According to data compiled from over 30 of the largest companies listed on the Nigerian Exchange, over the calendar year from January to December, Nigerian companies entered the final quarter of the year with a cash reserve of N2.3 trillion, amounting to 27% increase from 2022 and signifying the largest cash balance in recent history. Although, the data excludes commercial banks and insurance companies, whose business models allow them to receive cash on behalf of their customers.
The cash balances of the companies under consideration represent a 27% increase from the N1.8 trillion reported as cash and cash equivalents at the end of 2022. These companies reported total revenues of N8.05 trillion in the period under review. It further underscores the liquidity of Nigerian companies in a year fraught with macroeconomic challenges and subsequent monetary policy tightening. Moreover, this year the economy recorded its highest money supply in history, surpassing N66 trillion by the end of September 2023.
Accordingly, the data from the 28 largest companies listed on the Nigerian Exchange (NGX), revealed that the total cash reserves at the end of the third quarter rose to N2.3 trillion from N1.8 trillion at the end of 2022. But on a year-on-year basis, the total cash balance was N1.3 trillion as of September 2022, compared to N1.8 trillion as of December 2021.
Implicit to note is the fact that, in terms of freshly generated cash, or cash flow from day-to-day operations, the companies accumulated revenues of N1.7 trillion by the third quarter of the year. Among the 30 companies reviewed, all but seven generated a positive operating cash flow.
The net positive cash flow generation suggests that the companies were able to convert their sales into cash, a sign that businesses are still managing to secure payment from customers for goods and services despite a weakening economy. It also signifies that the cash collected from customers was sufficient to cover operating expenses. Dangote Cement, Seplat, MTN, and Dangote Sugar topped the list of companies with the largest cash reserves.
Despite generating increased net cash from operations, some of the companies also relied on debt financing for their survival. As of the third quarter of the year, the total outstanding debt for the companies under review stood at N4.9 trillion, compared to N3.3 trillion at the end of 2022.
The total balance sheet size for the companies under review also rose from N13.8 trillion in 2022 to a significant N17.3 trillion in 2023, reflecting the impact of several macroeconomic factors on company assets, such as the depreciation of the naira. Nigerian companies appear to have incurred more debt to support their operational and investment activities. Among the companies under review, only Cadbury, Unilever, CAP Plc, and GSK reported zero debt on their balance sheets. In terms of loan balances, MTN, Dangote Cement, Seplat, and BUA Cement topped the chart with the largest debts, accounting for a total of about N2.9 trillion.
Regarding net cash flow from financing activities, which includes funds used to repay some loans and distribute dividends, the companies disbursed N482 billion. The implication therefore is that, as the final quarter of the year approaches, Nigerian companies are positioned in an unprecedented state of liquidity, with a robust cash reserve of N2.3 trillion.
This substantial financial buffer offers both companies and investors a solid ground amid the current macroeconomic challenges. But for investors, the increased cash reserves and the companies’ ability to turn sales into cash despite economic headwinds signal a potentially favorable climate for dividends and the prospect of resilient share performance.
Looking ahead to 2024, these cash holdings could serve as a strategic war chest for companies, allowing them to navigate the uncertainties of a tightening monetary policy environment and to exploit growth opportunities without over-reliance on debt markets.
For companies, the decision between distributing cash to shareholders as dividends or reinvesting it into operations and growth initiatives will be critical. This balance will determine not only their ability to sustain performance but also to capitalize on an eventual economic upturn.
The significant cash reserves provide a dual advantage: a shield against short-term macroeconomic turbulence and a springboard for long-term strategic investments. Companies that judiciously manage these reserves, balancing shareholder returns with smart reinvestments, are likely to emerge as the frontrunners as the economy steadies and moves into a more stable phase in 2024. Investors, on their part, will be watching closely, seeking to align with those entities that demonstrate both fiscal prudence and strategic acumen in the face of prevailing economic conditions.
