The underlying gearing ratio of a lending company is much more obvious when that company takes in deposits as well. In the case of TRA all of the 'deposit' funding is provided by their banking arrangements. Turners is free to negotiate with its parent bankers on what is a suitable level of funding for the core of 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)). I have written the table with all the pieces adding up to a whole. However, the table has largely been constructed in a reverse way. That means starting with 'the whole' then figuring out a way to allocate 'the whole' to the separate constituent pieces. I start with filling in the number (1)s, then use arithmetic to calculate number (2)s. I keep on 'counting' the remaining numbers so that the table is filled in, in numerical order.
|
Assets |
|
Liabilities |
|
Shareholder Equity |
Finance (Not Underlying) |
$185.368m (3) |
- |
$166.831m (4) |
= |
$18.537m (6) |
Underlying Finance |
$289.799m (1) |
- |
$141.715m (5) |
= |
$148.804m (6) |
Finance Sub Total |
$475.167m (*) |
- |
$308.546m (*) |
= |
$166.621m (2) |
Automotive Retail |
$176.565m (*) |
- |
$128.863m (*) |
= |
$47.702m (2) |
Balance Sheet Total (All) |
$651.732m (1) |
- |
$437.409m (1) |
= |
$214.323m (1) |
(*) These items are from my off-line 'segmented' spreadsheet. Assets/Liabilities are sized in proportion to segmented balance sheet information, but with eliminations and corporate costs apportioned between the 'automotive retail' and 'all other finance' divisions.
Calculation (3) 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 = $185.368m x 0.9 = $166.831m (which is answer 4 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 the Turners Finance division. 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)
= $141.715m/$289.799m
= 48.9%
( c.f. equivalent calculation for FY2017:
Implied Available Financing Gearing ratio
= (At Risk Liabilities)/(At Risk Assets)
= $87.948m/$207.143m
= 42.5% )
Generally you would want to match your 'At Risk Liabilities' with your 'At Risk Assets'. The 'at Risk Assets' is another way of saying the 'finance receivables loan book'. The less borrowings you have to support the loan book, the more resilient your operation will be in a downturn. But there is another way to look at this. The less borrowings you have, the more restricted the size of the financial receivables loan book - you are not working the borrowing capacity to maximise the size of your loan book and hence maximise your returns. The greater the utilisation of your 'borrowing capacity' the greater the potential return, but also the greater the potential risk in a downturn.
The fact that the at risk liabilities have increased as a percentage of the at risk assets over the year suggests to me that the Turners lending policy has become more conservative in FY2018 compared to FY2017.
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