1. Introduction
The growing trend of urbanization has contributed to an exponential growth in the generation of urban solid waste (MSW) [
1]. Since the 1970s, the overexploitation of natural resources has led to overcoming the limit of ecosystems’ ability to regenerate [
2]. The predominant linear production model, the so-called cradle-to-grave model, consists of extracting resources, transforming them and discarding them in landfills or incinerators [
3]. However, if waste is not collected properly, environmental problems can occur with negative impacts on public health. At the same time, the existence of different regulations and the increasing awareness of consumers regarding the ecological impacts of waste disposal in landfills have pushed the waste management industry towards a more sustainable approach [
4]. In this context, strategies to ensure environmental sustainability include addressing the circularity of materials, minimizing waste. In addition, concerns about the economic, social and environmental impacts of waste generation must be integrated into waste management plans, which range from the initial stages of waste collection to the final phase of reducing the mass of solid waste, passing through the careful selection of waste disposal technology [
5]. Currently, one of the most acclaimed solutions is to promote the conversion of waste into another processing resource [
6], resulting in cleaner production, energy efficiency, water savings, minimization of resource extraction and optimized use of materials, which translate into economic and environmental benefits. [
7]. However, the transition to a Circular Economy (CE) model requires a systematic change in business approaches [
8] that allows the generation of profits without compromising environmental sustainability. The concept of CE is incorporated into a new business model that leads companies to sustainable development without compromising economic sustainability, the so-called Circular Economy Business Model (CEBM) [
9]. In this approach, sustainability is not dissociated from economic growth, but represents a factor of competitive advantage and value creation [
10]. The economic advantages resulting from the adoption of circular practices are demonstrated in some empirical studies. For example, one study [
11] underlines that CE can enable companies to achieve eco-innovations and industrial symbiosis. Another study for China [
12] showed that disclosure of information about 3R activities (Reduce, Reuse, Recycle) can send a positive signal to shareholders and contribute to greater green competitiveness, thus achieving higher rates of sustainable growth and return on equity (ROE). In addition, CE practices allow investors to better understand the environmental sustainability of their companies and operations, enabling them to better identify risks and make more effective investment decisions. Assessing the sustainability of CE practices is also useful for regulatory and supervisory authorities to identify companies that are likely to develop optimal sustainability strategies. In this context, small and medium enterprises (SMEs) can make important contributions to CE, as they can be particularly active in areas such as recycling, repair and innovation [
13].
In Portugal, there were 23 urban waste management systems (SGRU) scattered around the mainland in 2020, with greater production in the most populous regions. However, the recycling rate is still relatively low in the country. According to the Portuguese Environmental Protection Agency (APA) [
14], in 2020, the generation of MSW in the mainland corresponded to an annual capitation of 512 kg/(inhab.year), that is, a daily production of 1.40 kg per inhabitant. The total of 5.01 million tons represented an increase of 0.1% compared to the previous year. In regional terms, the collection is higher in Alentejo and the Algarve due to tourist seasonality.
The fact that most MSW collection remains undifferentiated can be explained, on the one hand, by the exclusive focus on paper, cardboard, glass, metal and plastic; and on the other hand, because the waste industry requires a large amount of labor in different parts of the product’s life cycle. Therefore, it is not surprising that the most common way of dealing with MSW continues to be dumping or disposal of waste in landfills.
Despite the social importance of these activities, there is a persistent gap in the literature on the economic sustainability of waste collection and treatment companies. This paper attempts to fill the gap through the assessment of the economic sustainability of these companies (NACE 38.0) in 2016–2020, through six management ratios. The analysis of the five-year period will provide further understanding on the latest trends on how operations are affected in terms of profitability, liquidity, debt and investment risk. In addition, the eventual financial success of these companies could constitute an indicator of green competitiveness and contribute to a higher rate of compliance with CE practices in other sectors in the economy. Furthermore, as the waste collection activity is entitled to some exploration subsidies, we discuss the role of these in explaining the discrepancies found in the financial performance of these companies. Thus, this paper also attempts to contribute to the discussion on the need and impact of subsidies on the financial performance and economic sustainability of sectoral companies.
After the introduction,
Section 2 carries out a literature review. Information on the data source and empirical framework is provided in
Section 3. In
Section 4, the results are presented, and
Section 5 discusses the results. In
Section 6, some conclusions are drawn.
