In this article, I computed the working capital (WC) for Dangote Cement using the financial statement for 2020. To calculate this, you must know the formula for WC on one hand and have access to the business financial statement. Dangote cement’s WC was not bad in 2019 in comparison with 2020 as you will learn.
In case you haven’t read my article on working capital, do so here. The term is the difference between current assets and current liabilities. It can also be called net working capital. A firm can have a positive or negative WC or both. Positive WC is good for business and reveals that the firm’s management is conservative. But, negative WC is not bad on its own if it is managed properly. And it indicates the aggressiveness of the business owners and management.
How I computed Dangote Cement Working Capital
This is done using the statement of financial position from the 2020 annual report of Dangote Cement. You can download a copy of it here. Furthermore, I use the net working capital formula which is Total Current Assets less Total Current Liabilities. You can read all my computations of the working capital of companies listed in the Nigerian Exchange Group here.
The screenshot below is the MS Excel Worksheet for Dangote Cement. I have extracted it from the statement of financial position. Here, the Group and the company working capital was computed. For the Group, Dangote Cement has a Negative WC for the two years that are compared. However, the company shows positive working capital.
Explanations for the Net Working Capital for Dangote Cement
For the group, the working capital is -279,679 in million Naira and -224,058 in 2020 and 2019 respectively. Both years have negative WC. However, the company shows 15,435 and 8,415 in million Naira for 2020 and 2019 financial years. Both years have positive WC for the company.
As I have already explained, having negative working capital is not bad for business. As long as the company can meet its liabilities immediately they are due for repayments. Negative WC is reflected in higher revenue and profits, and less tax payment.
From the statement of financial performance of Dangote Cement, the revenue for the group in 2020 was 1,034,196 in million Naira. This is higher than 2019 which is 891,671 in million Naira. Also, the profit for the year were 276,068 and 200,521 in million Naira for both years. From this, you can deduce that higher negative WC leads to more revenue and profits.
In addition to the above, the company can repay liabilities by debt financing. Borrowing in the long term can be used to pay up short-term debt (current liabilities) and at the same time reduces the amount of tax paid by the company.
For Dangote Cement, working capital for the Group in comparison with the Company has mixed feelings. The Group shows a negative WC while the company has a positive WC. Whatever is the case, the real problem is how the company manages negative WC. When properly utilized, negative WC can lead to higher revenue, profit, and fewer taxes.