NJFM Vol. 3 No. 1
INTERNATIONAL STANDARD SERIAL NO. 0189 3
Dr. S.C. Chukwu
Ex-Rector
Institute of Management and Technology,
Enugu, Nigeria.
BOARD OF EDITORS
Prof. Barach Lev
Vailing Professor of Accounting,
University of California,
Berkeley. U.S.A.
Prof. G.O. Nwankwo
Executive Director,
Central Bank of Nigeria,
Lagos, Nigeria.
Francis Lapham
Executive Director,
Clinton County Area Dev Corp.
New York State. US.A.
Prof. Holins B. Cheaery
(Ex. Vice President, World Bank),
Professor of Economics,
Harvard University. U.S.A.
Dr. Don. N. Ike
Reader in Economics,
Institute of Management and Technology,
Enugu, Nigeria.
Prof. M.R.K. Swamy
Professor of Economics
Institute of Management and Technology,
Enugu, Nigeria. (Editorial Adviser).
THE NIGERIAN JOURNAL OF FINANCIAL MANAGEMENT is a forum for facilitating the development of Science of
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KEY: NIGERIA'S EXPENSIVE BORROWINGS BREED MULTINATIONAL CORPORATIONS (MNCs)
INDEX OF INDUSTRIAL BACKWARDNESS:
1980
1981
1982
1983
(measured by development of Capital market; Govt.
97.9:2.1
98.0:2.0
96.3;3.7
96.7:3.3
Stock—industrial securities ratio)
1961-1983 (Nmn.)
3842
Cumulative Securities: of which
(Nmn.)
257
(i) Industrial securities
(% share)
6.7
(ii) Government stock
(N rnn.)
3585
( % share)
93.3
A good majority of industrial securities are by MNCs
INDEX OF INDUSTRIAL ADVANCEMENT:
(measured by sectoral distribution of G.N.P.: percentage share)
Industry
Agriculture
Services
37
23
40
EXTERNAL BORROWING PATTERN TO FINANCE SOPHISTICATED MEN,
MATERIALS & MACHINE OWNED/OPERATED BY MNCs:
1982
N
mm
(i) International capital market
5474
(ii) Trade arrears
2214
(iii) Non-guaranteed state governments
670
(iv) World Bank
530
Short-term loans as % of total external debt
Medium-term loans as ft of total external debt
%
share
60.5
24.5
7.4
5.9
24.5
75,5
N
mm
6483
4448
560
566
1983
%
share
52.8
36.4
4.6
4.6
36.3
36.3
CAUSE:
Trade arrears emerged as a result of over capitalisation which resulted in sluggish investment cycle
OVERALL EFFECT: "PUNCTURED INVESTMENT TYRE".
1982
1983
Capital—expenditure—external debt ratio
1.41:1
0.97:1
As trade arrears began to accumulate the result of heavy to heavy expenditure on capital projects which have turned into white
elephants, consequent of declining crude oil revenue, the Federal Military Government have taken positive measures to attain selfsustaining economic development by re-ordering development priorities by, at the same time, renegotiating settlement of payment
arrears, (see p. 46 of this issue).
SOURCE: Analysis based on latest official data released by the Federal Government, World Bank, Central Bank of Nigeria, etc, and
presented by SWAMY, M.R.K. (PROF.), "A Financial Management Analysis of Loan Administration in the Nigerian Economy", at the
in-service Training Course «n Credit Administration, organised by University of Nigeria May 1984.
EXPOSURE TO FINANCIAL RATIO ANALYSES OF THREE OPERATING FIRMS IN THE
BEER INDUSTRY IN NIGBRIA*
BY
JACKSON O. OLUJIDE, DEPARTMENT OF BUSINESS
UNIVERSITY OP ILORIN ILORIN, NIGERIA.
INTRODUCTION
It is paradoxical to note that from a situation in the
1960s of low purchasing power of the consuming public accompanied by low demand for goods and services and producing units
facing problems which pertained to searching for market outlets
with a view to dispose off production surpluses the Nigerian
economy faced new challenges posed by oil boom in mid - 1970s
resulting
in
high
purchasing
power
of
the
consuming
public
accompanied by heavy to heavy over demand for goods and services
causing
alarming
shortages
of
supplied
of
consumer
and
non-
consumer items. Emanating from this scarcity is the scramble for
sales and this has become a scramble for products and services
in order to "meet consumer needs. This wide-spread impact of an
emerging era of scarcity raises important questions and issues
regarding the appropriate role of management. It is obvious that
shortages and these developments in the economy will represent
opportunities for
some industries but will at the same
time
create for some the inability to meet growing customer needs
with
existing
production
or
consumption
systems.
