After some thought, I think I have been looking at this issue of gearing from the wrong angle.
Geneva is free to negotiate with its parent bankers on what is a suitable level of funding for the company. It seems inconceivable that they would negotiate their own loan package in a way that would put their own 'funding core' at risk. So we can use the information we have combined with a 'rule of thumb' to calculate an appropriate sized funding core.
The table below has taken items from the balance sheet (marked (1)), and used those numbers to generate other numbers in the prescribed order ( (2),(3),(4),(5) )
|
Assets |
|
Liabilities |
|
Shareholder Equity |
Not Underlying Finance |
$15.052m (2) |
- |
$13.547m (3) |
= |
$1.505m (5) |
Underlying Finance |
$54.576m (1) |
- |
$35.825m (4) |
= |
$18.751m (5) |
Balance Sheet Total |
$69.628m (1) |
- |
$49.372m (1) |
= |
$20.256m (1) |
Calculation (2) allows us to work out the core assets
not related the underlying finance contracts of the business (everything else apart from the receivables book) by simple subtraction. The finance company 'rule of thumb' for their core is to ensure that:
(Non-Risk Liabilities)/(Non-Risk Assets) < 0.9
From this, we can work out that the Non-Risk Liabilities must be no more than:
(Non-Risk Assets) x 0.9 = $15.052m x 0.9 = $13.547m (which is answer 3 above).
Simple subtraction and addition is then used to work out the rest of the numbers in the table.
So what's the point of this so far?
By working out the minimum size of the business core (as measured by assets and liabilities), that means we can measure how well the rest of the business is set up to do the customer lending, the bit that actually generates the profits for Geneva. This is done by looking at the assets and liabilities left outside the core.
Implied Available Financing Gearing ratio
= (At Risk Liabilities)/(At Risk Assets)
= $35.825m/$54.576m
= 65.6%
Generally you would want to match your 'At Risk Liabilities' with your 'At Risk Assets'. This particular match looks acceptably conservative. But how does it compare with other listed finance entities?