## soe-health-check-user-guide

## Source details

**Canonical URL:** [soe-health-check-user-guide](https://www.imf.org/-/media/files/topics/fiscal/fiscal-risks/tool/soe-health-check-user-guide.pdf)

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---

### Overview and purpose
- SOEs deliver services in utilities, infrastructure, natural resources, manufacturing, and finance and can comprise a sizable proportion of a country’s output and net financial wealth.
- Key aggregate statistics:
  - Assets of the world’s largest SOEs were USD 45 trillion, equivalent to 50 percent of global GDP.
  - Their debt amounted to USD 7.4 trillion.
  - SOE assets comprised 20 percent of assets of the world’s largest 2,000 largest firms.
  - Historic equity injections or other support provided to individual SOEs have cost on average, about 3 percent of GDP, and in some cases have been as large as 15 percent of GDP.
- Purpose of the SOE Health Check Tool (HCT):
  - Practical excel-based tool to assess financial vulnerabilities and fiscal risks from non-financial SOEs.
  - Designed to monitor portfolios of SOEs and identify those more likely to pose fiscal risks to inform early and targeted interventions.
  - Tailored to limited-data environments by requiring condensed balance sheet and income statement information.
  - Can analyze up to 40 non-financial SOEs and automatically generate selected financial indicators and risk ratings for the latest five years of data.

### Linking fiscal risks to financial indicators
- Fiscal impact mechanisms:
  - Lower-than-expected dividends, royalties or taxes → lower government revenue.
  - Higher subsidies, loans, equity injections, guarantee calls → higher expenditure or financing needs.
  - Failure of SOEs to repay loans or meet interest → higher government financing requirements.
  - Erosion of SOE equity → deterioration of general government net financial worth or public sector net worth.
  - Poor performance of macro-significant SOEs → indirect adverse effects on fiscal aggregates through constrained economic growth.
- Sources of risk:
  - Exogenous macroeconomic shocks: economic growth, trade, interest rates, exchange rates, commodity prices.
  - SOE-specific factors: lower demand, lower prices, higher input costs, asset damage, construction overruns, climate/environmental costs, governance/management weaknesses, regulatory changes.
- Financial conditions increasing likelihood of budgetary impact:
  - Thin capitalization, recurring losses, low liquidity, high leverage.
- Indicator categories the HCT focuses on:
  - Profitability: net profit margin, operating profit margin, return on working capital, return on assets (ROA), return on equity (ROE), cost recovery.
  - Solvency: debt to equity, debt to assets, debt to EBITDA, debt coverage, cash interest coverage, interest coverage.
  - Liquidity: current ratio, quick ratio, creditor turnover days, debtor turnover days.

### Structure of the Tool and workflow
- Main sections:
  - General information and user inputs: ‘README’, ‘Ratio Metadata’, ‘Financial Statement Metadata’, and three yellow-tab user-input sheets (‘Main’, ‘Input Forms’, ‘Parameters’).
  - Calculation sheets (hidden): perform indicator computations.
  - Output sheets (blue): ‘Risk Tables’, ‘Portfolio Level’, ‘Single Company Level’.
- Data capacity and options:
  - Tool can accommodate up to 15 years of financial data for 40 SOEs.
  - Users can input historical financials or forward-looking business plans/forecasts (by adjusting the number of years in ‘Main’).
  - Language options available: English, French, Spanish and Russian.
- Required inputs per SOE:
  - Descriptive information: name, sector, legal form, ownership, Company Acronym.
  - Financial data: balance sheet and income statement on IFRS or similar.
  - Government support data: subsidies, loans, equity injections, guarantees.
- Data sources recommended:
  - SOEs’ annual financial statements; notes to financial statements; SOE oversight entities; budget documentation; government finance statistics reports; fiscal risk statements; government financial statements prepared in line with international standards.

### Risk categorization and parameters
- Risk categories and thresholds:
  - Five risk categories with Category 1 = lowest risk and Category 5 = highest risk.
  - Thresholds are user-set in the ‘Parameters’ sheet and can be derived from historical experience, third party information, benchmarking, or common financial analysis thresholds.
  - Entities with negative equity or negative debt to EBITDA are automatically classified in Category 5.
  - The Tool applies the same thresholds across the portfolio; sector-specific thresholds require separate copies/tailoring.
- Illustrative threshold examples preserved from the guidance:
  - Cost-recovery:
    - cost recovery < 1 → not breaking even; illustrative thresholds classify cost-recovery < 1 in the two highest risk categories; cost recovery > 1.5 classified in the lowest risk category.
  - ROE:
    - Category 1 illustrative example: ROE exceeds average domestic stock market returns (illustrative example assumes 15 percent).
    - Category 2 illustrative example: ROE at least covers the government’s 10-year debt risk-free interest rate (illustrative example assumes 8 percent).
  - Debt to Assets:
    - Category 5 threshold set at 1 (debts exceed assets → negative equity → technical insolvency).
    - Lowest risk example: less than 25 percent of financing comes from debt.
  - Interest cover:
    - Category 5 threshold: interest cover < 1.
    - Lowest risk illustrative example: interest cover > 2.
  - Cash Interest Coverage:
    - Lowest risk illustrative example: > 3.
    - Highest risk threshold: < 1.
  - Current ratio:
    - Category 5 threshold: < 1.
    - Lowest risk illustrative example: > 2.
  - Quick ratio:
    - Lowest risk illustrative example: > 1.2.
  - Government transfers to total revenue:
    - illustrative thresholds increase from 0.3 (Category 2 threshold) to 0.6 (Category 5 threshold).
  - 50% Test:
    - Entities consistently unable to cover at least half of operating costs are considered general government entities for statistical reporting; Category 5 threshold set at 2, lowest risk threshold set at less than 0.7.
- Z-score thresholds used in the Tool:
  - Z-score (Eidelman version) thresholds:
    - Companies with a score less than 1.1 were likely to experience bankruptcy.
    - Companies with a score in excess of 2.6 were not expected to experience distress.
  - Z-score thresholds in the Tool cannot be adjusted.

