It is fundamental principle for a company to perform moderately well in majority of its financial indices before it could stand a chance of rewarding its shareholders. Conoil Plc financial records in the recent years have not been encouraging.
The oil marketing company has simply being struggling to post moderate earnings. Financial analysis of Conoil for year ended December 2014 recently released by the Nigerian Stock Exchange shows that majority of financial ratios such as return on assets, profit margin, current ratio and debt to equity ratio declined from previous years report.
The company’s short term debt of N22.7 billion in 2014 is currently above equity fund by N6.6 billion, this mean the company is largely being finance by borrowing. The burden of debts is currently eating deep into the company’s bottom line as it paid over N8.5 billion as interest expenses in the last three years.
Conoil Plc, one of the market leaders in the Nigerian Oil and Gas sector. The principal activities of the Company are the marketing of refined petroleum products, manufacturing and marketing of lubricants, household and liquefied petroleum gas for domestic and industrial use. it does not operate in the middle and upstream sectors of the oil and gas industry.
Net Profit Margin
Net profit margin in the last five years has been very unstable. In the financial year ended December 31, 2010, the figure was 2.7 percent and a year later, it decreased to 1.9 percent. NPM however dropped from 2.7 percent in 2010 to 0.65 percent as recorded in the company’s audited financial report ended December 31, 2014.
It would appear that Conoil Plc going by this ratio, is gradually losing its ability to convert revenue (sales) into profit. As at the last count, only one kobo out of every 100k sales made by the company could be kept as profit compared to three kobo out of every 100kobo in 2010.
It would also mean that the company’s ability to reward shareholders at the end of every financial year is gradually being jeopardised.
Return on Assets
It would appear that Conoil Plc is not sweating its assets to yield appropriate income. (Return on Assets (RoA) is a measure of the return on total investment of a company). In the review year financial period for Conoil Plc, the figure has been on a decline as it moved from 3.73 percent in December 31, 2013 to 0.96 percent in 2014 despite increase in its assets base by N5 billion.
The management of the company has steadily increased asset over the two years from N82 billion in December 31, 2013 to N87 billion in 2014 representing 5.12 percent growth. It represents about N5 billion annual investment by the company.
Since the company could not make money from it assets, it would mean that it will continue to depend on borrowings to finance its operations.
In the review five years financial period ranging from December 31, 2010 to 2014, it is evident that Conoil Plc does not have the capacity for enough resources to pay its debts over the next 12 months as current ratio has been below acceptable standard. (Acceptable current ratios vary from industry to industry and are generally between 1.5 and 3 for healthy businesses).
Meanwhile for Conoil Plc, the best current ratio it has ever achieved in five years was 1.4 in 2010 and this has further declined to 1.16 in December 31, 2014. It would mean that if all the creditors decide to swoop on the company in the next one year, it will not be able to meet their demand.
Debt to Equity ratio
The total debt to equity ratio is useful for judging an entity’s long-term financial viability. As the name suggests, it is the ratio of all interest bearing debt on the balance sheet, to total equity. This ratio measures financial leverage or the degree of the entity’s indebtedness relative to its equity funding.
In the case of Conoil Plc, it has recorded a fluctuation in debt to equity ratio in the review period moving from 41 percent in 2010 to 141 percent in December 31, 2014. The ratio was 189 percent in December 31, 2012. The figure stood at 41percent in 2010, 71 percent in 2011, 189 percent in 2012 and 66 percent in 2013.
Capital-intensive industry like the Oil and Gas where Conoil Plc operates requires a debt/equity ratio above 200 percent. It means that Conoil has a total debt to equity ratio that is significantly lower than that of its industry; therefore, one may question whether the company is being aggressive enough in pursuing profitable growth opportunities by raising debt when necessary to finance those opportunities.
Liquidity as the life wire of an organization most often, determines the growth of a company. A company with adequate working capital would be better positioned to ensure smooth operations. The lack of adequate working capital facing Conoil Plc has been dampening business growth and potential profitability in recent time.
For three successive years (2012-2014), Conoil recorded low growing record of net current liabilities neither supported by inventory nor receivables. Conoil current liabilities stand at N69 billion against current assets of N81.4 billion.
However, the number of day debtors takes to pay increased from 87 days in 2013 to 126 days. This is a sign that the quality of the company’s debtors is not improving. This is also an indicator that cash flow is not getting better, having moved from N13.2 billion working capital in 2013 to N11.4 billion in the review period. Trade creditors also dropped from N48.8 billion in 2013 to N43.5 billion.
Risk and Conclusion
Risk associated with the company is basically the stiff competition from big players in the sector especially in the area of retail products. The entry barrier into the industry is high due to capital requirements. The lack of adequate financial muscle to pursue highly profitable, capital intensive projects may also limit the company from actualizing its strategic objectives.