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Don’t buy shares without learning about these ratios

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The Nigerian equity market has been one of the top-performing markets this year as its All-Share Index (ASI) is positive Year-to-Date (YtD) 20.28%. Interestingly, the Nigerian exchange has not traded at this level since September 2008, over 13 years ago.

The Nigerian stock exchange has seen significant growth, especially in 2020, when it recorded over 50% growth in ASI. In 2021, the exchange ended the year marginally bullish by 5.89%, despite a strong appeal for U.S.-dominated stocks. However, its performance in 2021 is relatively small, compared to the parabolic performance in 2020.

So far, in 2022, the ASI Year-to-Date (YtD) performance is bullish, with the Nigerian market being one of the top-performing emerging markets in Africa. This is because in YtD performance, the NGX is doing better than its peers like the Ghanaian Exchange which is down 10.53% YtD, and the Johannesburg Stock Exchange which is down 10.85% YtD and Nairobi Securities Exchange, which is also down 28.74% YtD.

The growth of the NGX in 2022 has been majorly a result of the improved financial performance of listed companies on the exchange. Although many argue that these improved financial performances is as a result of the double-digit inflation rate the country is facing, we still cannot ignore the fact that the market has been getting more traction, especially from local investors in recent times.

The market has also seen astronomical growth in its equity market capitalization since September 2008, when it recorded N9.83 trillion. Compared to the latest market capitalization of approximately 26 trillion, this represents a growth of 164.50% in over 13 years. This is a testament to the growth and increased participation in the market, through capital injection, by both foreign and local investors.

Financial Ratios and why they are significant

Financial ratios are created with the use of numerical values taken from financial statements to gain meaningful information about a company. The numbers found on a company’s financial statements, balance sheet, income statement, and cash flow statement, are used to perform quantitative analysis and assess a company’s liquidity, leverage, growth, margins, profitability, rates of return, valuation, and more.

Being that a major factor to the growth is improved financial performance by listed companies, it becomes difficult to actually know which financial ratios/indicators are very important, going beyond just the top line items of a company’s financials.

A major benefit of financial ratios is that they help track the changes in the values of companies over time and in turn, helps spot trends that may be developing in a company. For example, an increasing debt-to-asset ratio may indicate that a company is overburdened with debt and may eventually be facing default risk.

Another major benefit of Ratios is that they help comparative judgments regarding company performance. With ratios, it becomes easier to compare financial ratios with that of major competitors and this will help identify whether a company is performing better or worse than the industry average. For example, comparing the return on assets between companies helps an analyst or investor to determine which company is making the most efficient use of its assets.

Here is a look at some ratios to check for before buying a stock:

Price to Earnings Ratio (P/E)

P/E ratio is a type of valuation ratio. Valuation ratios generally rely on a company’s current share price and reveal whether the stock is an attractive investment option at the time. The P/E ratio is one of the most commonly used financial ratios among investors to determine whether the company is undervalued or overvalued. The ratio indicates what the market is willing to pay today for a stock based on its past or future earnings. It is gotten by dividing the price per share by the earnings per share.

Price-to-Book Ratio (P/B)

The price-to-book ratio compares a company’s market value to its book value. The market value of a company is its share price multiplied by the number of outstanding shares. The book value is the net assets of a company. It is used to compare a firm’s market capitalization to its book value. It is gotten by dividing the market value per share by the book value per share.

Current ratio

This is a type of liquidity ratio. Liquidity ratios help measure a company’s ability to repay both short- and long-term obligations. The current ratio measures a company’s ability to pay off short-term liabilities with current assets. It is calculated by dividing the current assets by the current liabilities.

Operating cash flow ratio

The operating cash flow ratio is a measure of the number of times a company can pay off current liabilities with the cash generated in a given period. It is gotten by dividing operating cash flow by current liabilities.

Debt ratio

This is a type of leverage ratio that measures the amount of capital that comes from debt. The debt ratio measures the relative amount of a company’s assets that are provided from debt. It is calculated by dividing the total liabilities of a company by the total assets.

Debt to equity ratio

The debt-to-equity ratio calculates the weight of total debt and financial liabilities against shareholders’ equity. It is calculated by dividing the total liabilities of the company by the shareholder’s equity.

