Fixed Cost Coverage ratio (FCCR): FY2023 Perspective (Attempt 3)
Quote:
Originally Posted by
Snoopy
To get a better idea what we are talking about with FCCR, from 'Investopedia':
What Is the Fixed-Charge Coverage Ratio?
"The fixed-charge coverage ratio (FCCR) measures a firm's ability to cover its fixed charges, such as debt payments, interest expense, and equipment lease expense. It shows how well a company's earnings can cover its fixed expenses. Banks will often look at this ratio when evaluating whether to lend money to a business."
Investopedia then goes on to show us a slightly different formula for calculating FCCR than the one used to evaluate the FCCR number for PGW in the past. That is annoying, so I will revert back to the PGW definition of FCCR used in the past, and use the 'guiding principle' expressed in the Investopedia opening paragraph (as quoted above) to keep myself straight on why we are doing this calculation in the first place.
Since PGW were not censured by their banking syndicate for their FY2023 result (publicly anyway), this is an indication that my calculation, as quoted above, may not be right.
The total interest figure of $5.521m (Note 6 AR2023) is made up of 'bank interest on loans and overdrafts' of $4.565m and a 'bank facility fee' of $0.956m. Now the bank facility fee is a fixed charge imposed by the banking syndicate. It is not part of the normal monthly operating free flow of cash in and out of the business. So it would be a little bizarre if the bank asked for an FCCR covenant test to be done, but then imposed a hefty one off charge to ensure that their customer, PGW, failed the bank's own 'FCCR test'! I don't see the benefit in a banking syndicate firing 'foot shots' into their own client base.
If I leave the bank facility fee out of the FCCR covenant equation, (while still subtracting GoIncome Interest Revenue of $6.573m from the top line, AR2023 p71) it changes to to this:
FCCR= [(EBITDA - 'GoLivestock Interest Income'] / [Total Interest(less interest income in cash)+Lease Expenses]
= [$61.194m - $6.573m] / [$4.465m + ($3.800m+$19.532m)] = 2.0 (That just scrapes in over our 'target margin of 2 or more'). Phew!
I am not too happy with my efforts so far calculating this. Despite my impassioned argument in 'attempt 2', I have decided the 'Bank Facilities Charge' is a real charge that has to be met by income. Whether that charge is imposed by the bank (which it is) or not is irrelevant. I still have to include it.
The other change I am making is to take off only the cost of the 'GoFinance' income from the top line. Not the whole of the 'GoFinance' income like I did before. I should do this because all of the other top line items have had their cost of sales removed when the EBITDA figure is given. But being a pure finance scheme earner, the cost of running that 'GoFinance' loan is the interest cost and in fact the only company cost on the capital that is needed to fund it. This gives me a bit of problem because PGW does not disclose this 'funded interest rate' cost. Fortunately I have already done my homework on this topic. Post 5441 gives an indicative cost of funds rate of 8.6% on an average debt balance of $64.552m.
In funding cost terms, this translates to a dollar amount of: 0.086 x $64.552m = $5.551m over the year. We now have the information needed to complete our bank covenant equation.
FCCR= [(EBITDA - 'GoLivestock Interest Cost'] / [Total Interest(less interest income in cash)+ Banking Facilities Charge+Lease Expenses]
= [$61.194m - $5.551m] / [($4.565m-$0.485m)+$0.956m+($3.800m+$19.532m)] = 1.96 which is less than our targeted 2.00 figure, albeit not by much. That in turn leads me to my overall conclusion as best expressed by Charlie Brown: "Arrrrrrrrrggh!"
Combine a stupid dog brain with not enough firm information and you don't get the answer. Anyone like to factor a guess on what I have done wrong this time? (Or will those errant corporate syndicate bankers, going after PGW, be at the Christchurch Airport park PGW HQ front door, baying for blood on Monday morning after all?)
SNOOPY
Debt at PGW: FY2023 Perspective (Part 3.1)
Quote:
Originally Posted by
Snoopy
The next task is to work out what the profit margin is on these GoLivestock loans. To work that out, we need to calculate PGW's bank loan 'borrowing costs' as a percentage of bank funds borrowed. The borrowing costs over FY2023 were $5.521m (AR2023 p74). Once again we will use our three time stamp data points to average the funds borrowed across the year.
Reference Date |
30/06/2022 |
31/12/2022 |
30/06/2023 |
Cash & Cash Equivalents |
($4.676m) |
($2.484m) |
($4.643m) |
Short Term Debt |
$7.500m |
$48.000m |
$19.960m |
Long Term Debt |
$30.000m |
$50.000m |
$50.000m |
Total Net Debt |
$32.824m |
$95.516m |
$65.317m |
=> Average Debt over Year = ($32.824m+$95.516m+$65.317m) / 3 = $64.552m
So the interest rate charged by the banks on the funds loaned was: $5.521m / $64.552m = 8.6%. We know from part 1 of this analysis that the return on funds loaned by PGW was 10.8%. The difference between the borrowed and lent loan rates, multiplied by the average GoLivestock loan balance, is the NPBT earned by PGW from these GoLivestock loans:
(0.108-0.086)x $64.552m = $1.420m.
Of course it is likely that PGW earns a commission on the buying and selling of this animal stock via its own sale-yards as well. But such a commission would likely have been earned whether the animal stock was financed by PGW or not. It is the financing risk we are interested in here. It is only the $1.420m that is directly connected to that.
The $1.420m of profit earned on the funding aspect of the GoLivestock loans is taxable. The associated after tax profit figure was: 0.72 x $1.420m = $1.023m.
Now from the 'Consolidated Statement of Profit and Loss'', the declared profit for FY2023 was $17.518m. We can think of this $17.518m as money available to pay down debt, if the banks demanded that debt be fully repaid (in general this is a hypothetical situation).