3. Materials and Methods
Corporate sustainability practices are based on a three-way strategy: transparency, stakeholder engagement and vision of the future. The first is based on the belief that an engaging environment within a company through open communications (i.e., high levels of information disclosure, clarity and accuracy) will improve performance and increase profits. The second can be achieved by increasing the ecological literacy of staff and stakeholders. Finally, the third can be achieved by stimulating the generation of ideas to reduce production costs and/or increase profits.
This paper uses firm-level financial ratios to assess financial positions in the private sector. It is assumed that better financial performance is positively related to greater economic sustainability. Bearing in mind the results of the literature review, one might expect that companies engaged in waste collection, treatment and disposal activities can provide a good example to assess the relationship between the adoption of circular practices and economic sustainability. As described above, the need of these companies to make large investments in clean energy sources provide the argument to assume that:
Hypothesis 1 (H1). Companies operating in waste collection, treatment and disposal activities present high Debt levels to finance their activities.
In view of government subsidies to finance these companies, to meet its long-term goals of helping companies, managers may find a motivation to exhibit worse financial performances. Hence, we assume that:
Hypothesis 2 (H2). Companies with subsidies exhibit worse financial performances than companies without subsidies.
3.1. Data Collection
Of the 1397 companies that operate in waste collection, treatment and disposal activities (NACE rev. 2—code 38) identified in the SABI database, after excluding companies with missing data, we ended with an unbalanced data panel with 680 companies, for 2016–2020. The number of companies operating in this sector in Portugal represents only 0.1% of the total number of Portuguese companies but contributes 1.7% to the gross value added (National Statistics Office—INE). The regional distribution of the sample, and the population density across regions is shown in
Table 1.
Our sample has a good representation of companies in this sector since the percentage of regional structure given by INE for the year 2020 is similar to our percentage of observations, with the exception of the Centro, Lisbon and Alentejo. Lisbon is the capital of Portugal and is the region with the highest population density, attracting most companies in the sector. The regions of Lisbon, Madeira and the north are the most densely populated; while the Azores, the Algarve and Centro are less populated. The least populated region is Alentejo. The analysis of population density by region is relevant to assess possible balances between revenues and operating costs of these companies as there should be a minimum operational cost that requires a minimum revenue to break even, which may not be possible in some less populated regions. Thus, municipalities of these regions may give subsidies to compensate the high operating costs and low revenues from a declining population.
Lisbon and the north regions concentrate 68% of companies in the sample. The central region ranks in 3rd position but represents only 18.1% of the total number of sectoral firms and ranks in 6th in terms of population density.
Firm size, measured by the number of employees, is considered in this analysis since it can impact the company’s performance.
Figure 1 shows the sample distribution by company size.
Micro-enterprises (less than 10 employees) represent 68% of the sample and are the most representative type of enterprise in all regions. Small companies (with 10–50 employees) have a share of 25% in the sample. Small companies are more representative in the islands and in the north region, compared to the rest of the country. The share of large companies (more than 250 workers) is only 2%, and this type of company does not exist either on the islands or in the Algarve.
3.2. Method
To assess the financial performance of companies we use 6 financial ratios, following [
54,
55,
56], and perform a numerical and narrative analysis. A period of 5 years is used to understand trends and evolution of corporate performances. Data were retrieved from SABI. We focus on four groups of ratios: profitability, liquidity, capital structure (also called leverage) and investment risk.
Profitability aims to understand whether companies are efficient in using their investments to generate profits. All companies aim at generating returns [
55]. The lower the profitability of the company, the greater the probability of default [
56]. The most relevant ratios are ROA (return on assets) and ROE (return on equity) [
54]. ROA shows the ability of companies to generate profits from the investment made, providing relevant information to all stakeholders.
It must be positive, otherwise the company has losses.
ROE represents shareholders’ returns as it measures the company’s ability to generate profits using shareholder financing.
It must be positive, but not a false positive, i.e., both net income and equity must be positive.
Liquidity ratios allow understanding the company’s ability to pay current obligations using current assets. Short-term creditors are the ones who are most concerned about this information [
55]. The higher the liquidity, the lower the probability of default, as companies can meet their obligations [
56]. In this work, we use the current ratio:
It must be greater than 100% so that the company can cover short-term debt without raising external capital. The capital structure shows whether the companies can pay their credits. It provides information about the financial structure of the company [
55]. We use debt and solvency ratios. The debt ratio measures the company’s indebtedness, that is, the part of the company’s assets that is financed through liabilities. The greater the indebtedness of the company, the greater the risk of failure, as companies find it more difficult to comply with their financial commitments.
