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EVALUATION OF THE EFFECT OF NON-CURRENT ASSETS ON RETURN ON ASSETS OF CEMENT MANUFACTURING INDUSTRY IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Return on Assets is one of the measures of financial performance. And financial performance measure is one of the important performance measures for economic units. Financial performance measures are used as the indicators to evaluate the success of economic units in achieving stated strategies, objectives and critical success factors (Katja, 2009). The main objective of financial performance measuring is to determine the operating and financial characteristics and the efficiency and performance of economic unit management, as reflected in the financial records and reports (Amalenda  2010). Financial ratio analysis method is an important measure to financial performance analysis in the economic units because ratio analysis method is the most commonly used financial tool to evaluate the current and past performance in the economic unit and to assess its sustainability (Dick, Feenstra and Wang 2000).

Capital expenditure refers to the decisions related to capital budgeting as replacement of equipment or the expansion of plant. This expenditure is basically related to financial decisions of a firm. This should assure that net present value must be generated. Capital expenditure must be directly related to the corporate income in future. There are two kinds of assets in the commercial firms, such as current asset and the noncurrent t assets. The examples of non-current assets are building, land, plant, machinery and equipment, furniture and fittings and others. The productive capacity can be generated by investing in such assets which ensures long term profit range. The kinds of such assets do not change frequently. The basic purpose of the purchase of such assets is to produce and sale more. Assets have significant role in determining the profit ratio of a firm (Smith 1980)

There are many reasons why the assets are considered to be important. The non-current assets are about half of the total assets of the manufacturing firm and a greater return on investment can be obtained by having huge level of assets which are not current (Igbal and Mati 2012).

According to Okwo, Ugwunta and Nweze (2012) a firm acquires plant and machinery and other productive noncurrent assets for the purpose of generating sales. Therefore, the efficiency of noncurrent assets should be judged in relation to sales. Generally, a high non-current assets turnover ratio indicates efficient utilization of non-current assets in generating sales, while a low ratio indicates inefficient management and utilization of non-current assets. Thus a firm, whose plant and machinery has considerably been depreciated, may show a higher non-current assets turnover ratio than the firm which has purchased plant and machinery recently. By comparing the non-current assets turnover of the two firms, it cannot be conclusive that the former is more efficient in managing non-current assets because of the effects of depreciation. The asset turnover shows how much sales are generated for every N1(one naira)  of capital employed. A low asset turnover indicates that the business is not using its assets effectively and should either try to increase its sales or dispose of some of the assets.  

Ibam (2008) opined that a company’s investment in non-current asset is dependent to a large degree, on its line of business. Some businesses are more capital intensive than others. Firms in the natural resources just as firms in the brewery industry and other industry producers require a large amount of noncurrent asset investment and large capital equipment while, service companies and computer software producers need a relatively small amount of noncurrent assets.

Ibam (2008) is more interested in the average noncurrent assets. This noncurrent asset turnover ratio indicator looked at asset over time and compares the ratio to that of competitors.  This gives the investor an idea of how effectively a company’s management is, in utilizing noncurrent asset. It is a rough measure of the productivity of a company’s non-current assets with respect to generating sales. The higher the number of times turns over, the better. However investors should look for consistency or increasing non-current assets turnover rates as positive position in investment qualities Ibam (2008).

According to Albrecht (2005) Return on assets (ROA) is a financial ratio that shows the percentage of profit a company earns in relation to its resources. It is commonly defined as Earning before interest and taxes, it is derived from the income statement of the company and is the profit before taxes. The noncurrent assets are read from statement of financial position and include plant, property and equipment as depreciated. ROA is a ratio but usually presented as a percentage.

The higher the ROA, the better the management. But this measure is best applied in comparing companies with the same level of capitalization. The more capital-intensive a business is, the more difficult it will be to achieve a high ROA. A major equipment manufacturer, for instance, will require very substantial assets simply to do what it does, the same will be true for a power plant or cement manufacturing industry. But a fashion designer, or a software firm, may require only minimal capital equipment and will thus produce a high ROA, the industry average of ROA for capital intensive firms is five percent (5%) (Berstern and John 2000)

The difference between a highly capitalized business and one running largely on creative assets is that in the case of failure, the capital-intensive company will still have major assets that can be turned into real money, whereas a concept-based enterprise will fail when its art is no longer favoured, it will leave a few computers and furniture behind. Therefore ROA is used by investors as one of several ways of measuring a companywithin an industry, comparing it with others playing by the same rules.

When cash flow is tight, most owners focus on managing their current asset by cutting inventory and collecting money owed them by customers, However, the average business has as much capital  tied up in noncurrent asset-the property, plant and equipment used to create the goods and services to sell. How well the capital intensive utilize their asset determines the difference between profit and loss. If the property, plant and equipment assets are idle or not generating enough cash flow, this may impact on the value and financial health of the business.