This is not a correction. More an alternative point of view. I worked out PGW's borrowing costs in the past year, and I have quoted these above. But for that exercise I included the interest paid AND the borrowing establishment fees when calculating my number. Since the establishment fee does not change with account use, it is equally correct to calculate an interest rate charged while omitting the establishment fee from the calculation. I now find I need to do this because in my FCCR calculation, post 5475, I have just realised that I have double counted the establishment fee by removing it from the numerator as a cost, but then offsetting those consequently reduced earnings against that debt expense again by retaining the 'set up cost' in the denominator.
The reassessment of PGW's bank loan 'borrowing costs' is as follows. The borrowing costs over FY2023 were $4.565m (AR2023 p74). Once again we will use our three time stamp data points to average the funds borrowed across the year.
Reference Date |
30/06/2022 |
31/12/2022 |
30/06/2023 |
Cash & Cash Equivalents |
($4.676m) |
($2.484m) |
($4.643m) |
Short Term Debt |
$7.500m |
$48.000m |
$19.960m |
Long Term Debt |
$30.000m |
$50.000m |
$50.000m |
Total Net Debt |
$32.824m |
$95.516m |
$65.317m |
=> Average Debt over Year = ($32.824m+$95.516m+$65.317m) / 3 = $64.552m
So the interest rate charged by the banks on the funds loaned, interest charges only, was: $4.565m / $64.552m = 7.1%. That is rather different to the 8.6% figure that I was using before. That 7.1% is quite a good interest rate for a rurally based business isn't it? No wonder senior management did not want to spell it out specifically at he AGM for all to see! Ah well, it is out in the public domain now.
SNOOPY
Cost of Equity? Ask Chris Hipkins!
Quote:
Originally Posted by
Snoopy
FCCR= [(EBITDA - 'GoLivestock Interest Cost'] / [Total Interest(less interest income in cash)+ Banking Facilities Charge+Lease Expenses]
Another factor I have been thinking about in my 'Fixed Cost Coverage Ratio' formula in relation to 'the cost of doing business' is the 'cost of equity'. All that loan, sorry 'advance', money 'GoestoLivestock' 'out the door' on the strength of the PGW balance sheet. That is capital built up from 100 years of employee sweat (plus some capital from a certain Mr Lai in Hong Kong). Surely that has a cost which we need to reflect in these figures somehow? I am sure an investment banker would agree with this proposition.
Yet - it turns out, - in this context- , I believe our investment banker friend is wrong. FCCR is not about investment. It is instead an 'emergency siren warning' where 'cash coming in' is compared to 'cash going out'. I am not denying that capital has a cost. But by this FCCR measure there is no associated cash going out attached to the PGW share capital. That means, in the FCCR context, the cost of capital is zero - well maybe not quite.
There is the cost of the sausage rolls to warm the bellies of investors at the AGM. But as to the cost of that, a certain caretaker prime minister would have a much better idea than I do!
SNOOPY
'
Debt Ratio Review: FY2023 Perspective
Quote:
Originally Posted by
Valuegrowth
I just went through their balance sheet. One positive factor is they don’t have a lot of debt.
Following the sale of the PGW seed division, PGW was in a position to make a large capital repayment to shareholders, and therefore optimise debt. One way to consider what might be an optimised debt structure for this company is to look at the FY2020 balance sheet. The FY2020 balance sheet was the first produced after the capital repayment. If FY2020 was indeed 'optimal', it therefore becomes interesting to compare the debt:equity ratio at that time with the debt to equity ratio in subsequent years.
|
FY2020 |
FY2021 |
FY2022 |
FY2023 |
Total Liiabilities {A} |
$302.751m |
$279,496m |
$337.268m |
$327.267m |
Total Assets {B} |
$459.453m |
$453.034m |
$509.952m |
$496.528m |
Debt Ratio {A}/{B} |
65.9% |
61.7% |
66.1% |
65.9% |
|
Short Term Bank Debt |
$30.000m |
$9.900m |
$7.500m |
$19.960m |
plus Long Term Bank Debt |
$20.000m |
$0m |
$30.000m |
$50.000m |
equals Total Term Bank Debt |
$50.000m |
$9.900m |
$37.500m |
$69.960m |
|
GoLivestock Asset Balance |
$48.111m |
$45.869m |
$66.109m |
$74.023m |
|
Sales Revenue {C) |
$679.379m |
$714.894m |
$822.481m |
$854.503m |
Inventory {D} |
$87.111m |
$81.498m |
$102.048m |
$107.533m |
Inventory Turnover {C}/{D} |
7.8 times/yr |
8.8 times/yr |
8.1 times/yr |
7.9times/yr |
At first glance, some might say the debt ratio for PGW is quite high. However, we have to remember that PGW today has become more of a hybrid 'retailer' and 'rural animal bank' (via the GoLIvestock initiative). Finance companies in general, finance loans with a small amount of their own equity in the loan, and with by far the largest amount of their loan capital made up from borrowings. This tends to give finance companies an unfavorable debt ratio compared to pure retailers. It is this 'finance company effect' that is pushing up the debt ratio of PGW above what one might expect in pure retailers. It is interesting to note that should the GoLivestock loan portfolio be called in (this isn't going to happen, the suggestion is made to make a theoretical point), then there would be enough money to pay back all of their bank debt at the end of year balance date. By this measure then, company debt may be thought of as quite low.
Further information I have included on total bank debt shows that although this is rising, such a rise has not hit the debt ratio of the company. There is an argument to be made that PGW debt is only rising, because the GoLivestock live animal portfolio is rising in value in tandem.
Meanwhile PGW stock turn looks acceptable, with total product inventory turned over at a consistent rate of 8 times per year.
SNOOPY