Escalating costs weigh down company earnings

LIQUIDITY challenges, characterised by a weakening local currency, continue to choke companies as operating costs keep escalating.

Last week, a number of companies published financial results painting a gloomy picture of the economy although they remained optimistic of the future.

Revenue growth was premised on recurrent review and adjustments of prices to keep pace with inflation.

Operating costs are the ongoing expenses incurred during the normal day-to-day running of a business, while finance costs refer to the interest costs and other fees owed to debt financers.

A look at the financial results for the year ended December 31, 2022, for most companies shows that inflationary pressures as well as the deteriorating exchange rate continue to increase operating costs.

Turnall Holdings, in its financial statement for the period, said the liquidity challenges and low aggregate demand prevailing in the economy hampered the group’s efforts to realise its full potential with the inflation-adjusted gross profit for the year under review at 31% compared to 41% achieved last year.

Turnall said the margins were under pressure due to official and alternative market exchange rate disparities whose negative impact on the cost of doing business could not always be sustainably recouped through selling price adjustments.

“Consequently, the cost of goods sold went up by 35%, while revenue grew by 16%. The gross profit in historical terms, however, was 50% compared to 39% reported in the same period last year.” the group said

Operating costs, however, went down to $2,6 million from $5,5 million prior year.

During the period, First Mutual Properties saw operating costs under recoveries shoot to $415 million from $273 million in 2021 in inflation adjusted terms.

For Tobacco Sales Limited operating expenses went up to $5,2 billion from $3 billion in comparable period last year.

“Finance costs increased by 162% on prior year largely attributable to interest rate hikes by the monetary authorities. Consequently the group moved to extinguish its Zimbabwe-dollar denominated facilities to take advantage of more sustainable financing.” the group said.

Proplastics experienced a surge in finance costs to $461 million from $197 million in the same period 2021.

Distribution costs rose to $562 million from $318 million prior year in inflation adjusted terms while administration costs shot up to $2,98 billion from $1,6 billion in 2021.

“The official exchange rate deteriorated during the year with the rate closing at $671 to US$1 from a December 2021 rate of $111. This translates to a massive 504% increase and had a huge bearing on the significant exchange losses on foreign liabilities that the business recorded during the year. The exchange rate on the alternative market also moved significantly upwards and this was the main driver of inflation,” the company said.

Project development costs for Fidelity Life Assurance, however, went down to $44 million from $151 million in 2021.

For BridgeFort Capital Limited formerly MedTech Holdings Limited, the current low electricity generation drove up business operating costs negatively affecting consumer spending as more money is spent on alternative energy sources.

The company is pursuing various transactions to spread operating costs with additional transactions being expected to conclude as the underlying portfolio companies contribute towards the operating costs of the company.-newsday