Mobil Oil Plc In Working Capital Dilemma

By Festus Okoromadu

The management of Mobil Oil Plc, one of Nigeria’s foremost petroleum product marketing companies, may really be having a sleepless night over the current state of the company’s working capital.

The current figure contained in the company’s audited financial statement for the year ended December 31, 2012 showed that working capital stands at a deficit of N646.39 million compared with positive figure of N1.71billion in the preceding financial year.

Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses.

But as it stands for Mobil Oil Plc, it would be almost impossible for it to meet these operational needs without going through some sweat.  Perhaps the only means to keep the company afloat at the moment is to seek help from banks to run the business.

It should be noted that if current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. It would however be expected that the company deploy more efficient means to manage its working capital which involves managing inventories, accounts receivable and payable, and cash.

By implication, the company’s current liability has exceeded its current assets. In simple terms, if the company as at the close of operations on December 31, 2012 made any attempt to pay all its short term debts, it might go bankrupt.

However, financial experts believe that the situation may not constitute a source of worry for shareholders and investors since the company has a high inventory stock and does business on a cash basis.

Meanwhile, ThePost findings show a significant drop in the company’s liquidity ratios during the year. It was an implication that the company’s base was weak in the review financial year.

Similarly, all profitability ratios depreciated in 2012 when compared with the similar period of 2011. Return on equity (RoE), which measures how much financial gain a company brings to its shareholders dropped to 43.68 per cent from 90.79 per cent in the prior year. Similarly, gross profit margin dropped to 10.16 per cent from 16.32 per cent, while pre-tax profit margin went down to 5.05 per cent from 6.57 per cent.

On its part, profit margin, which shows the proportion of earnings that was converted to profit that, can be distributed to shareholders declined to 3.56 per cent from 6.57 per cent. This means that out of every N100 generated through sales during the year under review, only N3.56 was convert to profit that can be distributed to shareholders unlike N6.57 in the previous year. As a result, the company may not be able to pay as much as N5.00 per share dividend as it did during the financial year ended 2011.

The decline in liquidity and profitability ratios came in spite of posting growth in revenue, as gross earnings rose by 30.12 per cent to N80.802 billion from N62.099 billion. However, a corresponding growth in cost of sales which rose by 39.70 per cent to N72.591 billion from N51.963 billion dwarfed the growth in sales.

 

Mobil Oil Liquidity Ratio

  2012 2011
Current ratio 1.00 9.96
Quick ratio 0.57 6.50
Debtors (No of days 25.95 48.27
Creditors (No of days 46.51 66.03

Profitability Ratios

  2012 2011
Return on Equity (%) 1.00 9.96
Gross Profit Margin (%) 0.57 6.50
Profit Margin (%) 25.95 48.27
Pre-tax Profit Margin (%) 46.51 66.03

Mobil Oil 2012 (Profit & Loss Account)

  2012 N’ (Million) 2011 N’ (Million) % Change
Gross Earnings 80,801,947 62,099,515 30.12
Cost of Sales 72,590,947 51,962,991 39.70
Gross Profit 8,211,048 10,136,524 -18.99
Profit Before Tax 4,076,549 5,999,413 -32.05
Taxation (1,198,250) (1,917,354) -37.51
Profit After tax 2,878,299 4,082,059 -29.49