It
is
therefore clear that past consumption and production patterns
must
be
altered
advantage
of
the
in
response
to
opportunities
shortages
thereby
in
order
created
to
to
take
do
good
business
*The study is based on the operational performance of the three brewing firms
- - North Brewery, Kano; Golden Guinea Brewery, Umuahia and Ijagbo Brewery,
Ilorin.
As supplied information are classified", their names are omitted from the
text, and are classified as company A,B,C. However, as financial analyses are
based
on
actual
figures,
the
findings
of
the
study
will
have
their
own
relevance in the context of recent trends in the Nigerian economy as they
influence the beer industry in the country.
-85But
the
growing
increasing
demand
resource
for
most
limitation
commodities
promises
in
to
combination
significantly
with
alter
business strategies for many firms, including beer firms which is the
subject matter of this paper. In the light of the fluctuating fortunes
of business organisations as a result of their response to shortages,
every organisation would need to review its basic operations from time
to time to make sure they are tuned to the changing environment and
opportunities.
Nigeria's accelerating beer shortage crisis which continues with
rapidly
increasing
substantial
shifts
government
policies
consumption
not
only
as
in
they
throughout
the
affect
the
brewing
the
country
industry
is
but
importation/
causing
also
pricing
in
and
distribution of beer.
BEER INDUSTRY IN PSRSPBCTIVB; NIGERIA
Having said this much in a way of background analysis to the
contemporary problems and opportunities of product shortages, efforts
would
be
results
directed
and
towards
activities
of
appraising
three
firms
performance
in
the
and
brewing
contrasting
industry
in
Nigeria, in grappling with the problem of beer shortage and inability
to pay dividends to shareholders.
Having
carried
out
a
comprehensive
marketing,
audit
of
the
brewing companies and a critical examination of records and books of
account's it has come to light that the companies are not taking
advantage of the favourable business climate to do good business in
terms of increasing profits, increasing dividends for shareholders and
the growth of the companies. This implies that performance has been
disappointing. This paper then presents historical data analysis of
the past three years (1979 to 1981) of the operation of the companies.
The paper would have as its main the evaluation of performance in the
face of rising demand and cost, increasing competition and falling
profit.
The analysis of the costing lines of the brewing companies under
study shows that the pricing policy as determined by the Price Control
and Intelligence Board allows these companies to recoup their total
costs and still leave a wide margin of profit.
-86The
companies'
distribution
programmes,
though
flexible,
were
accomplished at a rising cost. But the facts and figures presented
have
shown
that
the
performance
of
the
firms
has
not
been
too
encouraging.
PERFORMANCE EVALUATION' BY U3INS RATIO ANALYSES
Ratio analysis, an element in financial management would be. used
in this performance evaluation exercise. The ratio , the mathematical
relationship between any two quantities, is of major importance in
financial
analysis
because
it
facilitates
not
only
a
quantitative
measurement but injects a qualitative interpretation and demonstrates
in a precise manner to Adequacy of one key financial statement to
another. The four ratios which we have proved themselves to be of
great value in actual business applications to the problem at hand
would be described and applied2.
The first of the ratios to be considered is net-profit-to networth which measures the profit return on investment, the reward for
the assumption of ownership risk. Profit measured against net-worth,
the
return
on
investment
important
as
an
incentive
to
the
owners
whether shareholders/ partners, or an individual proprietor and as a
means, of providing for the future growth of the company. Generally
when an individual, be he a shareholder, partner or an entrepreneur
joins in launching a business concern, he expects to derive direct
benefit
from
his
contribution,
not
solely
an
aesthetic;
pride
or
contentment but a reward in the form of monetary profit.
The figures for the three years of operation (1:979-1981) will be
examined in Table I.
TABLE - 1
NET PROFIT TO NET WORTH RATION
Indicator
Net Profit
(N‘000)
Company A
Company B
Company C
1979
712.96
1816.26
13256.00
1980
666.84
2715.24
12484.00
1981
794.13
3986.57
20402.00
Net Worth
(N'000)
Company A
Company B
Company C
1613.53
14394.00
60274.00
4965.26
16435.00
65017.00
7884. 07
20483.00
90192.00
Met Profit
to net
worth ratio
Company A
Company B
Company C
0.44
0.126
0.220
0.13
0.165
0.192
0.10
0.177
0.226
OURCE: Based on author's findings.
