Financial Profile

The financial analysis in this model is based on the "Financial profiling, measuring up" concept and ratios originally developed by FSMD for the Housing Corporation in 2002, supplemented by the work on multi-period cash cover ratios in "Do you have the capacity" published by the National Housing Federation and carried out in 2003, also by FSMD.

The full Financial Profile consists of 59 given ratios plus 6 user-defined ratios. Explanation of all the ratios are given on the Ratio Definitions page and an example of the Financial Profile is given on the relevant Analysis Screens page.

The headings under which the detailed ratios are arranged as follows;

Size
The 4 ratios are included as reminders of the context of the association and to help avoid invalid comparisons between associations.

Nominal Growth Rates
Growth ratios help us to understand the financial changes in housing associations over time. The real power of analysing growth ratios is to compare growth rates for different items eg growth in assets versus growth in debt or growth in surplus before interest and tax (SBIT) versus growth in interest.

Rent and Cost Structure
A new set of ratios, on Rent and Cost Structure, has been added to the original profile. This is for comparison of average real rents and real costs per housing unit over time and against other associations.

Profitability
Profitability ratios assist in determining the ability to generate surplus and the productivity and effectiveness of housing association's investment in assets and reserves. As not-for-profit organisations housing associations still need to generate an operating surplus to pay interest on borrowings, plus some more to provide a margin for safety and for retention of a surplus to support growth.

Asset Utilisation and Composition
Effective fixed asset utilisation is a key contributor to achieving a satisfactory level of operating profitability but it is dominated by the rent control regime. Understanding and managing working asset utilisation can be a key component of cash flows.

Cash and Tax Ratios
These are designed to capture some of the key relationships between the main components of housing associations' cash flow dynamics ie cash from operations, cash interest payable, net capital expenditure and cash required from funding.

Understanding borrowing capacity is central to this model, which explores the issue from four perspectives which may well be adopted by different parties eg different providers of commercial finance, the regulator, government agencies, associations themselves;

Balance Sheet Capacity (Cover Ratios)
These include income statement and cash flow approaches to the servicing of interest and loan repayments. A margin of cover is needed to allow for risks which might adversely affect the operating surplus and interest payments.

Balance Sheet Capacity (Debt Repayments)
These ratios compare debt with two measures of the wherewithal to repay, namely earnings before interest, tax, depreciation and amortisation (EBITDA) and net cash flow.

Balance Sheet Capacity (Gearing and Leverage)
This section has a mix of traditional and not so traditional measures; from debt per unit, through debt to balance sheet asset values and debt to estimated Existing Use Value Social Housing EUV(SH), through to debt to cash flow net present value (NPV).

Balance Sheet Capacity (Multi-period Measures)
These are the recently developed multi-period cash cover ratios, Loan Life Cover Ratios - 30 years (LLCR(30)) and Housing Association Life Cover Ratio (HALCR), quantifying the margin of cover between the net present value of future cash flows and the amount of outstanding debt.

The relationship between the key financial profiling topics is shown diagrammatically below;


Logic of Financial Profiling & Credit/Capacity Assessment