Debt must be less than 100%, otherwise it means that the company has negative equity (accumulated losses from previous years) and, in theory, they should have less than 70% to assure the ability to pay debts in the future.
Solvency measures the company’s ability to meet liabilities using equity. Creditors prefer a higher solvency ratio, because low solvency ratios mean that liabilities may not be paid due to insufficient capital.
It should be positive and as high as possible.
Investment risk is a ratio of EBITDA (earnings before interest, taxes, depreciation and amortization) to EBIT (earnings before interest and taxes) and shows how much depreciation impacts the operating income. We included this index to understand companies’ ability to make new investments.
The investment risk must be greater than 100%, but if it is too high, it means that depreciations have a big impact on profits, decreasing the company’s profits. Companies need to make investments in order to grow, although this increases depreciation, causing a decrease in net income.
4. Results
Table 2 shows the descriptive statistics of accounting information, namely wages and fuel costs (the most representative operating costs of this activity), turnover, subsidies, and net income from income statement, total assets, and total equity from the balance sheet, and the number of employees and capital expenditures (CAPEX). The annual number of non-refundable subsidies corresponds to government support in which there is an individualized agreement towards its concession, if certain conditions are met. Financial statements do not disclose what these conditions are. CAPEX allows to understand the firm’s investment in physical assets such as property, plants, buildings, technology, or equipment.
A large dispersion is observed among the companies, as the standard deviation is high for all variables. At the median, the number of employees is 5 (the average being 26 employees). There are some companies without employees, perhaps because these companies use subcontracts. Regarding turnover, while some companies have EUR 0, not indicating sales or services in that year, another has a maximum value of EUR 77,924,553.10. Wages and fuel represent, on average, 20% of the turnover. Some companies receive annual (non-refundable) subsidies from the government, but this is more of an exception than a reality, as the median is zero. In addition, companies have, on average (and median), positive net income and equity. However, not all companies exhibit profits and some are over-indebted, as the total capital is negative (minimum total capital = EUR −5,626,967.10) which means that the debt is financing not only the assets of the companies but also negative equity. Finally, most companies invest in tangible and intangible assets (Capex = EUR 192,100.70 on average), but there are exceptions as the minimum is negative, suggesting disinvestments. Descriptive statistics of financial ratios are presented in
Table 3.
Table 3 continues to show a large dispersion among the companies in the sample, as the financial ratios present a large standard deviation. On average and median, companies are profitable (ROA = 85.5%|2.4% and ROE = 12.4%|8.3%, on average and median respectively), and have liquidity, as this index is on average (and median) above 100%, indicating that current assets are enough to cover current liabilities. However, companies are highly indebted, as the debt ratio is greater than 100%, suggesting that many companies have negative equity. Thus, liabilities finance not only all of the company’s assets but also the total negative equity.
Regarding solvency, on average, companies are solvent, as the total capital covers the total liabilities; however, in the median, total capital covers only 59.6% of liabilities, confirming that several companies are heavily indebted. Investment risk is high, which means that depreciations have a big impact on company profits. These facts suggest that some companies do not have a stable financial situation, which poses problems to the economic sustainability of these companies.
To assess whether subsidies granted by the government help companies in the activities of collection, treatment and disposal of waste to achieve a superior performance, namely in terms of profitability, we compare two groups of companies: without and with non-refundable subsidies. As the data are not normally distributed (according to the Kolmogorov–Smirnov test), the medians of both groups are compared, using the nonparametric Mann–Whitney test to verify whether they are similar. It is important to identify that only 20.2% of companies receive subsidies. The results are presented in
Table 4.
Regarding the impact of subsidies,
Table 4 shows that there are significant differences in the average values of both groups, as well as for financial ratios except ROA, debt, and solvency. At the median, companies that receive subsidies employ more people, have more revenue, net income, total equity, total assets, and have more capital expenditures (CAPEX). However, in relation to financial ratios, companies that receive subsidies do not exhibit a better financial performance. At the median, ROA is positive and similar for both groups, but ROE is higher for companies without subsidies (8.7% vs. 6.8%). Companies without subsidies also have more liquidity, less debt, more solvency and less investment risk. When analyzing the structure of the most representative operating costs (wages and fuel), we find that the lower liquidity and solvency of companies with subsidies is due, at least in part, to the higher share of operating expenses in those two items, compared to companies that did not receive subsidies. However, it is important to point out that the group of companies without subsidies is very heterogeneous. These differences about the two groups of companies can also be explained by firm size.
