The Article is about Key Ratios to look out for while you are reading through financial statements of Public Sector Undertakings.
PSUs are different from normal companies primarily due to government ownership and a focus on broader socio-economic objectives alongside profit generation, unlike private sector companies. They also face heightened regulatory scrutiny and public visibility.
When examining the FS of PSUs, certain ratios gain additional significance due to their unique operating environment and objectives. Ratios that reflect aspects of financial health and stability which are closely monitored by regulators and the public are:
| Ratio Type | Specific Ratios |
|---|---|
| Liquidity | Current Ratio, Quick Ratio. |
| Profitability | Net Profit Margin, ROA, ROE |
| Efficiency | Asset Turnover, Inventory Turnover |
| Solvency | Debt-to-Equity, Interest Coverage |
- Profitability Ratios Profitability ratios are metrics that are used to evaluate the ability of PSUs to generate earnings relative to their revenue, assets, or equity.
- Net Profit Margin = Net Profit ÷ Revenue
- Return on Assets (ROA) = Net Profit ÷ Total Assets
- Return on Equity (ROE) = Net Profit ÷ Shareholder’s Equity
- Liquidity Ratios Liquidity ratios indicate how well the PSUs can meet their short-term obligations.
- Current Ratio = Current Assets ÷ Current Liabilities
- Quick Ratio (Acid-Test) = (Current Assets - Inventory) ÷ Current Liabilities
- Efficiency Ratios Efficiency ratio reflect on how efficiently the PSU uses its assets and resources to generate revenue.
- Asset Turnover Ratio = Revenue ÷ Total Assets
- Inventory Turnover Ratio = Cost of Goods Sold ÷ Average Inventory
- Solvency Ratios Solvency ratios indicate the ability to meet long-term financial obligations and hints on the financial stability of PSUs.
- Debt-to-Equity Ratio = Total Debt ÷ Shareholder’s Equity
- Interest Coverage Ratio = EBIT ÷ Interest Expense
Why do these ratios have special significance in the context of PSUs:
Coming to Equity, Equity in PSU often reflects capital infusions from the government to support welfare projects even if they're not commercially profitable. Moreover Equity in PSU reflects public trust entrusted by the society, with the expectation of responsible and impactful use .
Coming to Assets, PSUs assets often include large-scale infrastructure (power plants, rail systems and other public welfare facilities) that are vital for public welfare. These infrastructure assets are funded by public backed equity. Hence, evaluating the returns on these valuable assets and the equity invested becomes especially relevant for PSUs, as it reflects their efficiency and accountability in serving interests of all stake holders.
Hence, Analyzing these ratios helps assess how effectively PSUs use resources to achieve their various goals.
Why do these ratios have special significance in the context of PSUs:
Unlike private sector, PSUs often provide subsidized services and in this process, This can lead to higher receivables or delayed payments from other Government bodies due to bureaucratic delays. In this backdrop, maintaining strong liquidity is vital for PSUs to handle daily operations and unexpected expenses.
Why do these ratios have special significance in the context of PSUs:
It is common mindsight of public to criticize PSUs for inefficiency, considering issues with bureaucracy. Evaluating these ratios provides insight into how effectively PSUs convert assets into sales and cash flow and also highlights potential areas for improvement.
Why do these ratios have special significance in the context of PSUs:
Evaluating solvency ratios helps determine a PSU's financial independence and risk level regardless of Govt change or change in policies.