## Wednesday, 5 September 2012

### Hydro's current ratio

$\mbox{Current ratio} = \frac {\mbox{Current Assets}} {\mbox{Current Liabilities}}$

The current ratio measures a company's ability to meet it's short-term debt obligations. A higher ratio is generally better, excepting that if it's too high a company may not be efficiently utilizing its assets. But if it's low, with current liabilities exceeding current assets ( ratio of less than 1), then a company may have trouble paying it's debts.

Disclaimer: though I have taken a number of accounting and finance courses, I am not an accountant and not particularly well qualified to comment on these matters.

Anyhow, upon reading that Hydro lost $24 million last quarter, I spent a few minutes poking around Hydro's report to see where things went wrong, and something jumped out at me: current assets are half what they were the same quarter last year, while current liabilities increased 32%. (in millions of dollars, 2012 / 2011) Current assets: 591 / 1,178 Current liabilities: 717 / 543 Current Ratio 2011: 2.17 Current Ratio 2012: 0.82 That's a pretty stunning change in a short time. It may not be anything to lose sleep over if it's simply a result in a short-term blip in the market or other temporary factors, but it may also be a warning sign that troubled waters are ahead. Ye best be keepin' a close eye on this, Matey. #### 6 comments: Anonymous said... Unfortunatly Hydro seems to be the NDPs piggy bank. Until we get spending under control the government will continue to plunder Hydro (and other profitable crown corps) into the red. bgilchrist said... Generally your current assets would be turned into expenses to generate profit (think using cash to buy inventory, or prepaid expenses being used), so there are several reasons why the current ratio could degrade like it did. It would be less of an issue though if we saw an increase in revenue over the previous year, but we don’t. What screams at me though isn’t the degradation in the current ratio, but rather the decrease in cash flow which is shown further down. The cash flow drops from$611M to just $73, or a decrease of 88%!!! Couple that with the decrease in current assets, and that the rest of the balance sheet seems static, what I conclude is this is the first thing to happen when you aren’t generating enough funds to run your business. Next year will be interesting – will we see a further decrease in current assets? Will Hydro start liquidating Long-term and Capital assets to pay the bills? Or will we see an increase in current liabilities ( simply put – NOT paying their bills) Makes one wonder why Hydro is set on major capital expenditures ( BiPole, Wuskwatim), when they don’t appear to be in a financial position to be able to do it – Seems like Black Rod is right on this one. *Oh, and I AM an accountant. bgilchrist said... Just a further disclaimer that there may be timing issues at play here, since it is only a quarterly report that I looked at. Generally though, numbers should be comparable. Brian said... One likely explanation is of they had large sums held in reserve for future capital spending and then purged through those in the last year. cherenkov said... Brian G: Thanks for the insight. I was looking at the cash flow too, in particular the decrease in cash from financing activities. Wasn't sure what to make of it. Did Hydro stop selling Hydro Bonds? Brian K: Perhaps, except everything at Hydro is long term. Their capital expenditures are long term. The entire budget of Wuskwatim was$1.3 billion, but their cash flow decreased by almost half that much in the last year alone. I think there is something else at work here.

bgilchrist said...

As noted, it's only a quarterly report, but why would they have large sums for capital projects in the current asset line unless it was just transferred into that section the previous quarter a year ago.

If Hydro was holding sums of money in reserve for capital construction, I would expect that to be shown as either other assets or a restricted fund (liability)