### Outputs and analytical use
- Risk Tables:
  - Overview table provides an overall risk assessment for each SOE for a selected year (default: most recent year).
  - Users select financial soundness indicators and their weightings (must sum to 100 percent); overall risk rating is the weighted average of selected ratings.
- Portfolio Level outputs:
  - Aggregated charts over the most recent 5-year period for sector-level indicators including ROA, ROE, operating profit margin, net profit margin, debt to equity, debt to assets, cash interest coverage, interest coverage, and current ratio.
  - Highlights SOEs with largest share of liabilities, proportion of liabilities relative to EBITDA, and worst net liquid asset position.
  - Debtors’ and creditors’ turnover days compared across SOEs.
  - Option to present charts in local currency or as a percentage of GDP.
  - For each of the latest five years, weighted average financial indicators, overall risk rating, and summary financial information are presented.
  - Distribution of SOEs across risk ratings for each indicator and identification of worst-performing SOE on each metric.
- Single Company Level outputs:
  - Automatic calculation and illustration of financial indicators over the last five years for a selected SOE.
  - Graphs of key profitability, solvency, and liquidity metrics; indicators classified by parameters; Altman z-score and risk rating calculated for each of the 5 years using selected indicators and weightings.
  - Summary income statement and balance sheet presented; charts available in local currency or as a percentage of GDP.

### Limitations and appropriate use
- Scope limitations:
  - Designed for non-financial public corporations as defined by GFSM 2014; can be applied to general government units where classification is unclear, as a starting point to identify non-market entities per GFSM 2014 guidance.
  - Not tailored for public financial corporations (banks): bank analysis requires different indicators (capital adequacy, asset quality, profitability, liquidity, sensitivity to market risk) and may use IMF Financial Soundness Indicators.
- Analytical limitations:
  - The Tool does not generate financial projections or assess performance under alternative scenarios by itself; forward-looking analysis is possible only if users input projections. The IMF’s SOE Stress Test Tool is recommended for scenario-based projections and stress testing.
  - Applies the same risk thresholds across the SOE portfolio, which may not reflect industry-specific risk-return profiles or working capital cycles.
  - Accommodates up to 15 years and up to 40 SOEs; for larger universes users should focus on the largest/high-risk SOEs or run multiple HCT copies grouped by size or sector.
- Role as a diagnostic:
  - The HCT is a starting point to identify high-liability, higher-risk, and systemically important SOEs for prioritized, in-depth analysis.
  - Deeper analysis is required to understand drivers of risk and to design mitigation strategies.

### Areas for deeper analysis (selected recommendations)
- When dividends and taxes are lower than expected:
  - Rate of growth in revenues and major cost items.
  - Drivers of revenue and major costs, including linkage to macroeconomic variables.
  - Assessment of dependency on key client or supplier.
  - Benchmarking of costs to peers.
- When subsidies are higher:
  - Drivers of costs of subsidized activities, including linkage to macroeconomic variables.
- For increases to equity or loans and crystallization of contingent liabilities:
  - Level of foreign denominated debt.
  - Benchmarking of leverage to peers.
  - Aging profile of debtors and creditors.
  - Debt repayment profile and exposure to interest rate or exchange movements.
  - Factors influencing profitability.

### Annex II — Step-by-step operational guidance (selected points)
- A. Main sheet — setup and initial configuration:
  - Tool best run in Excel 2013 or later; Macros must be enabled each time the Tool is opened.
  - On ‘Main’ users select: country, currency and units (percentage of GDP calculations rely on using the local currency as per the IMF’s World Economic Outlook database), language (English, French, Spanish, Russian), start year and number of years of data, number of SOEs.
  - ‘Input Forms’ adjusts automatically to selected number of SOEs and years. The Tool does not forecast by itself; users may input business plans/forecasts by extending years.
  - Buttons: clear database (hidden ‘Data’ sheet) and clear ‘Input Forms’ (preserves database).
- B. Input Forms — required data, sources, and validation:
  - Required inputs: SOE descriptive information; financial data from summary balance sheet and income statement; government support data (guaranteed debt, on-lending, loans, current transfers, capital transfers, equity injections).
  - Depreciation and Amortization must be captured to enable EBITDA calculation.
  - A balance-sheet consistency check flags 'Pass' or 'Check'; the Tool will still calculate indicators if inconsistent but indicators may be distorted.
  - After entering data, the user must click ‘Import Data’ to copy inputs into the hidden ‘Data’ sheet; clearing the database deletes that hidden content.
  - Key line-item definitions include Cash and cash equivalents, Trade receivables, Inventory, Net property, plant, and equipment (Fixed Assets), Assets held for sale, Short-term debt (loan), Financial leases, Revenue from Trading Activities, Government Grants Received, Cost of Goods Sold, Finance Costs and Finance Income.
- C. Parameters — indicators, thresholds, and classification:
  - Financial indicators defined on ‘Parameters’ and ‘Ratio Metadata’ sheets; note that EBIT = Earnings Before Interest and Tax and EBITD = Earnings before Interest, Tax and Depreciation.
  - Users set risk thresholds for each indicator and can save defaults.
  - Thresholds apply portfolio-wide unless users run sector-specific versions of the Tool.
  - Approaches to define thresholds: historical data, third-party information, benchmarking, industry norms, expert judgement.

