Total debt of International Breweries Nigeria Plc has risen to a level that represents 84.15 percent of its enterprise value.
A company finances its operations with a combination of debt (money borrowed from financial institutions) and equity (money it raises from shareholders).
BusinessDay reports that while debt is cheaper to borrow due to the benefits of tax shield, too much of it most times result in deteriorating margins as huge interest expense or finance cost erodes operating profit. What this means is that a loss is inevitable as sales continue to grow at snail pace.
International Breweries’ capitalization ratio stood at 22.22 times or 2,222 percent as at December 2019, which implies for every N1 in equity there are 22.22 in debt on the books.
The company’s capitalization ratio was 41.09 percent or 0.41 in 2014, and then it jumped to 7.74 times or 774 percent in 2018.
The capitalization ratio compares total debt to total capitalization (capital structure). The capitalization ratio reflects the extent to which a company is operating on its equity.
This ratio helps in the assessment of risk. The companies with high capitalization ratio are considered to be risky because they are at a risk of insolvency if they fail to repay their debt on time. Companies with a high capitalization ratio may also find it difficult to get more loans in the future.
International Breweries’ total liabilities to total asset ratio (another capitalization ratio) stood at 0.97 times or 97 percent, and a ratio above 50 percent means there are more debt than equity in the balance sheet of an entity.
The company recorded as loss of N9.13 billion to end 2019 financial year as sales reduced by 5.26 percent, the first drop at the top lines (revenue) in 5 years.