Profitability
Ratio 21. Operating Margin
%
Operating surplus as a percentage of income from social housing lettings.
This is the net margin on turnover before any non-operating items such
as exceptional expenses and financial income and expenses are taken into
account. Increasing margins reflect financial efficiency and increase
the borrowing capacity of housing associations. Falling margins have a
direct impact on cash flow, debt-servicing and development potential.
This is an important ratio to monitor as it may be the first sign of trouble.
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Ratio 22. SBIT % Total
Assets
The surplus immediately before interest paid expressed as a percentage
of total assets, after adding back capital grants.
This is an overall measure of profitability and the net "efficiency"
in the use of assets. The ultimate comparison is with the "cash cost
of capital" (Ratio 27), ie the cost of funding the assets, which
must be exceeded in the long run. The mix of renting versus service activities
will have an impact on this ratio so this is a critical issue to understand.
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Ratio 23. Operating Surplus
% Total Operating Assets
Operating surplus (before financial income and exceptionals) expressed
as a percentage of total assets, with grants added back, less all financial
assets.
The aim is to determine the profitability of the core operating assets
and gauge the overall efficiency with which these assets are used.
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Ratio 24. Financial Income
% Financial Assets
Financial income expressed as a percentage of cash and short term investment
plus investments in other undertakings.
To determine the level of profitability of financial assets in relation
to the profitability of the operating assets. Susceptible to any big changes
in cash deposits over the year.
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Ratio 25. Effective Interest
Rate %
Gross interest paid divided by gross total debt at the year end.
Reflects the average cost of debt and the efficiency or otherwise of debt
management eg. fixed versus variable. In this analysis we look at gross
debt and gross interest paid. It can be distorted if debt changes dramatically
during the year but RSL debt levels tend not to show big annual changes.
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Ratio 26. Scheduled Loan
Repayments % Total Debt
The percentage of debt repaid in the year; the reciprocal of the average
term of the debt.
The smaller the amount, the lower the re-financing risk, and the lower
the cash flow required to cover total debt servicing.
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Ratio 27. Cash Cost of
Capital %
Gross interest paid expressed as a percentage of total assets gross of
grants.
This is the weighted average cost of capital assuming the cost of capital
and reserves and SHG is zero. Compare this ratio with SBIT% Total Assets
- if the cash cost of capital is less than the pre-interest return the
association is in a comfortable position. If the cash cost of capital
is greater than the return there is insufficient profit to pay the interest
due, which cannot continue indefinitely.
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Ratio 28. Margin over
Cash Cost of Capital %
The difference between the return on assets and the cash cost
of capital. It is the pre-tax return on assets. (SBIT % Total Assets –
Cash Cost of Capital %)
Ideally this should be a positive figure but not too large. If the margin
is positive, then the association has its head above water in terms of
a positive interest cover. If not the association is making losses and
this cannot continue indefinitely. If the margin is too big then this
means borrowing is low and development potential is being lost. This ratio
highlights the same issues as interest cover.
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Ratio 29. Operating Surplus
/ Employee (£000's)
Quantifies the average operating surplus generated by each employee, as
a broad measure of efficiency of human resources employed.
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Ratio 30. Income from
Social Housing Lettings/Employee (£000's)
This is expressed as the ratio of total turnover to the number of employees.
Quantifies the average turnover generated per employee, as a broad measure
of efficiency of human resources employed.
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Ratio 31. Assets / Employee
(£000's)
This is the ratio of the total assets, gross of grants, divided by the
number of employees.
Quantifies the average assets held per employee, as a broad measure of
asset utilisation per employee. Will be affected by the mix of housing-based
and non-housing-based activities.
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