### Box 1 — Z-score (Altman / Eidelman and HCT usage)
- Altman’s Emerging Markets model (1993):
  - Z- Score (Emerging Markets) = 6.56X1 + 3.26X2 + 6.72X3 + 1.05X4 + 3.25
  - Where:
    - X1 = Working capital / Total assets
    - X2 = Retained earnings / Total assets
    - X3 = Operating income / Total assets
    - X4 = Book value of equity / Total liabilities
  - Altman thresholds (emerging markets):
    - Z-score < 4.35 indicative of expected bankruptcy.
    - Z-score > 5.85 not expected to experience distress.
    - Scores between 4.35 and 5.85 indeterminate.
- Eidelman modification (1995) used by the SOE HCT:
  - Removes the constant; SOE HCT specification:
    - Z- Score (Emerging Markets) = 6.56X1 + 3.26X2 + 6.72X3 + 1.05X4
  - Eidelman thresholds:
    - Score < 1.1 → likely to experience bankruptcy.
    - Score > 2.6 → not expected to experience distress.
  - Practical note: the Z-score in the HCT is used as an indicator of the likelihood of bankruptcy within the next 2 years; users should consider several years of data (ideally a minimum of 3 years).

### Annex III — Guidance for interpreting indicators (concise definitions)
- Profitability metrics:
  - Net Profit Margin: percentage of revenue that is profit; higher is better.
  - Operating Profit Margin: percentage of revenue that is operating profit; higher is better and indicates ability to cover non-operating expenses such as interest.
  - Cost Recovery: indicates whether revenue covers operating costs; cost recovery < 1 → not breaking even.
  - ROA and ROE: efficiency measures of asset and equity use; higher is better; ROE signals speed of government equity erosion for loss-making SOEs.
- Solvency metrics:
  - Debt to Equity and Debt to Assets: higher values indicate greater reliance on debt and greater leverage risk.
  - Debt to EBITDA and Debt Coverage: indicate ability to service liabilities; higher values imply stronger capacity to service debt (context-dependent).
  - Interest Coverage and Cash Interest Coverage: measure ability to meet interest payments; higher is better; interest cover < 1 indicates inability to meet financing costs.
- Liquidity metrics:
  - Current Ratio: ability to meet short-term liabilities from short-term assets; higher is better; Category 5 illustrative threshold < 1.
  - Quick Ratio: stricter liquidity measure excluding inventory; higher is better.
  - Debtor Turnover Days: speed of collecting receivables; higher days indicate weaker collection and potential liquidity stress.
  - Creditor Turnover Days: speed of paying suppliers; increasing days may indicate arrears buildup.
- Government relations:
  - Government transactions to revenue: measures dependency on transfers; reductions can reflect improved independence or mounting fiscal risk if transfers are cut without efficiency gains.
  - 50 percent test (GFSM 2014): ability to cover at least half of operating costs from revenues (excluding transfers) is a criterion for classification as a market producer/public corporation.

*Source: Annexes I–III and Box 1, State-Owned Enterprise Health Check Tool User Guide, International Monetary Fund.*

### Annex I. Structure of the Tool .........................................................................................

### soe-health-check-user-guide - Annex I. Structure of the Tool

### Annex I
- Annex I. Structure of the Tool ........................................................................................................... 13

### Annex II: Step-by-step Instructions for Using the SOE Health Check Tool
- Annex II: Step-by-step Instructions for Using the SOE Health Check Tool .................................. 14
  - A. Main Sheet ...................................................................................................................................................................... 14
  - B. Input Forms .................................................................................................................................................................... 15
  - C. Parameters ...................................................................................................................................................................... 21
  - D. Risk Tables ...................................................................................................................................................................... 28
  - E. Portfolio level ................................................................................................................................................................. 29
  - F. Single Company Level................................................................................................................................................. 30

*soe-health-check-user-guide - Annex I. Structure of the Tool.*

### Annex III. Guidance for Interpreting Financial Indicators ..............................................................

### Annex III. Guidance for Interpreting Financial Indicators

### Overview and purpose
- SOEs deliver services in utilities, infrastructure, natural resources, manufacturing, and finance and can comprise a sizable proportion of a country’s output and net financial wealth.
- Key aggregate statistics cited:
  - Assets of the world’s largest SOEs were USD 45 trillion, equivalent to 50 percent of global GDP.
  - Their debt amounted to USD 7.4 trillion.
  - SOE assets comprised 20 percent of assets of the world’s largest 2,000 largest firms.
  - Historic equity injections or other support provided to individual SOEs have cost on average, about 3 percent of GDP, and in some cases have been as large as 15 percent of GDP.
- Purpose of the SOE Health Check Tool (HCT):
  - Practical excel-based tool to assess financial vulnerabilities and fiscal risks from non-financial SOEs.
  - Designed to monitor portfolios of SOEs and identify those more likely to pose fiscal risks to inform early and targeted interventions.
  - Tailored to limited-data environments by requiring condensed balance sheet and income statement information.
  - Can analyze up to 40 non-financial SOEs and automatically generate selected financial indicators and risk ratings for the latest five years of data.