-87 –
ANALYSIS OF DATA
The computation shows a net-profit-to net-worth ratio of
0.44 for company A, 0.126 for company B and 0.22 for company Cfor the operation year 1979. The figures for 1980 for the three
companies are 0.13, 0.165 and 0.192 respectively while those for
1981are
0.10,
0.177,
and
0.226,
The
mean
net-profit-to-'net-
worth ratio over the three-year period for the companies "are
0.223, 0,156 and 0.213 respectively. On their face value, the
figures portray a situation in which the companies are moving
infinitely great strides particularly for the 1979 operational
year for company A. But on a more Critical and beneath the
surface analysis, we cannot assume that as the net-profit-to
net-worth ratios are high, commensurate stability and progress
are necessarily reflected.
The high ratio for 1979 operation year for company A very
well tells a story of inadequate net-worth and demonstrates the
need for additional invested capital. Management realised this
and efforts were made to increase the net-worth. These efforts
yielded dividends as shown by the rapid increase in net-worth
from
a
mere
177,881,073
»1,613,526
in
1981,
in
1979
representing
to
a
S4,965,260
mean
annual
in
I960
increase
and
of
133.2 per cent. But unfortunately the profit level declined and
this is reflected in the falling trend of the ratio.
For company B on the other hand, a 15.6 per cent mean
annual rate of return on owners investment appeared reasonable
but unfortunately the company could not declare dividend during
the three-year period considered.
The performance of company 0 appeared the most attractive
of the three and the mean annual rate of return of 21.5 per cent
is an indication of a splendid performance. This situation is
accounted for by the absence of any serious competition in the
major product of this 'company throughout the country. A lot of
efforts must be put in by the company to ensure that this level
of performance is maintained as new investments are attracted
into that field.
- 88 From the foregoing discussion therefore, the net-profit-tonet-worth ratio has thus served a dual purpose of informing
management of the serious inadequacy of net-worth in the case of
company A and also the necessity, to strive Hard to improve the
profit level for the three companies.
MEASURE OF EFFICIENCY OF UTILISATION'OF INVESTMENT IN FIXED
ASSETS
The
ratio
efficiency
with
f
net-sales-to-fixed
which
the
assets
companies
are
measures
utilising
the
their
investments in fixed assets. In addition this rate serves as a
secondary test of the adequacy of the sales volume. Since fixed
assets are acquired to further the sales progress of a company,
that is, increasing production and service or reducing costs or
both,
the
utilization
of
these
assets
must
be
measured
by
reference to sales activity. An assessment of the efficiency of
plant and equipment expressed in a naira (H) of sales to a naira
(£f) of fixed assets is imperative ? regarding the relative size
of fixed investment in order to determine present conditions and
future needs in this area.
TABLE 2
NET SALES TO FIXED ASSETS RATIO
Indicator
Net Profit
(N‘000)
Company A
Company B
Company C
1979
7119.27
9180.00
147174.00
1980
11245.12
1740.00
151896.00
1981
10245.34
15336.00
184919.00
Net Worth
(N'000)
Company A
Company B
Company C
1987.81
13900.00
68485.00
5552.89
16308.00
67638.00
7078.00
22500.00
92540.00
Met Profit
to net
worth ratio
Company A
Company B
Company C
3.58
0.66
2.15
2.03
1.05
2.25
1.48
0.68
2.00
OURCE: Based on author's findings.
-89AKALY3IS OF DATA
The
companies'
investments
in
fixed
assets
have
not
been
justified as portrayed by the abnormally low figures for the period
considered of the net-sales-to-fixed-assets.
The figures for company
A" fall between the range of 1.48 and 3.58 with a mean of 2.36 for the
three years. The figures for company B portray a situation of total
neglect or indifference of management to the success of the company.
The range is between 0.66 and 1.05 with a mean of 0.88 for the three
years
considered.
The
figures
for
company
C,
though
better
than
company B, is nothing to rejoice about. The range is between 2.00 and
2.25 with a mean of 2.13.
To achieve an average performance, these companies must increase
their volume of sales by a minimum of 55 per cent. These companies
must have found out that their excessive fixed assets have caused
greater than average debt pressure, either short or long - term and
therefore had reduced profit stemming from high fixed costs on each
unit of sales.
