Key performance indicators – an appropriate way to perceive MOEs Good afternoon again dear colleagues, I congratulate you, this is the last workshop in this seminar. AD 3, principal auditor Julius Lukošius 2016-09-21

Key Performance Indicator (KPI) Is measurable value that demonstrates how effectively a company is achieving key business objectives. This year is the first year our SAI is conducting the audit in MOEs. So we have no experience. And we thought we should use this fact to our own benefit. We needed to choose audit criteria for our audit. We analyzed the system of setting goals and objectives in the municipality-owned enterprises. And we found little to none. So how to evaluate the performance of an enterprise then?

KPIs Help to assess the viability, stability and profitability of a business Say little about the firm's prospects in an absolute sense. There is not a lot to talk about the positive side of the KPI, but when we take into consideration the nature of MOEs, the use of KPIs is often stigmatized – some say, that profit should not be the main goal of MOE, but I believe, despite that fact that we still can use KPI in MOEs. Enterprises must provide the best quality of service, but not at any costs, costs are also relevant. The growth of capital, the efficient use of assets, reserves for the future investments, debt control. And this is why KPIs are important. BUT

The challenges we faced MOEs work in various different fields and unique market structures What do we measure? How do we make the comparisons? A lot of different MOEs. They have completely different goals.

Solution - being SMART about analysis Sector-based analysis Ability to Measure changes Include All MOEs Relevant to the municipality Time-frame long enough to see the trends 7 sectors. Water, heating, public transport, waste management, communal services, other and enterprises with no municipal function. Measure how indicators change in time and how they differ between enterprises Includes almost 280 MOEs. IMPORTANT! KPI show a picture because there many enterprises to compare. We chose KPIs which are important even when the profit is not a goal We included the data from the last 3 years.

KPIs we chose to measure in our audit

Gross profit margin Profit and loss statement Generally, compared to margins of other similar companies or previous periods margins. How much profit falls for 1 euro of net sales. Describes the subject's core business profitability. Indicates whether it’s worth to provide services (sell goods).

Y = operating profit – gross profit Operating Margin Profit and loss statement How much of operating profit earns 1 euro of sales. Y = operating profit – gross profit Y represents the cost of the administrative activities per 1 euro of sales.

Profit margin 5 and less - bad Profit and loss statement Profit margin is an indicator of a company's pricing strategies and how well it controls costs. The profit margin is used mostly for internal comparison. It is difficult to accurately compare the net profit ratio for different entities > 10 – good < 10 - unsatisfactory 5 and less - bad

Return On Equity (ROE) Profit and loss statement Statement of financial position (Balance sheet) 15 % is generally considered good A measure of the profitability of a business in relation to the book value of shareholder equity ROE is a measure of how well a company uses investments to generate earnings growth > 10 – good < 10 - unsatisfactory The company is working inefficiently. Competition in the market is particularly strong The market cycle is the falling stage. The company's capital structure is not effective.

Return On Assets (ROA) Profit and loss statement How many euros of earnings they derive from each euros of assets they control. A useful number for comparing competing companies in the same industry. > 15 – good < 8 – unsatisfactory

Debt ratio > 0,7 – unsatisfactory < 0,5 – good Statement of financial position (Balance sheet) Indicates the percentage of a company's assets that are provided via debt. The higher the ratio, the greater risk will be associated with the firm's operation > 0,7 – unsatisfactory < 0,5 – good

Thank you! So here I presented you all the KPIs we evaluate in our audit. Many of you, who are familiar with KPIs, might have noticed that we did not evaluate one of the most common KPI – EBIDTA. This is because here in Lithuania we could not calculate it from the open data we have. We would need to ask MOE for additional information and we thought it would take too much of our time to contact them all.