### Linking fiscal risks to financial indicators
- Fiscal impact mechanisms:
  - Lower-than-expected dividends, royalties or taxes → lower government revenue.
  - Higher subsidies, loans, equity injections, guarantee calls → higher expenditure or financing needs.
  - Failure of SOEs to repay loans or meet interest → higher government financing requirements.
  - Erosion of SOE equity → deterioration of general government net financial worth or public sector net worth.
  - Poor performance of macro-significant SOEs → indirect adverse effects on fiscal aggregates through constrained economic growth.
- Sources of risk:
  - Exogenous macroeconomic shocks (economic growth, trade, interest rates, exchange rates, commodity prices).
  - SOE-specific factors (lower demand, lower prices, higher input costs, asset damage, construction overruns, climate/environmental costs, governance/management weaknesses, regulatory changes).
- Financial conditions increasing likelihood of budgetary impact:
  - Thin capitalization, recurring losses, low liquidity, high leverage.
- Three indicator categories the HCT focuses on:
  - Profitability indicators: net profit margin, operating profit margin, return on working capital, return on assets (ROA), return on equity (ROE), cost recovery.
  - Solvency indicators: debt to equity, debt to assets, debt to EBITDA, debt coverage, cash interest coverage, interest coverage.
  - Liquidity indicators: current ratio, quick ratio, creditor turnover days, debtor turnover days.

### Structure of the Tool and workflow
- Main sections:
  - General information and user inputs: ‘README’, ‘Ratio Metadata’, ‘Financial Statement Metadata’, and three yellow-tab user-input sheets (‘Main’, ‘Input Forms’, ‘Parameters’).
  - Calculation sheets (hidden): perform indicator computations.
  - Output sheets (blue): ‘Risk Tables’, ‘Portfolio Level’, ‘Single Company Level’.
- Data capacity and options:
  - Tool can accommodate up to 15 years of financial data for 40 SOEs.
  - Users can input historical financials or forward-looking business plans/forecasts (by adjusting the number of years in ‘Main’).
  - Language options available: English, French, Spanish and Russian.
- Required inputs per SOE:
  - Descriptive information (name, sector, legal form, ownership, Company Acronym).
  - Financial data (balance sheet and income statement on IFRS or similar).
  - Government support data (subsidies, loans, equity injections, guarantees).
- Data sources recommended:
  - SOEs’ annual financial statements; notes to financial statements; SOE oversight entities; budget documentation; government finance statistics reports; fiscal risk statements; government financial statements prepared in line with international standards.
- Risk categorization:
  - Five risk categories with Category 1 = lowest risk and Category 5 = highest risk.
  - Thresholds are user-set in the ‘Parameters’ sheet and can be derived from historical experience, third party information, benchmarking, or common financial analysis thresholds.
  - Entities with negative equity or negative debt to EBITDA are automatically classified in Category 5.
  - The Tool applies common thresholds across the portfolio but allows copies/tailoring for sector-specific thresholds.

### Outputs and analytical use
- Risk Tables:
  - Overview table provides an overall risk assessment for each SOE for a selected year (default: most recent year).
  - Users select financial soundness indicators and their weightings (must sum to 100 percent); overall risk rating is the weighted average of selected ratings.
- Portfolio Level outputs:
  - Aggregated charts over the most recent 5-year period for sector-level indicators including ROA, ROE, operating profit margin, net profit margin, debt to equity, debt to assets, cash interest coverage, interest coverage, and current ratio.
  - Highlights SOEs with largest share of liabilities, proportion of liabilities relative to EBITDA, and worst net liquid asset position.
  - Debtors’ and creditors’ turnover days compared across SOEs.
  - Option to present charts in local currency or as a percentage of GDP.
  - For each of the latest five years, weighted average financial indicators, overall risk rating, and summary financial information are presented.
  - Distribution of SOEs across risk ratings for each indicator and identification of worst-performing SOE on each metric.
- Single Company Level outputs:
  - Automatic calculation and illustration of financial indicators over the last five years for a selected SOE.
  - Graphs of key profitability, solvency, and liquidity metrics; indicators classified by parameters; Altman z-score and risk rating calculated for each of the 5 years using selected indicators and weightings.
  - Summary income statement and balance sheet presented; charts available in local currency or as a percentage of GDP.

### Limitations and appropriate use
- Scope limitations:
  - Designed for non-financial public corporations as defined by GFSM 2014; can be applied to general government units where classification is unclear, as a starting point to identify non-market entities per GFSM 2014 guidance.
  - Not tailored for public financial corporations (banks): bank analysis requires different indicators (capital adequacy, asset quality, profitability, liquidity, sensitivity to market risk) and may use IMF Financial Soundness Indicators.
- Analytical limitations:
  - The Tool does not generate financial projections or assess performance under alternative scenarios by itself; forward-looking analysis is possible only if users input projections. The IMF’s SOE Stress Test Tool is recommended for scenario-based projections and stress testing.
  - Applies the same risk thresholds across the SOE portfolio, which may not reflect industry-specific risk-return profiles or working capital cycles.
  - Accommodates up to 15 years and up to 40 SOEs; for larger universes users should focus on the largest/high-risk SOEs or run multiple HCT copies grouped by size or sector.
- Role as a diagnostic:
  - The HCT is a starting point to identify high-liability, higher-risk, and systemically important SOEs for prioritized, in-depth analysis.
  - Deeper analysis is required to understand drivers of risk and to design mitigation strategies.

