Spiralling finance costs hobble Nigerian Companies

Avoiding firms with huge debt loads could mean better performance for your portfolio

A surge in finance costs for servicing debts owed by listed Nigerian corporates is beginning to put a squeeze on their bottom lines.

Businessday Market Intelligence (BMI), analysed the 40 biggest listed Nigerian companies ex-financials to see the impact of finance costs on their share performance and net income.

Cumulative finance costs on loans, overdrafts, short and long term borrowings and commercial paper, surged to N197.88 billion in the September, 2016 period.

This was 170.85 percent of the cumulative net incomes of the 40 firms which totalled N115.82 billion for the September, 2016 period.

Some firms finance costs were as high as 80 percent of their reported net income for the period, while many paid more to service loans than they made at the bottom-line.

While the risk of default for most of the companies may be low for now, higher interest payments coupled with lower earnings is a hindrance to growing shareholder value.

Stocks of companies that have spent the most as a percentage of net income to service debts have on average performed worse than the NSE All Share Index.

Vita-foam stock which is down -58 percent year to date (ytd), had finance costs that was equivalent to 271 percent of net income, Fidson Healthcare (stock -46% ytd),had finance costs that were 562 percent of net income, UACN Prop. (stock -57% ytd) had finance costs equivalent to 1853 percent of net income, Honeywell Flour Mill ( stock -47% ytd) had finance costs of 683 percent of net income, and Transnational Corporation (stock -50% ytd) with finance costs equivalent to 171 percent of net income.

This compares to a -11.55 percent return for the NSE-ASI in the same period.

 PATRICK ATUANYA