A quarter of NSE listed firms have negative working capital

Tuesday June 13 2023

Nairobi Securities Exchange (NSE). PHOTO | DIANA NGILA | NMG


About one-quarter of the firms listed on the Nairobi Securities Exchange (NSE) board are facing financial constraints, which may require fresh capital to sustain operations and dividend payment to shareholders.

The worrying state of affairs demonstrates the extent of the battering that listed firms have borne in the hands of the ongoing economic crisis and the investors seemingly lack of interest in stocks as a result of depleted disposable incomes and the emergency of alternative investment options such as real estate and private equity.

Data compiled by The EastAfrican for the year ended December 31, 2022 shows that 14 of the 57 firms actively trading on the Nairobi bourse are battling with negative working capital positions in which current assets have fallen short of current liabilities.

The data obtained from the audited financial statements of the listed firms excludes sugar miller Mumias Sugar Company, which is in receivership, ARM (under liquidation), Deacons East Africa (under administration) and Uchumi Supermarkets, which is under a court-backed voluntary arrangement plan with creditors.

Read: Nairobi bourse to scale up trading by wooing back retail investors

Last year, Uchumi acknowledged through its Company Voluntary Arrangement status report for June that it is facing numerous challenges that have hindered implementation of the plan, setting the stage for liquidation.


Operating ecosystem

Negative working capital means that these firms are wallowing in a precarious cashflow position in which they lack the cash and cash equivalents to finance day-today operations and meet short term obligations of up to one year.

But the Capital Markets Authority (CMA) says that the severity of each firm’s financial situation depends on the sector in which it is operating, since companies in the manufacturing and industrial sectors often bear the brunt of a negative working capital.

Read: CMA wants a return of preferential tax rates

“To be honest the environment has been very hostile, and everybody is feeling it, even at the individual level,” CMA chief executive Wycliffe Shamiah told The EastAfrican.

“If people don’t have money in their pockets, you will find that even companies that depend on them will start struggling.”

Working capital index

According to audited financial statements the 14 firms with a negative working capital are in sectors such as Automobiles and Accessories, Commercial and Services, Construction and Allied, Energy and Petroleum, Investment Services and Manufacturing and Allied sectors.

Read: Economic woes force NSE to wipe off $6 billion

The CMA is aware of the financial state of several listed companies, and it is in constant discussions with the boards and management of the affected companies in trying to come up with workable plans of addressing the financial shortfalls.

According to the regulator working capital is in fact not a ‘good’ indicator of the financial health of a company because some companies could lack short term funds but most of their cash is tied up in long-term assets.

“Working capital is not a good indicator of the financial health of a company. It depends on the sector. In certain sectors when you have a negative working capital it means you are struggling while in some sectors it can be a problem when you go beyond a certain level, while in others it is not a problem at all,” said Mr Shamiah.

As a result, the regulator is reviewing the listing regulations to expand financial indicators of listed firms beyond the working capital in various sectors.

The current regulations only require listed firms to have ‘sufficient’ working capital without detailing the quantum.

Read: Capital flight shakes East Africa stock markets

CMA is reviewing the Public Offers Listing and Disclosures Regulations with a view of increasing and retaining listings at the Nairobi Securities Exchange (NSE), support capital raising by Small and Medium Enterprises (SMES) and enhance investor protection.

Bourse ownership

The draft regulations aim to at establish fair, efficient and transparent capital markets by encouraging and promoting timely and accurate disclosure of information to investors.

They also provide for promoting investor protection and improved investor confidence in the capital markets.

Last year, NSE Plc which self- listed in 2014, recorded a 89 percent decline in net profit to Ksh13.72 million ($99,420.28) from Ksh132.53 million ($960,362.31) in 2021.

Read: Nairobi bourse third worst performing stock market in Africa

The NSE 20 Share Index declined by 11.9 percent to settle at 1,676.10 points from 1,902.57 points in 2021 in the same period.

NSE demutualized and self-listed in 2014 by allowing the public to own shares in the company which was previously wholly owned by trading intermediaries (stockbrokers).

However, many of the stockbrokers and investment banks — which after listing each held a stake of 2.7 percent in the bourse — have since sold their shares either fully or in part.

The bourse is currently majority owned (50.01 percent) by foreign investors, with stockbrokers owning a paltry 17 percent stake.