4 Financial Stability

There are a number of key indicators which are assurances for stakeholders that the organisation is financially sustainable and will continue to be so. These are measured with targets as set by our lenders in the form of covenants and our board establishes the target for operating margin. We also measure the return on capital employed for both our housing and commercial properties.

Covenants – our principal covenants are that our gearing (the amount we borrow compared to our reserves and grant received) must be below 60% and that our interest cover (operating surplus after adjusting for depreciation divided by the interest we have to pay to our lenders) must be 110% or higher. 

Operating margin – our target is to achieve an operating surplus before interest and property sales equal to 23% of our income. 

Return on capital employed – these figures are based on our 2016/17 results and show the differing rates of return on our housing and commercial property portfolios.   From 2015/16 we were required to adopt FRS 102 as a new accounting standard and so carry our market rent and commercial properties at valuation rather than historic cost.  This has inflated their values in the balance sheet considerably, thus reducing the return on capital employed.   The figures in parentheses for 2015/16 and 2016/17 represent the return under historic cost accounting.

 

Area 2012/13 2013/14 2014/15 2015/16 2016/17
Housing 2.7% 3.6% 3.4% 2.4% (2.9%) 3.0% (3.0%)
Commercial 7.2% 7.8% 8.3% 3.3% (6.9%) 3.1% (6.0%)
Total 3.5% 4.4% 4.3% 2.7% (4.0%) 3.0% (3.7%)

 

 

Self Assessment

Covenants - In our 2016/17 accounts our gearing was 39% and our interest cover was 280% so we were well within the required levels.

Operating margin - In 2016/17 we achieved a normal operating surplus of 34% of our income (excluding costs arising from revaluation of our pension scheme, changes in property values and profit on disposal of properties).

Return on capital employed varies significantly year on year.  The prime driver of this is the addition of properties, particularly if they occur close to year end as you have the full cost in, but little or no income relating to that property, which depresses the return.  This was the case in 2012/13, 2014/15, 2015/16  and 2016/17 resulting in lower returns.

The key measures of our financial health – lending covenants and operating margin are in robust health. Return on capital employed is more variable, but the five year trend shows an average value of 3.98%, so given a number of ongoing developments in progress at the year end this is a good result.

Our budget targets for 2017/18 are for interest cover of 170%, gearing of 35%, an operating surplus of 25% and returns on capital employed of 2.0% (2.9% under historic cost).  The primary reason for the decline in these metrics is the work being done on the investment strategy, which has an overall budget of c. £0.5m.  Excluding these costs the equivalent figures are 203% interest cover, 31% operating surplus and 2.5% (3.6%) return on capital.