### Areas for deeper analysis (selected recommendations)
- For lower dividends and taxes:
  - Rate of growth in revenues and major cost items.
  - Drivers of revenue and major costs, including linkage to macroeconomic variables.
  - Assessment of dependency on key client or supplier.
  - Benchmarking of costs to peers.
- For higher subsidies:
  - Drivers of costs of subsidized activities, including linkage to macroeconomic variables.
- For increases to equity or loans and crystallization of contingent liabilities:
  - Level of foreign denominated debt.
  - Benchmarking of leverage to peers.
  - Aging profile of debtors and creditors.
  - Debt repayment profile and exposure to interest rate or exchange movements.
  - Factors influencing profitability.

### Key statistics and parameters preserved from the guidance
- Asset and debt aggregates:
  - USD 45 trillion in assets for the world’s largest SOEs.
  - USD 7.4 trillion in debt for the world’s largest SOEs.
  - 50 percent of global GDP (assets equivalent).
  - 20 percent of assets of the world’s largest 2,000 largest firms (SOE share).
- Fiscal cost examples:
  - Average equity injections/support historically about 3 percent of GDP.
  - In some cases support has been as large as 15 percent of GDP.
- Tool capacities and time horizons:
  - Up to 40 non-financial SOEs can be assessed.
  - The Tool can accommodate up to 15 years of financial data.
  - Outputs are automatically generated for the latest five years of data.
- Risk categorization:
  - Five risk categories; Category 1 = lower risk, Category 5 = higher risk.
  - Negative equity or negative debt to EBITDA → automatic Category 5 classification.
- Indicator groupings:
  - Profitability: net profit margin, operating profit margin, return on working capital, ROA, ROE, cost recovery.
  - Solvency: debt to equity, debt to assets, debt to EBITDA, debt coverage, cash interest coverage, interest coverage.
  - Liquidity: current ratio, quick ratio, creditor turnover days, debtor turnover days.

*Source: Annex III. Guidance for Interpreting Financial Indicators, State-Owned Enterprise Health Check Tool User Guide, International Monetary Fund.*

### Annex I. Structure of the Tool

### Annex I. Structure of the Tool

### Overview
- Title: "Annex I. Structure of the Tool"
- Page identifier: 14

### Key element
- The annex is labeled "Structure of the Tool".

*International Monetary Fund*

### Annex II: Step-by-step Instructions for Using the SOE Health Check

### Annex II: Step-by-step Instructions for Using the SOE Health Check Tool

### A. Main sheet — setup and initial configuration
- The SOE HCT is ideally run in Excel 2013 or a later version. Users must enable Macros in Excel each time the Tool is opened.  
- On the ‘Main’ sheet users select:
  - country (from a dropdown box),
  - currency and units for data entry (from dropdown boxes) — percentage of GDP calculations rely on using the local currency as per the IMF’s World Economic Outlook database,
  - language: English, French, Spanish, or Russian,
  - start year and number of years of data to be entered,
  - number of SOEs to include.
- The ‘Input Forms’ sheet adjusts automatically to the selected number of SOEs and years of financial data. Users can change number of SOEs or add years by updating the values on the ‘Main’ sheet.
- The Tool does not forecast financials by itself; users may input SOE business plans and forecasts by extending the number of years on the ‘Main’ sheet.
- Buttons on the Main sheet:
  - clear data from the database (clears the hidden ‘Data’ sheet),
  - clear the ‘Input Forms’ sheet (clears input forms but preserves data in the database).

### B. Input Forms — required data, sources, and validation
- Required inputs on the ‘Input Forms’ sheet:
  - SOE descriptive information: SOE name, sector, legal form, ownership data, and a Company Acronym (short name used to identify the SOE throughout the Tool).
  - Financial data from summary balance sheet and income statement line items (see Table A2.1 line-item descriptions).
  - Data on government support: guaranteed debt (stock, repayments, defaults), on-lending (stock, repayments, arrears), loans from government (stock, repayments, arrears), current transfers, capital transfers, equity injections.
- Data sources and guidance:
  - Balance sheet and income statement data typically come from SOE annual financial statements. If not IFRS, users may still enter available information following the ‘Financial Statement Metadata’ sheet and Table A2.1.
  - Notes to financial statements are recommended to ensure correct classification.
  - Government support data should be sourced from published budget information, fiscal risk statements, government financial statements, or requests to budget/debt management/treasury authorities; triangulation with SOE or oversight entity data is beneficial.
  - For banks, deposit-taking and development finance institutions, different financial indicators are required; local bank regulator indicators or IMF financial soundness indicators can be a starting point.
- Data entry and aggregation rules:
  - The Tool provides only the line items necessary to compute the selected financial indicators; other items should be aggregated under catchall line items (e.g., Other Current Assets, Other Operating Expenses).
  - Long-term components of typically current items (or vice versa) can be captured under Other Non-current Assets or aggregated under the provided line item, with the caveat that such choices will affect specific ratios (e.g., Debtors days, Current and Quick ratios). Consistent treatment is most important.
  - Depreciation and Amortization must be captured (often from notes to the financial statements) to enable calculation of EBITDA.
- Validation and import:
  - A balance-sheet consistency check flags whether the two sides balance ('Pass') or not ('Check'). The Tool will still calculate indicators even if the balance sheet does not balance, but indicators may be distorted.
  - Income-statement net profit should match source data where possible.
  - After entering portfolio data, the user must click the ‘Import Data’ button on the ‘Input Forms’ sheet to copy inputs into the hidden ‘Data’ sheet (the Tool’s database). If data already exist, the user is asked to confirm overwriting.
  - Clearing the database deletes the hidden 'Data' sheet contents; clearing Input Forms only clears the input sheet while preserving the database.

