Capital Oil Plc: A need for reengineering

Introduction

Our analysis of Capital Oil’s recent financial reports shows that Nigeria’s economic recession had a degenerating effect on the company, and despite all efforts to curtail costs, was not quite able to turn out any profit in 2017, recording a loss instead.  Instead of profitability ratios, there were loss ratios. Also, there was no investor compensation.

We do not yet know what the 2018 financial year will be like for the company, but we do know that there is a need for this company to reengineer itself to profitability.

Core operations

Capital Oil did not have a good year in 2017 operation-wise. The company made less revenue from operations (same as making less in 2016), and turnover for the year declined by as much as 43.9 per cent to N471.4 million.

The company was also not particularly successful in its efforts to run a leaner operation, and it was unable to cut cost of sales as many other companies did for the period under review. Perhaps because of this, there was a pre tax loss rather than a pre-tax profit, but the pre tax loss for the year was milder than the pre tax loss recorded in the preceding year.

Pre tax loss was N156.5 million, better than the loss of N336.9 million recorded in the prior year. The same was the case for after tax loss. While the company recorded an after tax loss, the loss (at N160.8 million) was milder than that of the prior year.

Earnings per share, was predictably negative and was a loss per share of 0.07 kobo as compared to loss per share of 0.14 kobo before. As was expected, the company did not dedicate anything to shareholders in lieu of dividend.

Profitability ratios

Not only did the company’s ability to generate revenue decline, its ability to retain whatever revenue earned did not improve as well. In fact, it mostly recorded lower, and in some cases negative ratios rather than positive ones when it comes to profitability ratios.

For the year, it recorded a loss (rather than profit) margin of 43.9 per cent, the worst in three years. Analysis shows that for every N100 earned by the company in the course of the year, it had a pre tax loss of N43.90, as compared to a loss of N25.80 in the year preceding 2017.

Assets deployed also recorded a loss rather than a profit, same as it did in 2016. Loss on assets for the year stood at 13.8 per cent in 2017, as compared to a loss on assets of 26.4 per cent in 2016.

For the 2017 financial year, Capital Oil deployed equity valued at N230.9 million and for every N100 equity deployed, the company made an after-tax loss (rather than a profit) of N69.60, as compared to the loss of N86.90 made in 2016.

Perhaps because of the harsher Nigerian economic climate, the company employed fewer employees during the course of the year and its employee number decreased to 23 from 27. This represents a 15 per cent reduction in the workforce. Earnings per employee then declined to N20.5 million on the average, down from N31.3 million in 2016. This is not particularly indicative of employee productivity and company efficiency, because the company was operating with a much lower number of employees.

Other ratios

In terms of capital adequacy, Capital Oil performed worse in 2017 than it did in 2016, as its result for the year was lower than the preceding year’s. Its shareholders’ funds could finance about 23.3 per cent of its total capital, lower and worse than the already low 34.8 per cent ratio recorded before.

A common feature of the manufacturing industry for the 2017 financial year is that most companies had high current ratios, having the ability to meet short term liabilities with short term assets. Capital Oil was an exception, having a current ratio of 0.22 times, extremely down from 1.22 times in 2016.

Having a debt to equity ratio of 3.9 shows that the company is using N3.90 of liabilities in addition to each N1.00 of stockholders equity. In other words, the company is using N4.90 of total capital for every N1.00 of equity capital. This was slightly higher than what was achieved in 2016.

Sustainable growth

For the review year, the company recorded a loss of N160.8 million and internalised all of it, not giving anything out to shareholders as dividend.  Therefore, retention ratio was 1. Loss margin was 33.2 per cent, asset turnover was 0.42 times while assets to equity ratio was 4.9 per cent.

Sustainable growth rate for Capital Oil, which represents how quickly a company can expand using only its own sources of funding, was negative 67.8, meaning that it had no inherent capacity for growth at all. Meanwhile, it also did not record an actual growth rate, as it recorded a decline rate of 43.9 per cent during the course of the year.

Unique strategies

Capital Oil Plc was incorporated in Nigeria in 1985 as a private limited liability company. The company subsequently converted to a public limited company in 1989. The company is principally engaged in the downstream segment of the oil and gas sector, dealing in the sale and distribution of petroleum products through its retail outlets in different parts of the country.

Conclusion

We don’t expect that the 2018 FY will be a positive one for Capital Oil and its investors, and we are not assured of the company’s ability to reengineer itself. Whichever way, the 2018 FY will be a deciding one for the company.

*Source: Capital Oil’s 2017 financial report