.55 billion and shareholders’ equity of N392.36 billion; Dangote Cement had N1.98 trillion liabilities and equity of N1.37 trillion, and Lafarge Africa had N220.41 billion liabilities and N423.19 billion equity, respectively.
The ICIR reports that a debt-to-equity ratio is calculated by dividing a company’s total financial liabilities by its total shareholders’ equity.
Though Dangote Cement recorded more liabilities on its balance sheet, a lower debt-to-equity ratio indicated less debt on its balance sheet than that of BUA Cement.
A debt-to-equity ratio below the weight of one is considered safe, whereas values of two or higher are risky, according to a research institution.
Over the last four years, Dangote Cement has carried the highest debt-to-equity ratio weight more than the two other cement companies, checks on the companies’ financial statements indicate.
In 2019, Dangote Cement had 0.94k debt for every N1 of equity, as its total liabilities stood at N844.51 billion and total equity at N897.94 billion.
Lafarge Africa followed with a 0.44k debt for every naira as liabilities were N152.24 billion and equity, N344.91 billion. At the same time, BUA Cement had 0.29k debt for every naira of equity, with N106.87 billion liabilities and N363.697 billion equity.
In 2020, Dangote Cement’s debt-to-equity ratio was N1.27, BUA Cement, N1.04 and Lafarge Africa, 0.41k for every N1 of equity.
In 2021 and 2022, Dangote Cement’s debt-to-equity ratio was N1.43 and N1.42 for every N1 of equity; BUA Cement had 0.83k and N1.13 while Lafarge Africa was 0.39k and 0.44k, respectively.
A steadily rising debt-to-equity ratio may make it harder for a company to obtain financing, as the growing reliance on debt could eventually lead to difficulties in servicing the debt obligations, and a high ratio may result in loan default.
The three cement giants collectively reported a 29 per cent increase in total borrowings to N868.76 billion in 2022 from N671.72 billion in 2021 to stay afloat.
Worrisome cost of borrowing, debt burden
Over the years, the Manufacturers Association of Nigeria (MAN) has been critical of the cost of funding for businesses. The benchmark interest rate, currently at the double-digit mark of 18.5 per cent, directly impacts the cost of production and the manufacturing sector’s competitiveness.
Higher interest makes lending expensive, affecting manufacturers as borrowing costs for production become more expensive, financial analysts have argued.
In a report by The ICIR, the Director General of MAN, Segun Ajayi-Kadir, said, “The increase in the MPR (monetary policy rate) portends worrisome negative consequences for the manufacturing sector.”
This discourages investment and leads to increased factor costs, which feed into high product prices, thus making the country’s manufacturing industry unproductive, he said.
A study, ‘Equity and Debt Financing on the Profitability of Cement Industry in Nigeria,’ shows that debt significantly affects the profitability of the cement industry in Nigeria.
In contrast, equity financing does not substantially impact Nigeria’s cement industry’s profitability.
“It is recommended that cement industry owners should diversify their sources of financing their businesses by focusing more on debts to save their costs and reduce their risk in the investment.
“Industry owners should look outside the box by employing other sources of financing their businesses like debentures, bonds and so on, other than absolute dependence on equity,” the study recommended.
The study added that when the cement industry performs well, it improves the country’s gross domestic product (GDP) and invariably solves the unemployment problem.
