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.
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