Returns on noncurrent assets like property, plant and equipment vary greatly among companies. Every industry is different in the type of operating asset it has and the level of asset required for production. The industrial level is required to know how well the assets are deriving profits and cash flow.

Return on Assets (ROA)  ratio illustrates how well management is employing the company’s noncurrent assets to make profit. The higher the return, the more efficient management is in utilizing its asset base. The need for investment in current and noncurrent assets varies greatly among companies. Capital intensive businesses (with a large investment in noncurrent assets) are going to be more asset heavy than technology or service businesses. The capital intensive businesses with a large investment in noncurrent asset will have smaller ROA than non-capital intensive businesses (with a small investment in noncurrent assets) because of a low denominator number. It is precisely because businesses require different sized asset bases that investors need to think how they use the ROA ratio. It is in the light of the above that the effect of noncurrent asset on ROA of cement manufacturing company is important.

The manufacturing companies depending on the structure of assets consist of two types of assets, non-current and current assets. The manufacturing companies use noncurrent assets to transfer the raw materials into finished goods. These assets are called property; plant and equipment include land building equipments, automobiles and furniture (Mawih 2014)

It is the primary concern of business organization to give significant attention to return on assets because of its implications to business survival. High Performance reflects management effectiveness and efficiency in making use of company’s resources and thus in turn contributes to the country’s economy at large.

Poor utilization of noncurrent assets causes low return on investment. And low return on investment is an attribute of ineffectiveness and inefficiency of utilization of assets. Inadequate of noncurrent assets results to low productive activities because noncurrent assets are like the structure while current assets are like flesh. And without the structure the flesh cannot stand. The productive engine is the noncurrent assets in manufacturing organization.

The problem of appropriate level of investment on noncurrent assets to current assets in cement manufacturing firms in Nigeria is vital because more current assets can create high liquidity, surplus cash and high liquidity impairs profitability. The problem of proper evaluation of investment on noncurrent assets is necessary because investment cannot be taken on the hunch, hence investment analysis is very necessary before assets are acquired for income yielding. 

It can therefore be argued that despite the strategic importance of non-current assets in cement manufacturing firms in Nigeria. Comprehensive studies on non-current assets are lacking hence the necessity of this study.

Cement Manufacturing Industry

Establishing a cement factory is highly capital intensive which makes a cement factory very expensive to install and maintain. The cost of cement production is very high all over the world, with energy being the major cost center.

The consumption of cement in Nigeria is determined by factors influencing the level of housing and industrial construction, irrigation projects, roads, water supply pipes, drainage pipes, establishment of new universities by federal government and private individuals. Growth in population and level of urbanization in major cities like what we are currently experiencing in Lagos and Port-Harcourt are also other factors that confirm the imminent demand for cement in Nigeria and other parts of Africa. All these including the supply gap of cement in Nigeria show that future investments in Nigeria cement industry will be a viable venture.

The history of cement production in Nigeria

The history of cement production in Nigeria is traceable to the Pre and immediate Post-independence era which witnessed the introduction of development plans and import substitution policy and which had impacted on the cement requirement for development of civil infrastructure of the nation. (Mojekwu, Idowu and Sode 2012)

They further stated that the basic inputs into cement manufacture are Lime stone, Red alluvium, Shale and Gypsum. With the exception of gypsum, which occurs in Nigeria only in thin vein layers, Nigeria is abundantly endowed with all the other inputs. Limestone, the major input occurs in all the six geopolitical zones of the country. Apart from the basic raw material inputs, the other major requirement for cement production is fuel. Nigeria, as a nation, is rich in all sources of energy: oil, gas, coal and even other

alternative fuel (waste).

The demand for cement is derived from the demand for residential and non-residential construction. Of these two, the latter is predominantly due to government and business activity. Non-residential construction is therefore highly vulnerable to cut-backs in government spending and to forces of depression in the private business sector.

Residential housing is by far the largest segment of cement consumption. The crucial forces on the demand for residential housing are population pressure and the rent level. It is also noted that the pressure from these sources is so critical as to make housing an essential commodity.

