Turners 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)). 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.
|
Assets |
|
Liabilities |
|
Shareholder Equity |
Finance (Not Underlying) |
$185.326m (3) |
- |
$166.793m (4) |
= |
$18.533m (6) |
Underlying Finance |
$207.143m (1) |
- |
$87.948m (5) |
= |
$119.195m (6) |
Finance Sub Total |
$392.469m (*) |
- |
$254.741m (*) |
= |
$137.728m (2) |
Automotive Retail |
$164.164m (*) |
- |
$130.176m (*) |
= |
$33.988m (2) |
Balance Sheet Total (All) |
$556.633m (1) |
- |
$384.917m (1) |
= |
$171.716m (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 = $185.326m x 0.9 = $166.793m (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)
= $87.948m/$207.143m
= 42.5%
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? Rather better than the 64.3% that I have calculated for 'Geneva Finance' for FY2017 as it turns out. In practical terms, one might take this to mean that Turners has the capacity to expand their finance business loan book at a greater rate than Geneva, without issuing new capital. Not saying I wouldn't buy Geneva. But on this measure TNR looks better, which might be one reason why it trades on a higher PE than Geneva.