BC2: Liquidity Buffer Ratio FY2015
Quote:
Originally Posted by
Snoopy
Why is the liquidity buffer ratio important? It doesn't matter how profitable a finance company is. If there is a need for cash in the current year, and the company cannot call on enough current assets to pay up, then the company will likely go out of business. This is effectively what happened when almost the whole finance sector in New Zealand collapsed a few years ago. So with that still fresh in the memory of high interest hunting debenture investors (and finance company shareholders) , this is probably the most important financial statistic of all. It is very frustrating when a company's annual report does not detail the headroom in their banking facilities. However, with a little sleuthing I know have it (a minimum of $22m with the banks). So, at last, we can see where DPC stood at the end of their financial year.
From note 26b in AR2014, we can see that the company's Financial Assets that are due to mature in the next twelve months are:
$26.463m + $8.229m = $34.692m
On the same page we see that borrowings that must be repaid or refinanced with Dorchester's banking syndicate amount to:
$0.723m + $7.648m = $8.371m
Under note 24 secured bank borrowings are $17.565m. That still leaves borrowing headroom of:
$22m - $17.565m = $4.435m
This is the extra amount of capital that DPC could borrow at 31-03-2014 -should they need to- without any renegotiations with their bankers.
However, in this case the $34.692m in maturing business more than covers the $8.371m of capital due. So there is no need to resort to borrowing headroom. DPC's liquidity is just fine.
All the above information was taken from note 26b-Liquidity Risk in the FY2014 annual report. The equivalent information is not so neatly tabled in the FY2015 annual report. When presentation of results changes from year to year, I immediately become suspicious: What has the company got to hide by changing their result presentation format? The current account information that I seek is still in the FY2015 annual report, but it is scattered. Let's see what happens when I bring it all together again.
Financial Assets |
0-12 months |
Reference |
Cash & Cash Equivalents |
$12.339m |
AR2015 p32 |
Financial Receivables Contractural Maturity |
$74.174m |
AR2015 p53 |
Reverse Annuity Mortgages |
$1.603m |
AR2015 Note 16 |
Total Current Resources |
$88.116m |
(addition) |
Financial Liabilities |
0-12 months |
Reference |
Current Liabilities |
$79.629m+$37.539m |
AR2015 p44 |
Total Current Liabilities |
$117.168m |
(addition) |
What we have here is an on paper 'theoretical' current shortfall of:
$117.168m - $88.116m = $29.052m
Of course there are ways to make up this shortfall.
1/Some of those account receivables could be rolled over into new business, thus making the 'theoretical' shortfall disappear.
2/There is $8.984m of stock on the books at the 'Fleet & Auction' division, that could be sold for cash.
3/ Retaining half (company policy is to pay out half of earnings as dividends) of the profit of $10.050m budgeted for the ensuing year.
4/ If any of the shortfall remained, the difference could be borrowed under the company's banking facilities. However, information on the capacity of spare banking facilities available is not listed in the annual report.
The test I am asking TNR to meet is a follows: Over the twelve months from balance date:-
[(Contracted Cash Inflow) + (Other Cash Available)] > 1.1 x (Contracted Cash Outflow)
=> ($88.116m+$8.984m+0.5x$18.050m) > 1.1 x $119.459m
=> $106.125m > $131.405m (this is false)
The theoretical shortfall of $27.278m represents:
$27.278m/$142.827m = 17.7% of the end of year loan book balance
In summary, not a good result compared to the strong cash positive position of last year. The contractual cash deficit position of TNR is substantial, greater than the (record) full year profit in FY2015 of $18.05m!
SNOOPY