To create the financial sustainability index of state-owned companies, 50 companies with the following features were selected: the assets under management more than 1 million MDL, equity more than 1 million MDL. The companies that have a strategic significance for the national infrastructure have been included in the sample by default. The financial sustainability index consists of 10 indicators, which assess the financial performance, the capacity to face the financial obligations in short and long-term, the liquidity and leverage ratios.

Hence, the index has been formed from the following indicators:

1. Liquidity ratio – evaluates the coverage level of current liabilities by current assets. A proportion of 1:1 shows a sufficient coverage of the current liabilities, meaning that the company has the necessary liquidity to face all current liabilities. A level lower than 1, is risky but this doesn’t mean that the company will bankrupt. Usually, this indicator is the result of the business model implemented by the company. Companies in industries, such as the retail industry, typically have current ratios below 1. This is acceptable to investors given that these companies are able to negotiate long credit periods with suppliers while offering shorter credit periods to customers. This means that they would have higher account payables, which falls under current liabilities, compared to lower account receivables under current assets.
2. Profitability ratios – this indicator is divided into 3 sub-indicators: Return on equity, return on assets, return on sales. This ratio shows the performance of the operating activity and the profit margin of the company. The first 2 sub-indicators calculate the profitability of the equity and the assets employed in the operating activity, while the profit margin shows us how much from 1 MDL in sales will end up as profit. 
3. Leverage ratio – shows by how much the debt is covered with total assets and earnings before interest, taxes and depreciation. If these ratios are higher than 1, it means that the company can face a financial distress risk.
4. Activity ratio – show the ability of the company to transform different positions of the balance sheet into cash and cash equivalents. It also shows how efficient is management in employing the assets to generate revenues. A level lower than 1, implies that the company is not run efficiently.

The information on which the index was developed has been collected from the financial statements of the selected companies for 2015-20167 years. On the other side, the colleagues from INEKO collected the same information about Slovak private and state-owned companies in order to set up a benchmark for comparison of Moldovan companies. 

Read the entire article here - Assessment of financial sustainability of the state-owned companies

This material is part of the series of publications "Evaluating the financial sustainability of municipal and state –owned enterprises".

The article was developed within the initiative „Promoting transparency and financial sustainability of regional policies, state – owned enterprises and local authorities in Moldova", implemented by IDIS "Viitorul", in partnership with the Institute for Economic and Social Reforms in Slovakia (INEKO). The initiative is financially supported by the Official Development Assistance of the Slovak Republic (SlovakAid). It aims to improve the efficiency of the state administration, self-government and civil society in the area of creation and control of regional policies, administration of state-owned enterprises, and monitoring of budgets and information openness of municipalities.