The post civil war reconstruction activities led to an explosion in demand for cement. Government response to this was to embark on massive uncoordinated importation of cement (Makoju 2010).Makoju (2010) reported that demand for cement increased rapidly and initially all the requirement was met with imports. For instance, imports which was estimated to be 80.000tons in 1946 grew by more than double in 1950 and quadruple to 626,500 tons by 1960. All this supply was met entirely with imports until the establishment of Nigercem in Nkalagu in the then Eastern Region in 1957. This was followed by the construction of another 600,000tpa plant sponsored by the then Western Region government in Ewekoro which was commissioned in 1960. Next was Bendel Cement Plant in Ukpilla in the then Bendel State (150,000mt) in 1964 and Calabar Cement which was commissioned in 1965. In the North, at the Cement Company of Northern Nigeria (CCNN) in Sokoto a 100,000mt plant was also commissioned in 1967. These five Plants represented the first generation cement plants in Nigeria table 1, table 2 is additional capacity between 2003 – 2008 and table 3 is on-ongoing cement plants.

Adapted from Mojekwu J.N, Idowu A. and Sode Oluseyi (2013) Analysis of the contribution of imported and locally manufactured cement to the growth of gross domestic product (GDP) of Nigeria (1986 – 2011) African Journal of Business Management Vol. 7(5), pp. 360-371.

1.2 Statement of Problem

The optimization of investment on non-current assets in order to achieve satisfactory return on asset is a major problem being suspected by the researcher in the cement manufacturing industry in Nigeria. Given the huge investment on noncurrent asset, the return on Asset seems not to be satisfactory as perceived by the researcher.  This inadequate production of cement in the country with regard to demand causes high prices of cement and sometimes scarcity in the market. The problem of scarcity often leads to importation of cement in the country causing capital flight and foreign exchange. The inadequate plant and machinery creates low production activities. While surplus investment on land and building does not affect directly the production of cement in the country, the investment on furniture and fittings do not create productive activities in the cement manufacturing industry in Nigeria. The problem of how the assets are performing or to identify specific assets or groups of assets that are idle or not performing in order to match the income to specific assets (or groups of assets) that produce the income. To determine which assets are under- performing in the business. The older machines and equipment look attractive and profitable because they have very low depreciation expenses. However the outdated or run down equipment may be costing more than their worth; if the necessary overhead to support those assets are considered like repair, maintenance, utilities, taxes and lost productivity. It may be that the older depreciated assets are using up too much energy, wasting resources or causing bottlenecks in the production. This undesirable situation attracted the attention and interest of the researcher in evaluating the optimization of investment in non-current asset of cement manufacturing industry in Nigeria in order to assist the investors and management of the cement manufacturing industry.

1.3 Objectives of the Study

The main objective is to ascertain the effects of noncurrent assets on the return on assets of cement industry in Nigeria.

The specific objectives are as follows:-

1.     To assess the effect of investment in plant and machinery on the return on Assets of cement manufacturing industry in Nigeria.

2.     To ascertain the effect of investment in land and buildings on the return on Assets of cement manufacturing industry in Nigeria.

3.     To evaluate the effect of investment in motor vehicles on the return on Assets of cement manufacturing industry in Nigeria.

4.     To investigate the effects of investment in furniture and fittings on Return on Assets of cement manufacturing industry in Nigeria.

1.4 Research Questions

1.     To what extent does the investment in plant and machinery affect the Return on Assets of cement manufacturing firms in Nigeria?

2.     What is the effect of investment in land and buildings on Return on Assets of cement manufacturing firms in Nigeria?

3.     To what level does investment on motor vehicles affect the return on Assets of cement manufacturing firms in Nigeria?

4.     What is the effect of investment on furniture and fittings on Return on Assets of cement manufacturing firms in Nigeria?

1.5 Statement of Hypotheses

Ho1 The amount of investment in plant and machinery does not

significantly impact on the return on Assets  of  cement manufacturing industry in Nigeria

Ho2  The amount of investmentonland and buildings does not    significantly affect the Return on Assets of cement manufacturing industry in Nigeria.      

Ho3 The amount of investment in motor vehicles does not significantly impact on the Return on Assets of  cement manufacturing industry in Nigeria.

Ho4   Investmentin furniture and fittings does not significantly affect the Return on Assets of  cement manufacturing industry in Nigeria.

1.6 Significance of the Study

The study was undertaken to evaluate the effect of noncurrent assets on return on assets of cement manufacturing industry in Nigeria.

The study will be of primary importance and benefit to the cement manufacturing companies in Nigeria.

Other  importance of the study is its  contribution to knowledge.   It would be useful to other researchers and anyone who is interested on the evaluation of effect of investment on noncurrent asset on return on assets of cement manufacturing industry in Nigeria.

1.7 Scope of the Study

The research work was restricted to evaluation of effect of noncurrent assets on return on assets of cement manufacturing industry in Nigeria for the period of 2004-2013. The dependent variable is Return on Assets (ROA) and return on Assets (ROA) was used as the variable for financial performance, while independent variables are noncurrent assets (Plant and machinery, land and buildings, motor vehicles, furniture and fittings. 

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