- Key line-item input descriptions (selected highlights from Table A2.1):
  - Cash and cash equivalents: cash on hand and highly liquid investments readily convertible to known amounts of cash with insignificant risk of value change.
  - Trade receivables: invoiced receivables outstanding.
  - Inventory: held for sale, in production for sale, or materials/supplies to be consumed in production/service delivery.
  - Net property, plant, and equipment (Fixed Assets): net of accumulated depreciation; excludes investment property.
  - Assets held for sale: assets with committed sale plans and high probability of sale within 12 months; includes discontinued operations.
  - Short-term debt (loan): short-term component of borrowing excluding government borrowing.
  - Financial leases: short-term and long-term components as applicable; from 1 January 2019 include lease liabilities under changed IFRS rules.
  - Revenue from Trading Activities: revenue from sale of goods or rendering services in ordinary activities.
  - Government Grants Received: current transfers (grants or subsidies) from government, excluding payments for goods or services purchased in the normal course of business.
  - Cost of Goods Sold and Other Operating Expenses: follow standard accounting definitions; Depreciation and Amortization may be embedded and must be captured from notes.
  - Finance Costs and Finance Income: include interest and dividend income or borrowing costs.
  - Government Transactions: guaranteed debt (stock, repayments, defaults), on-lending (stock, repayments, arrears), loans (stock, repayments, arrears), current transfers, capital transfers, equity injections.

### C. Parameters — indicators, thresholds, and classification
- Financial indicators used in the SOE HCT are defined on the ‘Parameters’ sheet and in the ‘Ratio Metadata’ sheet and Annex III. Note: EBIT equals Earnings Before Interest and Tax and EBITD equals Earnings before Interest, Tax and Depreciation.
- Users set risk thresholds for each financial indicator on the ‘Parameters’ sheet and can save these as defaults for later resetting.
- Risk categories:
  - The HCT assigns SOEs to risk Categories 1 through 5, where Category 1 is the lowest risk and Category 5 is the highest risk.
  - The threshold set for Category 2 defines values that will be classified as Category 1 if indicators are lower/higher (depending on indicator) than that threshold.
  - Indicator values lying between Category 2 and Category 3 thresholds are classified as Category 2; between Category 3 and Category 4 as Category 3; between Category 4 and Category 5 as Category 4; beyond Category 5 as Category 5.
  - Thresholds are applied to all SOEs across the Tool; sector-specific thresholds require using separate versions of the Tool per sector.
- Approaches to define thresholds:
  - Use historical data, third-party information (e.g., credit rating agencies), benchmarking, industry norms, and expert judgement.
- Illustrative threshold guidance and metric interpretation (indicative examples provided in the Tool):
  - Cost-recovery:
    - A cost recovery indicator of less than 1 means the SOE is not breaking even at an operating level.
    - Entities with cost-recovery < 1 are classified in the two highest risk categories under the illustrative thresholds; entities with cost recovery > 1.5 are classified in the lowest risk category.
  - Return on equity (ROE):
    - Category 1 (lowest risk) example: ROE exceeds average domestic stock market returns (illustrative example assumes 15 percent).
    - Category 2 example: ROE at least covers the government’s 10-year debt risk-free interest rate (illustrative example assumes 8 percent).
    - Negative ROE places SOEs in the higher risk categories.
  - Return on Assets (ROA): thresholds determined relative to ROE and balance-sheet leverage thresholds.
  - Debt to Assets:
    - Category 5 threshold set at 1 (debts exceed assets → negative equity → technical insolvency).
    - Lowest risk category example: less than 25 percent of financing comes from debt.
  - Debt to Equity: thresholds set at levels equivalent to Debt to Assets.
  - Debt to EBITDA: based on levels used by Standard & Poor’s for a similar metric.
  - Interest cover:
    - Category 5 threshold: interest cover < 1 (cannot meet financing costs).
    - Lowest risk category example: interest cover > 2.
  - Cash Interest Coverage:
    - Lowest risk category example: > 3 (common benchmark for absorbing negative events and still meeting financing costs).
    - Highest risk threshold: < 1 (company would need to borrow to cover interest payments).
  - Debt Coverage: related to inverse of Debt to EBITDA thresholds; includes only borrowings and finance lease liabilities.
  - Current ratio:
    - Category 5 threshold: < 1 (insufficient current assets to meet current liabilities).
    - Lowest risk category example: > 2.
  - Quick ratio:
    - Lowest risk category example: > 1.2.
  - Debtor Turnover Days and Creditor Turnover Days:
    - Illustrative norm: 30-day period used for both debtors and creditors, with debtor thresholds set lower than creditor thresholds for working capital effectiveness.
    - Basel Committee conventions referenced: loans > 90 days overdue considered non-performing; retail loans 180 days overdue as in default.
  - Government transfers to total revenue:
    - Illustrative thresholds increase from 0.3 (Category 2 threshold) to 0.6 (Category 5 threshold).
  - The 50% Test:
    - Assesses whether the SOE can cover more than half of operating costs from own revenues (excluding property income, finance income, and government transfers).
    - Entities consistently unable to cover at least half of operating costs are considered general government entities for statistical reporting; Category 5 threshold set at 2, lowest risk threshold set at less than 0.7.
  - Z-score (bankruptcy likelihood over next two years):
    - Category 2: metric > 2.6,
    - Category 3: metric between 1.1 and 2.6,
    - Category 4: metric < 1.1.
    - These Z-score thresholds cannot be adjusted.