But a critical look at the dates of the acquisition of
the major equipment and the companies' sales volume over the three
years shows that the investment in assets was relatively recant. This
implies that the companies have expanded for the future some-what,
beyond
their
immediate,
needs.
Though
the
companies
are
feeling
temporary financial strains now because of the expansion programme,
the
advance
planning
might
indeed
turn
out
to
become
a
future
advantage. But" for the investment to become a future advantage, sales
must move up to an appreciable rate.
MEASURE OF SALBS VOLUME SUPPORTED BY INVESTED CAPITAL BEER FIRMS ARE
SERIOUS UNDER TRADERS
The ratio of net-sales-to'-net-worth is rather commonly known as
the trading ratio.
It is a measure of the extent to which a company's
sales volume is supported by invested capitals. Clearly, one of the
objectives of commercial ventures is to make profit, something which
can be accomplished only by selling goods or services in adequate
quantities at proper price levels. And in order to increase the level
of profit, every company must reckon with daily cost of both fixed and
variable nature.
- 90 The fixed costs of course, accrue without interruption whether
the plant operates or is idle and whether a single item moves
off the shelf. Only by achieving a level of sales adequate to
offset fixed costs as well as their variable counterparts, can
any company hope to break-even, let alone realise profit. As
sales
exceed
percentage
the
rises
break-even
sharply.
So
level,
the
management
may
company's
logically
profit
expand
strenuous efforts to achieve ever higher sales in the hope of
obtaining even greater profit.
TABLE 3 NET SAIE'S TO NET WORTH RATIO
Indicator
Net Profit
(N‘000)
Company A
Company B
Company C
1979
7119.27
9180.00
147174.00
1980
11245.12
1740.00
151896.00
1981
10456.34
15336.00
184919.00
Net Worth
(N'000)
Company A
Company B
Company C
1613.53
14394.00
60274.00
4965.20
16435.00
65017.00
7881.04
22483.00
90192.00
Met Profit
to net
worth ratio
Company A
Company B
Company C
4.14
0.64
2.44
2.26
1.04
2.34
1.33
0.68
2.05
OURCE: Based on author's findings.
ANALYSIS OF DATA
The figures portray the companies as serious under-traders.
The value of the ratio for the years considered for company A
shows a decreasing trend from.4.41 n 1979 to 2.26 in 1980 to
1.33 in 1981 definitely represents under-trading. The value of
the same ratio for company B portrays a-situation that could be
likened to inaction; it ranges from 0.64 in 1979 to
1.04 in
1980 to 0.68 in 1981 This company is definitely an under-trader
and if it wants to stay on in business,
serious and conscious
^efforts must be made by management to remedy the poor state
trading activities. The figures for company C, though reflected
a relatively consistent and non-volatile performance, it never
the less" exhibited under-trading.
-91The range is from 2.05 to 2.44. The values of the ratio for
the three companies definitely show a condition of undertrading.
She Bander-trading of these companies results from large capital
investments and diminishing activity and the consequence of this
situation is inadequate profit.
The companies therefore need-to
concert and channel all efforts towards increasing their volume
of sales at reduced expense.
PURPOSE OF BUSINESS IS TO MAKE PROFITS
Every company has as its goal the realization of profit
from each naira worth of the merchandise it sells. The ratio of
net-profit to net-sales measures the success any given company
has achieved in meeting this objective.
Unless a company profits from selling its goods or services
it has little reason to exist. For every naira of sales the
successful company finds a number of kobo in profit flowing back
into
its
coffers.
The
more
kobo
per
Naira,
the
greater
the
opportunity for growth and through growth those kobo may become
profits retained in the business to boost working capital, add
to net worth and aid in restoring balance to any ratios that may
be
deficient.
Conversely,
losses
on
sales
aggravate,
any
financial imbalance for they strike directly at both working
capital and networth and automatically distort any ratios that
relate to those two vital areas.