Debt service coverage ratio

The debt service coverage ratio helps reveal how easily a company can pay its debt obligations. It is gotten by dividing the operating income by the total debt service.

Asset turnover ratio

This is a type of efficiency ratio. Efficiency ratios help measure how well a company is utilizing its assets and resources. The asset turnover ratio in question helps measure a company’s ability to generate sales from assets. It is gotten by dividing net sales by average total assets.

Inventory turnover ratio

The inventory turnover ratio measures how many times a company’s inventory is sold and replaced over a given period. It is gotten by dividing the cost of goods sold by the average inventory.

Gross margin ratio

This is a type of profitability ratio that measures a company’s ability to generate income relative to revenue, balance sheet assets, operating costs, and equity. The gross margin ratio compares the gross profit of a company to its net sales to show how much profit a company makes after paying its cost of goods sold. It is gotten by dividing gross profit by net sales.

Operating margin ratio

The operating margin ratio compares the operating income of a company to its net sales to determine operating efficiency. It is gotten by dividing the operating income by net sales.

Return on equity ratio

The return on equity ratio measures how efficiently a company is using its equity to generate profit. It is gotten by dividing net income by shareholder’s equity.

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 Analysing the demands of Nigerian SMEs to achieve global competitiveness 

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Growing globalisation presents Small and Medium Enterprises (SMEs) across the globe with an unprecedented opportunity to extend market reach, enhance performance, and potentially upscale to larger companies. Thanks to global interconnectedness, a small family-run business in a remote part of China can manufacture shirts and export worldwide. This is the case for most Chinese SMEs. In 2020 they accounted for 68% of Chinese exports, according to estimates by the Organisation for Economic Co-operation and Development (OECD). In Nigeria, the reality is different for most small and medium-sized businesses. 

In its latest report, the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) reported that only 7.7% of business enterprises surveyed exported their goods or services. Of this crop of businesses, 95.3% of exports value less than 10 million Naira ($23,300). This export data highlights the gross under-representation of Nigerian SMEs in international trade despite contributing to nearly half of the domestic GDP when combined with micro-scale businesses. 

The exclusion of Nigerian SMEs from global trade matters because the success of small and medium-scale businesses will directly translate to the enhanced global competitiveness of the Nigerian economy. China and India, both highly populated developing countries, have risen to prominence on the back of value-creation by entrepreneurs in SMEs. 

Furthermore, there is only so much value that can be created within a geographical market; however, expansion to other regions can create new demand and opportunities. Take, for instance, the $93 billion global oil palm industry where Nigeria has a market share of less than 5% despite having abundant natural and human resources to potentially produce and supply oil palm as well as derivatives. We lose out on the multi-fold values that could have been derived from processing and exporting to the vast global market if our agricultural commodities are only consumed within the country and our SMEs fail to break into the global markets. 

There is a plethora of reasons why less than a handful of SMEs in Nigeria are engaged in exports; most of the bottlenecks are behind the borders and overlap with challenges already identified by small and medium business operators. In the 2021 SMEDAN report, 92.4% of surveyed businesses believed the biggest challenge to enterprise development was the lack of finance.  

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The availability of funding is critical for the day-to-day operation of businesses as well as financing business expansion in the long term. Due to high-interest rates, high rates of informality, poor documentation culture, lack of sufficient cash flow, and weak macroeconomic conditions, many SMEs are unable to obtain loans from most financial institutions. Where obtaining a loan is possible, for example from a micro-finance bank, the volume is too little to make a meaningful impact while the volume of loans disbursed by government programs is good but could be better. As a result, 48% of SMEs depend on family and friends, while 15% rely on credit facilities, 8% on trade credit, 6% on co-operatives, and 6% on grants based on PwC MSME Survey 2020.  

Yet, engaging in exports is a capital-intensive venture because of the need to produce goods that meet international standards, as well as investments that need to be put into securing authorization (from Nigeria Export Promotion Council, Standards Organisation of Nigeria, NAFDAC, CBN, etc.) for exports and facilitating the logistics.  