- Users can adopt the illustrative thresholds or derive thresholds from country-specific data, rating-agency guidance, benchmarking, or expert judgement to improve robustness.

*Source: Annex II of the SOE Health Check User Guide, SOE Health Check Tool*

### Box 1. Z-score

### Box 1. Z-score

### Origin and model specification
- In 1968, Altman developed the original Z-score model using medium-sized manufacturing firms in the United States (US).
- Altman developed a Z-score model for emerging market companies in 1993 for both manufacturers and non-manufacturing companies.
- Altman’s Emerging Markets model is specified as:
  - Z- Score (Emerging Markets) = 6.56X1 + 3.26X2 + 6.72X3 + 1.05X4 + 3.25
  - Where:
    - X1 = Working capital / Total assets
    - X2 = Retained earnings / Total assets
    - X3 = Operating income / Total assets
    - X4 = Book value of equity / Total liabilities

### Thresholds and interpretation (Altman emerging markets)
- Using Altman’s emerging market model:
  - A Z-score of less than 4.35 was indicative of a company that was expected to go bankrupt.
  - Companies with a Z-score higher than 5.85 were not expected to experience distress.
  - For scores in between 4.35 and 5.85, it could not be clearly stated whether the company was likely to experience bankruptcy or not.

### Eidelman modification and SOE HCT usage
- Eidelman (1995) modified Altman’s emerging market model by removing the constant and adjusting thresholds accordingly.
  - Rationale: The constant in Altman’s emerging market model (3.25) was used only to standardize the model results with US bond rating equivalents.
- Eidelman’s thresholds (after removing the constant):
  - Companies with a score less than 1.1 were likely to experience bankruptcy.
  - Companies with a score in excess of 2.6 were not expected to experience distress.
- The SOE HCT uses Eidelman’s version of the model:
  - Z- Score (Emerging Markets) = 6.56X1 + 3.26X2 + 6.72X3 + 1.05X4

### Practical note on fiscal risks timing and usage
- Fiscal risks from SOEs often arise well before an entity reaches the point of bankruptcy.
  - Examples include reduced inflows from dividends and royalties, or government decisions to provide equity injections to support troubled SOEs.
- In the SOE HCT, the Z-score is calculated and used as an indicator of the likelihood of the entity going bankrupt within the next 2 years.
- Users should consider several years of data (ideally a minimum of 3 years’ financial results) when using the ratio for classification.

*Source: IMF SOE Health Check Tool user guidance — Box 1. Z-score.*

### Annex III. Guidance for Interpreting Financial Indicators

### Annex III. Guidance for Interpreting Financial Indicators

### Profitability
- Net Profit Margin
  - Reflects what percentage of each unit of revenue earned by a business ends up as profit at the end of the year.
  - A positive indicator indicates the entity is profitable.
  - The higher the indicator, the more profitable the entity and the better costs are being contained.
- Operating Profit Margin
  - Reflects what percentage of each unit of revenue ends up as operating profit.
  - Indicator of a company's earnings ability and the extent to which operating costs are being contained.
  - Indicates the proportion of revenues that are available to cover non-operating expenses such as paying interest.
  - The indicator should be positive, indicating that the entity’s operations are profitable, before taking into account financing costs and taxation.
  - The higher the indicator the better.
  - Trends can be analyzed, and the indicator benchmarked against other companies, including internationally as it excludes the impact of different taxation regimes.
- Cost Recovery
  - Reflects whether an entity is generating sufficient revenue to cover its operating costs.
  - An indicator of less than 1 reflects an entity is not breaking even at an operating level.
  - The direction over time is important: an indicator that is decreasing over time means the entity is operating less efficiently from period to period.
  - The indicator can be benchmarked against other companies and assesses the same aspect of a business as the Operating Profit Margin.
- Return on Assets
  - Measures the allocative efficiency of the entity in using its available capital (both debt and equity).
  - Indicates how efficiently an entity is managing its assets to produce profits.
  - Trends can be analyzed to assess whether the returns are increasing (improving) or not.
  - The indicator can be used for benchmarking.
- Return on Equity (ROE)
  - Measures the ability of a firm to generate profits from its shareholder’s investments in the entity.
  - ROE is an indicator of how effective management is at using equity financing to fund operations and grow the entity.
  - The higher the indicator the more profitable the business.
  - Trends can be analyzed.
  - Returns can be compared to returns from other investments (on a risk-adjusted basis) and should be higher than the cost to the shareholder of the capital that has been invested.
  - For loss making SOEs, ROE is an indicator of how quickly the government's equity is being eroded.