TABLE 4
Indicator
MET PROFIT TO NET SALES RATIO
1979
1980
1981
Net -profit
Company A
712.96
66.84
794.13
(N ‘000)
Company B
1816.26
2715.24
5986.57
Company C
13256.00
12484.00
20402.00
Net sales
Company A
7119.27
11245.12
10456.34
(N'000)
Company B
9180,00
17040.00
15336.00
Company C
147174.00
151896.00
184919.00
Company A
0.100
0.059
0.076
to net sales Company B
0.198
0.159
0.260
ratio
0.090
0.082
0.110
Net profit
Company C
SOURCE; Based on author's findings
- 92 –
ANALYSIS OF DATA
The performance of company A as shown by the ratio is that in
1979 for every naira of sales 0k represented profit while 5.93k and
7.59k represented the figures for 1980 and 1981 respectively. For
company B the figures were 19.78k for 1979,
15.93k for 1980 and
25.99k for 1981. For company C the figures were 9k for 1979, 8.2k for
1980 and 11k for 1981.
On average company A got 7.84k as profit from every naira of
sales while company B got 20.57k and company C got 9.4k. These ratios
indicate a not too successful performance particularly for companies,
A and C and a fairly profitable venture: for company B5, These figures
also indicate that the various managements of the companies have a lot
to do in the area of cost control in order to enhance profitability of
their respective companies.
RECOMMENDATIONS
The
above
analyses
point
to
three
areas
that
require
urgent
attention, and these are (1) sales (ii) profit and (iii) fixed assets.
*
The present sales volume for the three companies is inadequate in
the face of business opportunities;" management should make serious
efforts to achieve a higher level of sales at a lower expense per
naira of sales.
This would increase
the level of profit generated.
The consequence of this would be an increase in profit ploughed back
for expansion, increase in dividends to stock holders and enhanced
conditions of service to employees.
*
Like it has already been pointed out the investments in fixed
assets of the companies are pretty high and therefore a substantial
proportion of the companies capital is tied up in Illiquid, permanent
and
depreciable
assets
(see
Table
1).
A
disproportionately
high
investment "in fixed assets places a burden on the companies because
it
limits
current
assets
and
increases the debt position and
productive
miscellaneous
assets,
may depress profits through heavy
fixed costs. Prom the foregoing, it is imperative for these companies
to increase their productive capacities above the present level which
is below 40 per cent. For this to be feasible experiments should be
conducted to test the suitability of local raw materials such as corn
and millet. In addition efforts should be intensified to increase
production
of
Gongola States.
barley
already
grown
on
the
plateau
in
Plateau
and
-93This will help arrest the problem of erratic and inadequate supply of
raw materials. Efforts in this direction will surely help conserve scarce
foreign exchange and increase the spill-over effects of the beer industry on
the economy.
Another area that requires urgent attention is that of water supply.
Water is a very important input in the production system. But an unqualified
reliance on the public water supply system would surely create a lot of
problems for establishments that require a considerable-amount and regular
supply
of
water
for
their
operations.
The
public
water
supply
is
characterised by acute shortage and irregularity. These companies, in the
light of their experience, should as a matter of urgency and inevitability of
choice
embark
on
a
programme
of
establishing
bore
holes
which
would
supplement the supply of public treated water. A related factor that has
serious
consequences
for
optimal
public electricity supply.
production
is
the
unreliable
nature
of
This is an area that calls for concerted efforts
on the part of the management of these companies.
*
Lastly the management
of these companies should endeavour to recruit
brewing engineers who will put their expertise and experience to bear on the
incessant
machine
break
downs
which
have
characterised
the
operations
of
these brewing companies. It is hoped that all the above would have the net
effect of boosting- productive capacity and consequently sales.
* In conclusion, I wish to draw the attention of the various managements to
the importance of getting reliable and up-to-date information about their
most important customers, critical markets and immediate competitors and the
economy.
This
would
enable
management
to
plan
ahead
by
establishing
a
realistic budget and budgeting control procedures for monitoring performance
against
standard
and
taking
corrective
measures
when
there
are
important
variances. This will also force management to look ahead, to anticipate and
prepare for changing conditions.
From all indications the brewing industry would be vulnerable to the,
present
national
economic
recession
more—so
now
that
the
companies
are
enjoying rising market demand without being able to turn into profit. The
companies
should
consider
making
innovative
efforts
in
their
processes,
products, and in all areas of distribution and customer expectations. These,
I hope would produce high rewards and, additional benefits.
REFERENCES
1.
Kotler
P.,
"Marketing
During
Period
of
Shortage"
Journal
of
Marketing. July 1974, PP, 20-29. 2&3.
2.
Davidson S. Financial Accounting; An Introduction to Stickney, C.P.,
Concepts. Methods and Uses (The Dryden Weil, R.L., Press, 1979) pp.
188-212; 551-568