Notore Chemical Industries Plc debts have risen faster than profit as the fertilizer marker is struggling to meet its long and short term obligations.
A possible default by the company could send a shockwave across the market, spooking inventors who are already worried about liquidity position.
The company’s quick ratio, which measures its ability to use liquid assets to meet short-term debt obligations, stood at 0.31 as at September 2020, according to MoneyCentral data. A quick ratio of 1 or above is typically considered healthy.
Notore, which produces fertilizer for sale within Nigeria for export to West Africa, South Africa and Europe, has been recording recurring losses since the last economic downturn of 2016.
Huge production costs have swallowed weak revenue, resulting in loss after tax of N6.39 billion in the period under review from a loss of N5.75 billion the previous year.
And little wonder there is N29.12 billion in accumulated losses or negative retained earnings in the capital structure. What that means is the company can’t pay dividend because entities can only often make such payment to shareholders from distributable profit.
The company is burdened by huge long term debt that could threaten its going concern status if revenue continues to shrivel as it may default on its bond.
While debts are cheaper than equity because it enjoys tax savings, too much of it could make a firm renege on its debt covenant, and the entity risks being put in the hands of a receiver.
Notore’s total debt- long and short term- stood at N108.35 billion as at September 2020, that compares with 2019’s N79.97 billion, according to data gathered by MoneyCentral.
There is more creditors’ money in the capital structure of the company as debt to equity ratio stood at 171.13 percent as at September 2020, from 114.96 percent the previous year, according to MoneyCentral Calculations.
Notore is struggling to pay interest on outstanding debt as times interest coverage ratio stood at 0.45 times operating income. When a company’s interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable.
In March 2020 and before the lockdown imposed by the government to curb the spread of the virus, the fertiliser maker planned to seek shareholder approval for a N40 billion capital raise.
Notore acquired the assets of state-owned fertilizer company National Fertilizer Company of Nigeria, based in the Niger Delta for $152 million more than 12 years ago and in 2012 entered into a joint venture with Mitsubishi Corporation to develop a new fertilizer plant, it said in the presentation.
It now has Africa Finance Corporation (AFC) as one of its shareholders with 4.9 percent holding. More than half of the shares are held by a vehicle registered in Mauritius.
Notore has the capacity to produce 500,000 metric tonnes per annum of urea, it said and also develops and sells staple crops such as maize and rice.