### Solvency
- Debt to Equity
  - Measures the extent to which the entity’s financing comes from liabilities relative to equity.
  - A higher indicator indicates more reliance on credit rather than shareholder financing.
  - A lower indicator usually implies a more financially stable business.
  - Companies with a higher debt to equity indicator are considered riskier as they have a higher debt burden; required interest payments on debt must be met, and the debt repaid on stipulated dates.
  - Dividends can be paid only when the entity has realized profits and has the cash to do so—allowing greater financial flexibility to weather financial difficulties.
  - Equity is a more expensive way of financing a business and higher levels of equity mean that the ROE will be lower.
- Debt to Assets
  - Measures the proportion of an entity’s financing that comes from liabilities.
  - Shows an entity’s ability to cover its liabilities with its assets, indicating its solvency.
  - Companies with higher levels of liabilities compared with assets are considered highly leveraged and riskier.
- Debt to EBITDA
  - Indicates the ability of a firm to service its liabilities.
  - EBITDA is a proxy for the cash an entity can generate in a year from its operations, so the indicator indicates the number of years it would take for the entity to generate sufficient cash to pay off all its debt.
  - A higher value would indicate a more indebted entity which may not be able to service its debt.
- Interest Coverage
  - Measures an entity’s ability to meet its interest payments on its debt and remain profitable.
  - Helps identify whether an entity is generating sufficient operating profits to be able to service its debt.
  - Lenders want to see that the entity can cover its financing costs and that there is a buffer to accommodate any risks.
  - A higher indicator is indicative of a stronger entity.
- Cash Interest Coverage
  - Indicates the cash flow available to meet the entity’s interest expense.
  - EBITDA is a proxy for the cash generated from the operations of the business.
  - A higher indicator indicates greater ability to pay. There should be a buffer so that the entity is able to absorb negative events.
- Debt Coverage
  - Similar to Debt to EBITDA, indicates the ability of a firm to generate cash to service its obligations.
  - In this case only the borrowings and financial lease obligations are taken into account.
  - A higher value would indicate a stronger entity that is better able to service its debt; it is better placed to absorb shocks and remain current on its debt obligations.

### Liquidity
- Current Ratio
  - Assesses an entity’s ability to meet its short-term liabilities (those falling due in the next 6 months) from its short-term assets.
  - An entity with larger amounts of current assets will more easily be able to pay off current liabilities when they become due without having to sell off long-term, revenue generating assets.
  - The current assets should cover the current liabilities with some buffer to ensure that if there were difficulties turning some of the current assets into cash there would still be sufficient other resources that could be mobilized.
  - A higher indicator is indicative of a stronger entity.
- Quick Ratio
  - Measures the ability of an entity to pay its short-term liabilities when they come due using only its more liquid short-term assets.
  - It is a stricter form of the current ratio as inventories are excluded from the current assets available to service the current liabilities.
  - The remaining current assets should cover the current liabilities to ensure an adequate buffer; the higher the indicator the better.
- Debtor Turnover Days
  - Measures speed with which an entity collects its revenue from its customers.
  - Intended to evaluate the ability of an entity to effectively issue credit to its customers and collect funds from them in a timely manner.
  - A high Debtor Turnover Days could indicate a loose or nonexistent credit policy, an inadequate collection function, and/or a large proportion of customers having financial difficulties, and consequently that the entity may experience liquidity challenges.
  - Working capital is being effectively managed when the time taken to pay creditors is longer than the time taken to pay debtors, indicating that the entity is using credit from its creditors to finance its business.
- Creditor Turnover Days
  - Measures the speed with which an entity pays its suppliers.
  - If the turnover time increases from one period to the next, this indicates that the entity is paying its suppliers more slowly and may be an indicator of worsening financial condition and accumulation of arrears.

### Z-score
- Z-score Indicates the likelihood of a business going bankrupt in the next two years.
- The Tool calculates the Altman Z-score for emerging markets.
- If the Z-score is greater than 2.6, the probability of the company going bankrupt is very low.
- If it is less than 1.1 there is a high risk of the company going bankrupt.
- If the Z-score is between 1.1 and 2.6, then the outcome is uncertain.
- The predictive accuracy of the Z-score will vary between countries and should first be established in the relevant context.

### Government relations
- Government transactions to revenue
  - Shows the dependency of the SOE on transfers from government.
  - A reduction in the indicator may indicate that the SOE is better able to operate independently without government support (result of improvements in SOE efficiency, reducing the subsidies it requires, or a reduction in QFAs it undertakes and for which it should be compensated).
  - Alternatively, a reduction may reflect a decision by the government to reduce the transfers without any improvements in efficiency or curtailment of QFAs, which can signal that fiscal risks may be mounting.
- 50 percent test
  - According to GFSM 2014 an SOE should only be classified as a public corporation where it is a market producer, for which one of the criteria that is used is that it is able to cover at least half of its operating costs from its revenues, excluding transfers from the government.
  - A lower indicator indicates a more independent SOE.

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_Source: https://www.imf.org/-/media/files/topics/fiscal/fiscal-risks/tool/soe-health-check-user-guide.pdf_