The PSO debt spiral continues

The latest financial reports published by the state owned oil giant have again raised concerns about the company’s financial health. The results published late last month paint a very dismal picture of the company’s financial performance over the first half of the current financial year. 

Having the title of the national oil company, PSO is responsible for importing the bulk of Pakistan’s petroleum products, ranging from liquified natural and crude oil to finished products like motor gas (mogas) and high speed diesel (HSD).  

For the half year ending on December 31, 2022, the company incurred a loss of Rs 3.6 billion. Similarly in terms of its cash cashflow the company didn’t fare any better as it recorded a net decrease of Rs 27.23 billion in its cash and cash equivalents.    

As the country battles one of its worst cycles of economic and political turmoil, the situation is going from bad to worse for the state owned giant. The government continues to raise the interest rate in an effort to curb inflation and reduce imports, whereas at the same time this policy is staggering the company’s financial costs. 

Can the company pay its debts?

Dissecting the meaning of liquidity, i t is basically a corporation’s capacity to quickly convert its assets into cash. Current assets are frequently used by businesses to meet their short-term financial responsibilities and pay their short-term liabilities. You can do business with more freedom the more liquid your cash is.

A company’s ability to cover its current assets, which include cash, accounts receivable, and inventories, against its current obligations is measured by the current ratio (due within a year). 

It can be calculated more easily by dividing current assets by current liabilities. The better and more liquid the company is, the higher the ratio. In the case of PSO, the current ratio stands at 1.27, which is the same as it was in the last quarter, a good sign. 

A company should ideally have a ratio greater than 1, which means it has more current assets than current liabilities. But in real life the number alone doesn’t cut it. It’s important to compare ratios to similar companies within the same industry for an accurate comparison.

The fast ratio, which is also called the acid-test ratio, is identical to the current ratio with the exception that inventory is not taken into account while calculating it. Inventory is excluded because it is the most difficult to convert to cash compared to cash, short-term investments, and accounts receivable.

As a result, inventory has less liquidity than other current assets. A ratio value greater than one is frequently viewed as favorable from the perspective of liquidity, but this depends on the industry. The quick ratio for PSO produces a result of 0.83, which is somewhat less than the 0.87 it produced in the previous quarter.

Businesses find it challenging to carry out daily operations without cash. Cash flow refers to the net balance of funds entering and leaving a business at a specific point in time, and managing this cash flow is crucial.

Operating cash flow ratio is an important business ratio to assess liquidity capability and frequency of current loan repayment. It is determined by dividing the operating cash flow by the current liabilities of the company. It is preferable to have a larger number because it shows that the company can pay down its current liabilities more regularly.

The operating cash flow ratio for PSO is a pitiful -0.19 down by 0.03 from the previous quarter. The negative number shows that throughout the three-month period, more money was spent than was brought in. And this is a cause for concern.

Without a good operating cash flow ratio, the company cannot survive over the long term. To stay afloat, a company with a negative ratio must generate additional positive cash flow from either finance or investing activities.