Oil companies are NOT making too much profit

 By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

24 April 2011

Are the oil companies in Kenya making unfair profits? Before delving into that question, I must first declare that I have no interest in the oil sector – I am not an employee, nor a shareholder, nor do I have any business dealings with oil companies, except, of course, when I buy petrol and cooking gas.

The two largest oil companies in the country are Total Kenya Ltd and KenolKobil Ltd. In 2010, they controlled about 45 percent of all the products sold – Total with 27 per cent and KenolKobil 18 per cent. Luckily, these two companies are quoted at the Nairobi Stock Exchange and therefore, their financial statements are available to the general public (they are regularly published in the press).

In the year ending 31st December 2010, Total Kenya Ltd made sales of over Sh64 billion. After deducting all expenses, the company was left with a profit (before tax) of Sh1.388 billion. The figures for KenolKobil were Sh102 billion turnover and Sh1.777 billion in profit.

Now a company that makes profit in the order of billions of shillings is not doing badly, is it? In fact, we might be tempted to say that it is making “too much”. But let’s not jump the gun…

A quick method of checking whether the profit is “too much” is to calculate it as a percentage of the sales. That is, how much did the company make out of every Sh100 in sales. In the case of Total Kenya, we get 2.2 per cent (Sh1.388b divided by Sh64b). In other words, only Sh2.20 out of Sh100. The corresponding value for KenolKobil is 1.7 per cent – Sh1.70 out of every Sh100.

I know many business people who would not touch a business that makes only two bob out of Sh100 in sales per year! They will see it us locking up their money – “hiyo ni kufunga pesa” they’d say.

I have seen hawkers buying an item for Sh50 and selling it for Sh300. Their operating expenses are quite small – perhaps only bus fare and the Sh20 daily fee to the City Council – thus making at least Sh150 profit. This comes to about 50 percent of the sales turnover! But for some strange reason, society tends to excuse “small, ordinary citizens” who make a kill, so let’s see how the profits of the oil companies compare with other big businesses.

The Nation Media Group is also listed at the Stock Exchange and its financial reports are also public information. In the year ended 31st December 2010, this company made a profit (before tax) of Sh2.15 billion. The sales of the period were Sh9.6 billion.

Therefore, the profit-to-sales ratio comes to 22 per cent. Is that “too much”? Well, when you bear in mind that news dissemination is not as crucial as fuel distribution, it then becomes reasonable to conclude that the Nation Media Group is also not making “too much” profit.