BREAKING: Companies cut back on net cash flow used in investment in first quarter of 2023

Key highlights

  • A recent analysis by Nairametrics shows that companies in Nigeria deployed less cash on investment in the first quarter of 2023 compared to the same period in the previous year.
  • The decline in net cash flow used in investment can be attributed to two significant factors: the upcoming 2023 National elections, which introduced uncertainty for businesses and led to a more cautious approach to investment, and the scarcity of the Nigerian naira in the first quarter, which hampered business activities and investment decisions.
  • The reduced investment activity is reflected in companies’ lower spending on property plants and equipment, avoidance of rolling over matured investments, and cutbacks in software acquisition.
  • Major companies like MTN, Dangote Cement, and Seplat experienced significant drops in net cash flow from investment during the period.

A recent Nairametrics analysis reveals companies deployed less cash on investment in the first quarter of 2023 compared to the same period last year.

Nairametrics tracks the cash flow statements of listed companies to gauge how cash is being utilized across key sectors of the economy. The net cash flow used in investment reported by companies helps understands trends.

Net cash flow used in investment refers to the overall change in cash resulting from a company’s investment activities during a specific period.

It represents the difference between cash inflows and outflows related to investments in long-term assets, such as property, plant, and equipment (PP&E), acquisitions of other companies, purchases or sales of investments, and loans made to others.

Nairametrics earlier reported that companies listed on the Nigerian Exchange reported a cash balance of N1.8 trillion at the end of March 2023, up from N1.2 trillion in the same period in 2022.

Why this matters:  A net cash flow used investment serves as an economic barometer, with different implications depending on whether it is positive or negative. A negative cash flow suggests that businesses are investing in capital expenditures (capex) for long-term growth, indicating confidence in the economic outlook.

  • It signifies that businesses are willing to allocate resources for expansion and investment opportunities. Conversely, a positive or slowdown in net cash flow from investment suggests that businesses are more cautious and skeptical about investing.
  • They may be conserving cash and refraining from significant capital expenditures, indicating a more reserved economic sentiment.
  • Monitoring this metric allows for a better understanding of businesses’ confidence levels and their impact on overall economic activity.

What the data reveals: A cursory analysis of data of about 30 listed companies in sectors ranging from construction, oil and gas, manufacturing (including consumer goods companies), agriculture, real estate, and telecommunications otherwise referred to as COMART shows the companies deployed less cash on property plant and equipment so far this year.

  • In addition, some companies kept more cash on their balance sheet as they avoided rolling over matured investments. Others just cut back on spending on software acquisition.
  • The Net cash flow on investments for the companies under review fell to N221 billion in the first quarter of 2023 compared to N615.7 billion in the same period in 2022.
  • The major drops came from the likes of MTN, Dangote Cement, and Seplat which made up a combined N566 billion of the net cash flow from investment recorded in the first quarter of 2022. In the corresponding quarter of 2023, the companies also had a net cash flow from investing of N66.2 billion.

MTN which reported N76 billion in net cash flow used in investment compared to N246.3 billion in the same period last year indicates the reason was that it spent less on the acquisition of intangible assets in Q1 compared to the same period last year.

  • While it spent N141.5 billion last year on intangible assets (such as software expenses) it spent just N6.5 billion in 2023.
  • The company also spent less on the acquisition of property plant and equipment at N23.9 billion this year compared to N52.1 billion last year.

Dangote Cement reported a net cash flow used in investing of N71.9 billion compared to N255. 6 billion in the same period.

  • However, the drop was largely driven by a net decrease in loan repayment to its parent company which was surprisingly classified as cash flow from investing.
  • However, it spent less on the acquisition of property from N27.9 billion to N10.1 billion.

Seplat’s net cash flow used in investing dropped because of an N53.4 billion deposited for investment and more specifically as an advance towards the acquisition of the entire share capital of Mobil Producing Nigeria Unlimited from Exxon Mobil Corporation, Delaware.

  • Dangote Sugar and Nigeria Breweries also reported drops in net cash flow used in investing as they deployed less cash on investing in the period under review.
  • Dangote Sugar spent N7.7 billion on property plants and equipment in 2022 versus N5.1 billion in 2023. NB reported N7.4 billion in 2022 versus N2,3 billion in Q1 2023.

Why the drop in spending?

This trend could be attributed to two significant factors. Firstly, the upcoming 2023 National elections in Nigeria introduced uncertainty for businesses.

  • During periods of political transition, companies often adopt a more cautious approach to investment, as they await the outcome and potential policy changes that could impact their operations.
  • The uncertainty surrounding the elections might have led businesses to conserve cash and adopt a more reserved economic sentiment, resulting in reduced investment activity.

Secondly, the scarcity of Nigerian naira in the first quarter of 2023 could have hampered business activities and investment decisions.

  • Limited access to foreign exchange due to currency scarcity can create challenges for companies, particularly those reliant on imported inputs or equipment.
  • The difficulty in obtaining foreign currency could have led businesses to scale back on capital expenditures, property plant and equipment investments, and software acquisition, as reflected in the reduced net cash flow from investment during the period.

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