Auditor-General’s Report on the Annual Financial Report of the State of Victoria: 2017–18

Tabled: 24 October 2018

Appendix F. Water sector financial sustainability risk indicators

This appendix sets out the definitions and criteria we used for the current and prior years to assess and report on financial sustainability risks across the water sector.

These financial sustainability indicators are only indicative, highlighting ongoing and emerging financial sustainability risks at a sector and group level—metropolitan, regional urban and rural.

It is important to note that a definitive view of financial sustainability requires a more holistic analysis beyond historical financial reporting, taking into account forward-looking financial forecasts and plans, operations and an entity's environment, particularly the regulatory environment within which these water entities must operate.

Figure F1 shows the indicators we used to assess the financial sustainability risks of the water entities covered by this report. These indicators should be considered collectively and are more useful when assessed over time as part of trend analysis.

Figure F1
Financial sustainability indicator definitions and formulas

Indicator

Definition

Formula

Short-term financial sustainability indicators

Cash interest cover

This measures an entity's ability to meet ongoing interest payments and ability to service debt. The higher the ratio, the better the ability for the entity to meet its interest payments from borrowings.

Net operating cash flows before net interest and tax payments / Net interest payments

Internal financing (%)

This measures an entity's ability to finance capital works using cash generated by its operating cash flows. The higher the percentage, the greater the ability for the entity to finance capital works from its own funds.

Net operating cash flows less dividends / Net capital expenditure

Current ratio

This measures an entity's ability to pay existing liabilities in the next 12 months. A ratio greater than 1.0 means there are more cash and liquid assets than short-term liabilities.

Current assets / Current liabilities (excluding long‑term employee provisions and revenue in advance)

EBITDA margin (%)

This measures an entity's ability to generate surplus to fund its operations. This measure is generally used for entities with significant fixed assets and/or debt financing. The larger the EBITDA margin, the stronger the result.

Earnings before interest, tax, depreciation and amortisation / Total revenue

Net result margin (%)

This measures how much of each dollar collected as revenue translates to net result. A positive result indicates a surplus, and the larger the percentage, the stronger the result.

Net result after tax / Total revenue

Long-term financial sustainability indicators

Gearing ratio (%)

This is a longer-term measure that compares all current and non-current interest-bearing liabilities to total assets. It complements the current ratio, which is a short-term measure. A lower ratio indicates that the entity relies less on debt to finance its assets.

Total debt (including finance leases) / Total assets

Return on assets (%)

This ratio shows the percentage of profit the entity earns in relation to its overall resources. A positive result indicates the entity's resources are generating a surplus, and the larger the percentage, the stronger the result.

Earnings before net interest and tax / Average total assets

Return on equity

(%)

This is a measure of profitability which calculates how many dollars of profit an entity generates with each dollar of equity. A positive result indicates the entity is generating a surplus with each dollar of shareholders' equity, and the larger the percentage, the stronger the result.

Net profit after tax / Average total equity

Capital replacement

This compares of the rate spending on infrastructure, property, plant and equipment, and intangibles with depreciation and amortisation. This is a long-term indicator, as capital expenditure can differ in the short term if there are insufficient funds available from operations, and borrowing is not an option. A ratio less than 1.0 means the spending on capital works has not kept pace with consumption of assets.

Cash outflows for property, plant and equipment and intangibles / Depreciation and amortisation

Gross debt to revenue

This assesses an entity's ability to pay the principal and interest on borrowings, as and when they fall due, from the funds that the entity generates. The lower the ratio, the less revenue the entity is required to use repay its total debt.

Total interest-bearing liabilities (including finance lease) / Total revenue

Net debt to revenue

This assesses an entity's ability to pay the principal and interest on borrowings, as and when they fall due, from the funds it generates. The lower the ratio, the less revenue the entity is required to use to repay its total debt.

Total interest-bearing liabilities (including finance lease) less cash and cash equivalent / Total revenue

Source: VAGO.

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