Eterna Oil has recently released its unaudited Q4/2023 results, revealing a Q4 loss after tax of N5.38 billion, significantly below the projected profit after tax of N309 million.

Following the release of the company’s results on January 31st, 2024, as of the close of trading on Friday, February 9, 2024, the share price of Eterna Oil has declined by 19%.

This decline has moderated the year-to-date gain to 26.90%. However, this gain trails behind the year-to-date gain of the NGX All Share Index (NGXASI), which stands at 36.22%.

Typically, the release of a disappointing financial result can lead to negative market reactions, including a decline in the company’s stock price, increased volatility, and decreased investor interest.

The substantial difference between the projected profit and the actual loss suggests potential challenges in Eterna Oil’s operations or market conditions in the results of the 2023 financial year.

While the company sustained respectable top and mid-line performances, evidenced by a significant increase in gross profit by 99.89% and operating profit by 182%, its bottom-line performance was adversely affected by foreign exchange losses and a high cost of fuel-to-fuel revenue ratio. Consequently, the company reported a loss after tax of N9.332 billion in 2023.

Eterna experienced a foreign exchange loss of N9.622 billion in Q2 and N5.634 billion in Q4, contributing to the overall N15.4 billion loss in 2023.

Given the ongoing depreciation of the Naira, it is increasingly unlikely that the company will beat its Q1 2024 earnings forecast of N391.54 million.

If the company fails to meet its earnings forecast, it may face pressure from investors, shareholders, and analysts, leading to potential declines in stock price and market confidence.

Additionally, an analysis of Eterna Oil’s balance sheet reveals challenges in its financial leverage ratios. The debt-to-equity ratio and equity multiplier have been strained due to the company’s recent losses and the consequent reduction of shareholders’ equity.

Eterna Oil’s debt-to-equity ratio of 11.997 reveals that the company holds nearly 12 times more debt than equity.

Similarly, its equity multiplier of 16.918 implies that for every N1 of equity, the company possesses approximately N16.9 of assets.

These ratios underscore Eterna Oil’s heavy dependence on debt financing. While debt financing theoretically has the potential to amplify returns, it appears that this has not been the case for the company.

Instead, the significant reliance on debt financing or erosion of shareholders’ funds due to recent losses may elevate Eterna Oil’s financial risk, potentially compromising its long-term stability.

Due to the recent loss, Eterna Oil’s retained earnings turned negative, amounting to -N2.845 billion, causing a decline in shareholders’ funds from N13.1 billion in 2022 to N3.6 billion in 2023

Given the already high debt level, Eterna Oil may need to explore alternative avenues to address the shortfall in shareholders’ funds.

One potential option is to raise additional capital through equity offerings, including rights issues.

By issuing new shares, the company can inject fresh capital into its operations without further increasing its debt burden.

Raising additional capital through equity offerings would bolster Eterna Oil’s liquidity and provide funds for various purposes, including debt repayment, capital expenditures, and meeting working capital requirements.

This infusion of funds is particularly crucial considering the company’s relatively weak liquidity position, as indicated by its current ratio of less than 1 (0.84).

Considering that Eterna Oil’s share price surged by an impressive 107% Year-to-Date (YtD) in 2023, the decline after the release of the unaudited 2023 results suggests that investors are concerned about the company’s ability to maintain its historical growth trajectory.

This decline of approximately 19% could reflect investor apprehension regarding the company’s future performance and its capacity to meet anticipated forecasts.

Eterna’s recent challenges, including loss after tax, negative earnings multiples and missed forecasts, highlight the need for a cautious approach for investors.