Trend lines of Eskom’s annual net profit margin, ROI, and ROE from 2007 to 2019
ESKOM’S DEBT SITUATION
Net working capital
Net working capital is the result of subtracting current liabilities from current assets.
It is a useful measure for determining whether a firm is able to pay off its current debt.
For 2018/19, Eskom’s net working capital was just shy of -R44.1 billion, more than double the negative net working capital of the previous financial year which stood at -R20.6 billion.
Eskom thus had an excess of R44.1 billion in current liabilities relative to its current assets.
In simple terms, if Eskom’s short-term liabilities had to be paid off now, it would fall just over R44 billion short of its payment obligations.
These figures were calculated according to Eskom’s financial statements as of March 2019; odds are that this shortfall may have increased by now.
Trend lines of Eskom’s net working capital (right axis), current ratio, debt ratio, and assets-to-liabilities ratio from 2007 to 2019. Source: Nominal values ratios calculated by author using annual financial statements provided by Eskom. Note: Hodrick-Prescott filter used to compute trends of raw data
Current ratio
The current ratio serves the same purpose as that of net working capital. It just represents the relationship between current assets and current debt as a ratio rather than as a net nominal amount.
On this calculation basis Eskom cannot pay off its current debts.
For every R1 in current liabilities, it only had R0.59 in current assets. Relative to R0.78 in the previous year.
Debt ratio
The debt ratio measures the amount of total liabilities for every rand of total assets held by the firm.
Put differently, it measures how much of the firm’s assets are funded by the firm’s creditors.
Eskom’s debt ratio stood at 0.8 at the end of the 2018/19 financial year, up from 0.77 at the end of the 2017/18 financial year, meaning 80% of its assets are funded by creditors.
Assets-to-liabilities ratio
This ratio simply measures the amount of total assets Eskom has relative to every rand in total liabilities.
The most worrying aspect regarding Eskom is its debt.
Even though it might have more total assets than total liabilities, this ratio is extremely low and has been getting lower over time.
Eskom is in financial ruin. It is doubtful whether it is now even viable for privatisation anymore.
The last time Eskom had at least R1.50 for every rand in total liabilities was in 2008.
Currently, Eskom only has R1.25 in total assets for every rand in total liabilities.
Eskom is in financial ruin.
It is doubtful whether it is now even viable for privatisation anymore.
The fundamental problem with state-owned enterprises like Eskom is that there is absolutely zero economic incentive on the part of management to run it as a profitable company.
There isn’t even a political incentive to manage it effectively.
The ANC, despite all its failures, has been kept in power.
When Eskom’s next financial statements are released around September, it is highly improbable that they will reflect a healthier financial condition.
One can only hope that the government comes to its senses and allows private electricity generators to contribute to the grid and save us from a catastrophic collapse of the entire national grid.
- Jacques Jonker is an intern at the Free Market Foundation. He has a BCom in Law and a BCom (Hons) in Economics from the North West University. The views expressed in this article are those of the authors and not necessarily those of the Free Market Foundation.
*Authors Note: This article was amended on January 24 to reflect a change to Eskom's ROI after a minus sign was left off the two figures. This has been corrected.
This article was first published on City Press on 24 January 2020