Profitability and Cash Flow Maps

Introduction

The two sets of four financial maps are graphical representations of selected pairs of ratios which highlight and analyse key features of associations’ financial performance and credit/borrowing status. Below is a summary of the selected pairs of ratios used in these maps.

The 'contour lines' for each map are intended to assist interpretation and are based on analysis of large numbers of housing associations in the UK. Generally the contours on the earlier maps indicate the 'normal' limits of the ratio in question around a typical average. The credit maps tend to have indicated maximum or minimum limits.

Income & Expenditure Drivers (1)
Chart (1) explores the main drivers of Surplus per Unit by comparing Average Weekly Rent/Unit with Average Weekly Costs/Unit, all figures expressed in real terms (today's values).

An association's absolute position on this chart will reflect the nature and mix of its housing stock but the relation between rents and costs is always relevant.

Profit Drivers (2)
Chart (2) explores the main drivers of Operating Return on Assets by plotting Asset Turnover on the vertical axis and Operating Margin on the horizontal axis. Increasing either of the two constituents can increase operating profitability, but 'turnover' is essentially a function of rent levels and margin is essentially about costs.
An association’s position on this chart will be determined very much by its fundamental nature and mix of activities.

Cost of Capital Drivers (3)
Chart (3) explores the main drivers of the Cash Cost of Capital by plotting the Effective Interest Rate on the vertical axis and Adjusted Leverage on the horizontal axis. Increased borrowing will increase interest paid as a percentage of total assets, as will inefficient financing.

An association’s position on this chart is determined by its treasury policy i.e. how much it borrows and on what terms. Increasing leverage for development programmes obviously is not necessarily a bad thing but it will increase the cash cost.

Value Drivers (4)
Chart (4) explores the main drivers of Margin over Cash Cost by plotting Operating Return on Assets (Surplus before Interest and Tax (SBIT) as a percentage of Total Assets) on the vertical axis and the Cash Cost of Capital on the horizontal axis. If the cash cost is rising because development expenditure is debt financed then operating profitability must increase at a faster rate if the pre-tax margin is to be maintained.

The line which equates SBIT and Cash Cost of Capital defines zero surplus after interest and therefore indicates an Interest Cover of 1.0. Above the line cover will be less than 1.0 and vice versa. It can be argued that associations should gear up until the minimum acceptable interest cover is achieved to maximise use of debt for new development. This will depend on the degree to which future interest costs can be forecast with confidence and on the stability of the forecast surpluses.