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Another area in SMEs that needs intervention to improve their development, and in turn, global participation is the provision of infrastructure. Per the SMEDAN report, 20.9% consider the paucity of the quality physical infrastructure to be a critical challenge. The problem of infrastructure extends across the entire chain of value businesses rely on. Epileptic power supply means shorter production hours, high operating costs when generating sets (industrial or residential) are employed, or even high capital expenditure to procure alternative power sources. After scaling the issues of power supply, SMEs face obstacles imposed by poor transportation networks. For SMEs involved in exports, goods can be stuck for months at the port and end up in poor form by the time they arrive at their destination. 

Another area of demand for SMEs and similar businesses is vocational and entrepreneurship training. From the SMEDAN report, 20.8% of surveyed businesses rated gaps in vocational and business skills as the main constraint on enterprise development. Often overlooked, entrepreneurship and management skills are a bedrock of SMEs’ success. Programs on vocation and entrepreneurship will help business owners and operators learn essential business skills such as financial and risk management, strategy, sourcing business capital, taxation, human resource management, and so on. This training will also help businesses formalise and position themselves for better opportunities in the market.  

Other pressing demands of SMEs are the need for workspaces, consistent government policies, and access to research & development. Concerning government policies, some of the pain points of businesses are the multiplicity of taxes, demolition of properties, high fuel prices, customs duties, a ban on particular raw materials importation, and trade permits.  

The government would need to improve accessibility to capital to improve the situation for SMEs. Several state and private funding initiatives such as FGN Special Intervention Fund for MSMEs, National Enterprise Development Programme, the YouWIN Connect Nigeria program, The Youth Entrepreneurship Support (YES) Programme, Tony Elumelu Entrepreneurship Programme (TEEP), and Lagos State Entrepreneurs Trust Fund (LSETF) already exist amongst others. Improving access would involve creating more specialised funds for women entrepreneurs, and training SMEs on how to keep records and apply for existing credit and grants.  

There are no shortcuts to solving the problem of infrastructure for SMEs, but one quick win is expanding opportunities for export-oriented SMEs to participate more in Free Trade Zones (FTZs). FTZ, as defined by Mondaq, is any location where goods can be shipped, handled, manufactured, reconfigured, and re-exported without the involvement of customs agencies. These zones have a tendency to have better infrastructure and streamlined processes that allow a smoother flow of goods.  

On vocational and entrepreneurial training, a partnership by local and foreign experts in the private sector with the government in organising workshops, seminars, boot camps, and similar programs for SME owners and operators will go a long way. Through tax incentives consulting firms like the Big 4s can be encouraged to organise training for SMEs in areas like digitalisation, taxation, financial records keeping, and business strategy. This idea can be extended to the areas of research and development. Asides from private and public research institutes, academia can be a viable partner to pair SMEs with so that new products and technology can be developed. 

To conclude, it is paramount to drive home the point that SMEs hold so much potential to enhance growth and development for Nigeria, as is the case for many developing countries. The limitation faced by SMEs in global market participation is therefore an important issue for national development that must be addressed by all stakeholders.  

About the author:

 Connect with Nnamdi Okoh on Instagram @nnamdiokoh, Twitter @Lord_nnamz and LinkedIn @Nnamdi Okoh. Learn more about Terminal Africa’s service offerings at www.terminal.africa.

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Lagos seals 42 health facilities across the state

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The Lagos State Government, through the Health Facilities Monitoring and Accreditation Agency (HEFAMAA) has sealed a total of 42 health facilities out of about 1040 visited between January and September 2022. 

This was made known by the executive secretary of HEFAMAA, Dr. Abiola Idowu, in Ikeja while reviewing the activities of the agency in the nine-month period. 

Sealed for non-compliance with regulatory standards: Idowu said the facilities were sealed for non-compliance with regulatory standards, adding that other infractions committed include non-registration of facilities and lack of qualified medical personnel, as well as the illegal training of auxiliary nurses.  

She disclosed that in the same period, 170 facilities across the state were inspected for registration, while about 157 closure notices were issued. 

Idowu explained that the key areas monitoring officers focus on during monitoring and inspection exercises of health facilities are: the qualification of personnel, operation processes of the facility, the environment, and the standard of equipment. 

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On HEFAMAA’s monitoring activities, the executive secretary explained that the aim of the franchise is to improve the effectiveness of the monitoring exercise so that all the health facilities in the state can be monitored at least twice a year as the law stipulates. 

