Results of 2018‒19 Audits: Local Government

Tabled: 27 November 2019

Appendix D. Financial sustainability indicators

Figure D1 shows financial and non-financial sustainability indicators used to assess the financial sustainability risks of councils. These indicators should be considered collectively and are more useful when assessed over time as part of a trend analysis.

Our analysis of financial sustainability risk in this report reflects on the position of each council.

Figure D1
Financial sustainability indicators, formulas and descriptions

Indicator

Formula

Description

Net result margin (%)

Net result/Total revenue

A positive result indicates a surplus, and the larger the percentage, the stronger the result.

A negative result indicates a deficit. Operating deficits cannot be sustained in the long term.

The net result and total revenue are obtained from the comprehensive operating statement.

Adjusted underlying result (%)

Adjusted underlying surplus (or deficit)/ Adjusted underlying revenue

This measures an entity's ability to generate surplus in the ordinary course of business—excluding non-recurrent capital grants, non-monetary asset contributions, and other contributions to fund capital expenditure from net result.

A surplus or increasing surplus suggests an improvement in the operating position.

Liquidity (ratio)

Current assets/ Current liabilities

This measures the ability to pay existing liabilities in the next 12 months.

A ratio of one or more means that there are more cash and liquid assets than short-term liabilities.

Internal financing (%)

Net operating cashflow/Net capital expenditure

This measures the ability of an entity to finance capital works from generated cashflow.

The higher the percentage, the greater the ability for the entity to finance capital works from their own funds.

Net operating cashflows and net capital expenditure are obtained from the cashflow statement.

Note: The internal financing ratio cannot be less than zero. Where a calculation has produced a negative result, this has been rounded up to 0 per cent.

Indebtedness (%)

Non-current liabilities/Own-sourced 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.

Own-sourced revenue is used, rather than total revenue, because it does not include grants or contributions.

Capital replacement (ratio)

Cash outflows for the addition of new infrastructure, property, plant and equipment/ Depreciation

Comparison of the rate of spending on new infrastructure, property, plant and equipment with its depreciation. Ratios higher than 1:1 indicate that spending is faster than the depreciating rate.

This is a long-term indicator, as capital expenditure can be deferred in the short term if there are insufficient funds available from operations and borrowing is not an option. Cash outflows for infrastructure are taken from the cashflow statement. Depreciation is taken from the comprehensive operating statement.

Renewal gap (ratio)

Renewal and upgrade expenditure/Depreciation

This compares the rate of spending on existing assets through renewing, restoring, and replacing existing assets with depreciation.

Ratios higher than 1.0 indicate that spending on existing assets is faster than the depreciation rate.

Source: VAGO.

Financial sustainability risk assessment criteria

The financial sustainability risk of each local council has been assessed using the criteria outlined in Figure D2.

Detailed benchmarking, the underlying raw data, and the results of each indicator for each of the councils from 2014–15 to 2018–19 is published on our website as part of our interactive data dashboard.

Figure D2
Financial sustainability risk indicators—risk assessment criteria

Risk

Net result

Adjusted underlying result

Liquidity

Internal financing

Indebtedness

Capital replacement

Renewal gap

High

Less than negative 10%

Insufficient revenue is being generated to fund operations and asset renewal.

Less than 0%

Insufficient surplus being generated to fund operations

Less than 0.75

Immediate sustainability issues with insufficient current assets to cover liabilities.

Less than 75%

Limited cash generated from operations to fund new assets and asset renewal.

More than 60%

Potentially long-term concern over ability to repay debt levels from own‑source revenue.

Less than 1.0

Spending on capital works has not kept pace with consumption of assets.

Less than 0.5

Spending on existing assets has not kept pace with consumption of these assets.

Medium

Negative
10%–0%

A risk of long-term run down to cash reserves and inability to fund asset renewals.

0%–5%

Surplus being generated to fund operations

0.75–1.0

Need for caution with cashflow, as issues could arise with meeting obligations as they fall due.

75–100%

May not be generating sufficient cash from operations to fund new assets.

40–60%

Some concern over the ability to repay debt from own‑source revenue.

1.0–1.5

May indicate spending on asset renewal is insufficient.

0.5–1.0

May indicate insufficient spending on renewal of existing assets.

Low

More than 0%

Generating surpluses consistently.

More than 5%

Generating strong surpluses to fund operations

More than 1.0

No immediate issues with repaying short-term liabilities as they fall due.

More than 100%

Generating enough cash from operations to fund new assets.

40% or less

No concern over the ability to repay debt from own‑source revenue.

More than 1.5

Low risk of insufficient spending on asset renewal.

More than 1.0

Low risk of insufficient spending on asset base.

Source: VAGO.

Back to Top