Figure 2 shows the sample distribution by size, measured by the number of employees.
Figure 2 shows that most companies without subsidies are micro companies (with less than 10 employees), suggesting that size can impact results, as micro companies tend to have a less stable financial situation. It is interesting to note that the share of companies with subsidies in relation to those that did not receive subsidies decreases with the size of the company. Thus, large companies with subsidies are seven times more than those without subsidies, while the magnitude is 6 for medium-sized companies, 2 for small companies and less than half for micro companies.
Figure 3 shows the regional distribution of companies with and without subsidies.
Most subsidies are awarded to companies located on the islands, followed by Alentejo. Lisbon, where most companies operating in this sector are located, is the region with the lowest percentage of companies receiving government subsidies.
The analysis of
Table 5 can provide more details on the relative structure of the most representative operating costs (wages and fuel costs) of these companies by region, and by subsidies received. One can observe that companies that receive subsidies have a much higher share of costs with wages and fuel. Madeira is a paradigmatic case, in which, for example, companies without subsidies do not pay salaries while companies that received subsidies have an average cost of EUR 396,000.
Figure 4 analyzes the evolution of the ratios (median values) per year for companies with and without subsidies. The specific case of micro-enterprises is also analyzed, as it is the type of company that prevails in the sample. When companies do not receive subsidies, their financial situation is more stable over time compared to companies that receive subsidies. Subsidies last a certain period, and there are no certainties of its renewal, so companies have a financial situation when they receive the subsidy, but this situation is not maintained in other years. In addition, these companies, from 2017 to 2020, improved their financial performance. The joint analysis of
Figure 3 and
Figure 4 suggests that the region where companies operate may have a mediating effect on the impact of subsidies on the financial performance of companies.
Companies that receive subsidies, especially micro-enterprises, show greater variations in financial performance characterized by periods with greater returns, liquidity, solvency and lower debt and investment risk, altering with periods in which they exhibit an inverse performance. This suggests a lack of management capacity or permanent operational difficulties inherent to certain regions that make financial performance dependent on the year in which the company receives subsidies.
Furthermore, as
Table 1 showed that Madeira Island is a more densely populated region, while the Azores and Alentejo are among the least populated regions, it raises the question of why subsidies were allocated in Madeira. In the Azores and Alentejo, the reason may be related to imbalances between costs and revenues from low-populated regions.
Eventually, the decision to subsidize Madeira’s companies will be more related to political reasons than possible real needs of companies in those regions. Or perhaps Madeira operations are carried out using more modern technologies that require greater investments in machinery and equipment, jeopardizing the viability of these companies and justifying the granting of subsidies.
Table 6 may help to clarify this, by presenting the average values of financial indicators by region for companies with and without subsidies. In particular, the reason for the attribution of subsidies being the investment in assets (machinery and equipment) can be checked through the analysis of ROA of companies with and without subsidies, since this indicator shows the ability of companies to generate profits from the investments made. We find that, in slightly more than half of the cases, companies without subsidies show a better financial performance than companies with subsidies, suggesting that companies with subsidies are not using them in the best way to improve their economic sustainability. Analyzing this in detail in regional terms, and starting with Madeira, being a populated region, the companies can rationalize the waste collection activities and obtain economies of scale in their operations.
Subsidized companies in Madeira have the highest solvency levels and rank second in terms of liquidity in the country but exhibit the worst performance in terms of economic and financial profitability. In relation to companies without subsidies, companies have the best solvency levels and the lowest level of indebtedness, and greater investment risk. Comparing the performance of the two types of companies, those that did not receive subsidies also show low levels of indebtedness and high solvency. Thus, the analysis suggests that the subsidies helped to obtain solvency and liquidity but did not improve economic and financial profitability, that is, they were not effective. This is evident in the better performance of non-subsidized companies in terms of economic and financial profitability.
Subsidized companies in the Azores show the highest economic and financial profitability in the country, but also the highest level of indebtedness. This happens not only in comparison with companies from other regions but also with those companies in the region that did not receive subsidies. Thus, this shows that subsidies were effective in the Azores, contributing to the economic and financial profitability of companies, although they did not prevent companies from falling into debt.