  • She said, “The Agency is empowered by the Health Sector Reform (HSR) Law 2006 to franchise some of its activities. Section 49 (5) of the law granted the agency the power to select franchise companies to monitor and ensure compliance with the law by health facilities in the state.’’ 

Get acquainted with the law: Dr. Idowu, therefore, advised owners and operators of health facilities to get acquainted with the law and carry out their operations in accordance with it to safeguard the health of the people. 

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She also emphasized the commitment of the state government to sustain the fight against quackery and unprofessional conduct in the system, as well as urged intending operators to ensure proper registration with the agency through its website, hefamaa.lagosstate.gov.ng before commencing operations. 

Going further, she added that existing registered operators should ensure prompt renewal of their certificates to avoid being sanctioned. 

 

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Nigeria produces 13% of global tantalum output – EITI

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The Extractive Industries Transparency Initiative (EITI) said Nigeria produces 13% of the global production of tantalum. 

EITI disclosed this in its 2022 Mission Critical Report which was released on Wednesday, November 2.   

Tantalum is a highly resistant mineral used in manufacturing electronics, especially mobile phones, laptops, and super alloys. 

According to EITI, the mineral will potentially be used in electric vehicle (EV) batteries, depending on the technology development and deployment of alternative zero-cobalt batteries.    

In 2021, China recorded imports of tantalum from Nigeria, the Democratic Republic of Congo (DRC), Ethiopia, Madagascar, Mozambique, and Sierra Leone.   

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Nigeria lacks mining data: The report showed that aside from the recorded tantalum production rate, Nigeria rarely had any definite data for 14 of the minerals highlighted in the report. That’s because the country’s solid mineral sector is characterised by artisanal mining and small-scale mining of manganese and tantalum. 

Lack of data discourages investors: The report showed that exploration and mapping of mineral deposits are limited in many EITI-implementing countries, especially African countries like Nigeria. The availability of comprehensive and public geological data determines the ability of resource-rich countries to attract responsible investors and negotiate favourable terms for the country and its people.  

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The importance of open geological data: EITI said access to open geological data is important to support a transition mineral development strategy and to level the playing field in negotiations between governments, companies, and communities. Transparent information can improve the terms of contracts, facilitate mine planning, and ensure that all stakeholders are well informed.  

Profit shifting in Nigerian mining market: In October 2021, the International Monetary Fund (IMF) said countries like Nigeria lose $600 million in revenue due to tax rate differences between African countries and offshore affiliates in the same multi-national enterprises’ group.   

The EITI report corroborates what the IMF said. The report said: 

  • “Research on profit shifting in mining across Sub-Saharan Africa indicates that African countries are losing, on average, between $470 million and $730 million per year in corporate income tax from MNE tax avoidance. The baseline estimate – which also includes Sub-Saharan African economies with small mining sectors – suggests a revenue loss of about $600 million, based on tax rate differentials between African countries and offshore affiliates in the same MNE group.”   

What you should know: Tax base erosion and profit shifting (BEPS) is a serious governance challenge for countries pursuing resource revenues from the taxation of multinational enterprises (MNEs).  

  • BEPS occurs when companies shift reporting of profits generated in higher tax jurisdictions to other parts of their business in lower tax or no-tax jurisdictions.  
  • This challenge could become more pronounced in the transition minerals sector given the integrated business structures of many of the MNEs involved in mining, processing, refining, marketing, and trading in transition minerals across multiple jurisdictions.  
  • There are also increasingly powerful global partnerships controlling transition mineral value chains, for example, through the consolidation of mine-to-car business deals by upstream and downstream MNEs.    

Nigeria must take action: Nigeria and other sub-Saharan African countries need to take intentional steps to maximize their mineral resources, especially in the era of the global energy transition.  

  • During the October 2022 Reuters Impact Climate Conference in London, the president of the Africa Finance Corporation (AFC), Samaila Zubairu said it was time for Africa to rethink the approach to its mining value chain.  
  • According to him, mining is carried out in Africa, and the minerals are exported to Asia where they are processed and exported to other parts of the world. He said that this cannot continue and Africa needs to also process mineral resources so, there is value capture here before exports take place, and Africa can expand its mining capacity.   
  • Zubairu said; “Africa needs to expand its mining capacity, more minerals should be sourced, mined, and processed here on the continent. More investments in adaptation will increase infrastructural capacity.” 

 

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