Minimum Debt Repayment Time: FY2017 perspective
Quote:
Originally Posted by
Snoopy
My return on assets (and hence return on equity) is based on 'cost value' not 'book value'. Cost value, or contributed value, is what the shareholders have put in. Book value is what the assets are worth now. Using 'book value' the return on assets is modest. But book value is principally made up from previous years asset revaluations These Asset valuations were effectively 'new capital' that goes onto the balance sheet out of thin air, with no contribution from shareholders! This is a good thing for shareholders, but makes for unrepresentative return on shareholder contributions. You will artificially (in my view) decrease the ROE figures if you calculate ROE at declared asset value. So what are the representative return on equity figures?
Net Profit Margin = Normalised Net profit / Contributed Equity
FY2013: $147.1m/ ($3,181.7m -$2,831.4) = 42.0%
FY2014: $186.5m/ ($3,219m -$2,844m) = 49.7%
FY2015: $136.4m/ ($3,337m -$3,119m) = 62.5%
FY2016: $141.1m/ ($3,315m -$3,110m) = 70.9%
FY2017: $168.5m/ ($3,308m -$3,005m) = 55.6%:
Conclusion: Pass Test (rather magnificently)
Any easy way to get ROE up to very high levels is to borrow a lot of money. This is undesirable in a marketplace that is likely subject to 'future shocks'. So despite the very favourable ROE figures, is the debt position of MCY sustainable? I like to use 'Minimum Debt Repayment Time' (MDRT) to answer this question. This is a very simple test and is the answer to teh question:
"If all the profit for the current year was put into repaying debt, and that earnings rate and policy continued in future years, how many years would it take to pay off all company bank debt?"
In the FY2017 annual report, the balance sheet gives term debt as:
1/ $80m (short term liabilities) plus
2/ $1,024m (long term liabilities) equals
3/ $1,104m (total bank debt)
Divide this figure by current normalised earnings and I get:
$1,104m / $168.5m = 6.6 years.
In overall terms, I would judge 6.6 years to represent a 'medium level of debt. However, this kind of debt is not unusual for a utility type company with a good certainty on future cashflows. So I rate a 6.6 year MDRT as quite acceptable for a company like Mercury Energy. In fact 6.6 years is significantly down on the MDRT position of the previous two year's perspective (FY2015: 8.3years, FY2016: 8.1 years). Showing the four 'Buffet test results' have not been 'financially engineered' by debt, I am happy to take this analysis to the next step.
SNOOPY