Northern companies are the second most indebted. They show high levels of indebtedness whether they are subsidized or not, but those that do not have subsidies also show greater investment risks. Thus, we can say that the subsidies did not help them to improve the situation of high indebtedness.
Subsidized companies in the Centro rank in second regarding solvency, while companies without subsidies show the highest liquidity and rank in second in terms of solvency. Comparing the performances of subsidized companies with those that did not receive subsidies, it seems clear that the subsidies have made it possible to improve economic and financial profitability, liquidity and solvency. Companies without subsidies show greater indebtedness and greater investment risk. Thus, the role of subsidies in the central region was effective in improving the financial performance of these companies.
Subsidized companies in Lisbon rank second in terms of economic and financial profitability, while companies without subsidies only have the second highest economic profitability. Thus, the subsidies seem to have contributed to improve the financial profitability of companies in the Lisbon region.
In Alentejo, subsidized companies presented the highest investment risk and the worst performance in terms of economic and financial profitability. In relation to companies without subsidies, they show the highest level of indebtedness and the worst performances in terms of economic and financial profitability, liquidity, and solvency, but lower investment risks. Comparing the two types of companies, we can see that companies with subsidies exhibit a poor performance in terms of financial profitability and present high investment risks, while companies that do not have subsidies in addition to poor performance in terms of financial profitability also show weak economic profitability (ROA), low levels of liquidity and solvency, but present the lowest level of investment risk.
In the Algarve, companies with subsidies rank second in terms of investment risk and exhibit the lowest levels of liquidity. Companies without subsidies have the best economic and financial profitability and higher levels of liquidity. Thus, results suggest that subsidies have contributed to making investments at the expense of the company’s liquidity without resulting in a corresponding economic and financial profitability. This suggests that subsidies are not effective in the Algarve.
6. Conclusions
The objective of the present study was to evaluate the economic sustainability of the companies involved in the collection and treatment of residues, through financial ratios. We compared companies with and without subsidies to understand whether non-refundable government subsidies help companies improve their financial performance. In addition, regional effects are also analyzed. The main results show that companies with subsidies are mainly small companies and located in regions with lower population densities (Alentejo and the Azores). The subsidies can assist companies with resources to hire employees and even increase revenue and profits. However, the regional analysis showed the effectiveness of such subsidies in only three of the seven NUTs II regions: Centro, Lisbon and the Azores. Since the companies without subsidies appear to exhibit a more stable financial situation, which has been increasing in recent years, we suggest caution when granting subsidies if the purpose is to assist these companies in achieving economic sustainability.
Indeed, our findings confirm H1 and H2. On average, companies operating in this sector exhibit profits but are highly indebted. Companies with subsidies tend to perform worse than companies without subsidies. This can be explained by the managers’ desire to maintain an uninterrupted source of subsidies but also through barriers to the activity, such as the budget for the development and maintenance of operations, the lack of norms, policies and guidelines; the fact that conventional sources of waste disposal imply high energy consumption; and the lack of technical knowledge and skilled labor and the lack of integration of operations’ management.
Since financial ratios allow the assessment of a company’s financial health and are, therefore, a good tool to assess the economic sustainability of recycling activities, this study suggests that the government and other stakeholders continue to make efforts to contribute to increasing the environmental responsibility of producers. However, implementing CE requires large investments, cultural and organizational changes and economic incentives that are not always easily predictable and quantifiable. In every company, the CE plays an important role in defining the corporate strategy. However, the corporate response to sustainability challenges changes according to business models and priorities. Some companies promote circular initiatives and assume “ethical leadership”, while others focus on cost reductions, better resource allocation or energy savings.
This analysis provides further insights into the latest trends in how subsidies might affect profitability, liquidity, indebtedness and investment risk. The results can fill the gap in the literature related to the advancement of knowledge about the economic sustainability of these companies in Portugal and provide recommendations to improve their economic sustainability. They can benefit managers, shareholders, stakeholders and policymakers. In line with the caveats presented in the previous section, future research could consider an extended period of time and include other European countries to confirm our findings. The research gaps mentioned above can be used to guide future research that seeks to explore methodologies and tools for a systematic assessment of the economic performance of waste collection and treatment companies, to provide feedback for successful management plans and decisions.