Measures within the framework

The financial monitoring framework is comprised of 12 measures. These are related to financial viability and financial sustainability. While customised to the tertiary education institutes sector, most ratios are also in common commercial usage.

Each ratio is assigned a score based on a scoring table. The scoring table converts the financial ratios into a score between -2 and +5. The conversion of ratios into scores is weighted so that progressively poorer performance has a greater negative effect. The table below provides an example of a scoring table for operating surplus/deficit as a percentage of total income before abnormal items.

 

High risk

Score and level of risk

Low risk

 

Minimal risk
-2 0.5 2 3 4 5
<-4% -4% to 0% 0% to 3% 3% to 5% 5% to 7% 7% +

We expect tertiary education institutes (TEIs) will maintain an overall financial risk rating of ‘low risk’, a score of 3 or above. If some measures score below 3, an average of 3 or better can still be obtained by raising the scores received for other measures. We do not expect TEIs to strive for minimal risk on all measures. Once an overall score of low risk is achieved, a TEI should focus its resources on improving its educational performance indicators.

The measures within the framework are listed below along with some brief comments about each measure.

Financial viability Definition/calculation Comments
Operating surplus/deficit Operating surplus/deficit before abnormals to total income. Well established measurement of sufficient earnings to meet expenses and provide income to accommodate growth.
Core earnings Earnings before interest, tax, depreciation, amortisation and abnormals/unusual (EBIITDA1) items to total income. A measure of the underlying ability of the TEI to generate cash flow likely to fund capital expenditure.
Net cash flow from operations Cash inflow (receipts) from operations to cash outflow (payments) from operations. A well established measure assessing the ability of TEIs to pay expenses from cash flow generated through operations.
Liquid funds ratio (liquidity) Liquid resources less short term overdrafts to cash outflow (payments) from operations. A well established measure assessing the ability of TEIs to pay expenses from cash flow generated through operations.
Ability to service debt (interest coverage ratio) Earnings before interest paid and abnormals to interest paid. A common commercial measure in lending agreements. Sector customisation has occurred as many TEIs do not have interest expenses from borrowings.
Quick ratio Readily liquefiable resources divided by current liabilities likely to result in cash outflows. Similar to the working capital ratio but with an increased focus on the near cash element of current assets and liabilities.

1 EBIITDA – Earnings before interest paid and earned, taxation, depreciation, amortisation and abnormals (unusual and non-recurring items).

 

Financial sustainability Definition/calculation Comments
Debt equity ratio Total debt to total debt plus equity. Measures the proportion of the balance sheet that interest bearing borrowings represent.  Differs from some calculations that use all liabilities.
Achievement of Student Achievement Component domestic funded allocation ($) Actual delivered domestic SAC funding as a percentage of original SAC domestic funded allocation as agreed with TEC at beginning of year. With Crown funding representing the largest source of funding, this measure looks at whether the TEI is operating in such a way to deliver the mix of provision expected from this funding. The TEC expects TEIs to deliver within 97% to 103% of agreed levels.
Three-year average viability Viability is calculated for three years and the average of these is taken as the score value. Sustainability is about the longer-term perspective, and maintaining viability over the longer term contributes to a sustainable organisation.
Three-year average return on property, plant and equipment employed The ratio EBIITDA  to end of year property, plant and equipment is calculated for three years and the average of these is taken as the ratio value. This ratio assesses if sufficient returns are being generated to support the maintenance of the asset base of the TEI.
Debt repayment Total debt less any surplus liquidity to 3-year average surplus/deficit before abnormals. This measure looks at the size of a TEI’s borrowing relative to the size of surpluses that would ultimately repay this borrowing.  The ratio reduces borrowings for any large cash balances held and uses surpluses not cash flow as TEIs typically have significant ongoing capital requirements that would match the depreciation allowance.
Trend and variability in financial viability indicators Comparison of long-term trend in financial viability over a five-year period. This measure considers whether TEIs have stability (positive) or variability (negative) in their viability (shorter-term financial performance), if viability is showing positive or negative trends and if the absolute value of the last viability calculation or trend point is relatively high or low.

 

The scoring for these measures is listed below: 

Financial viability -2 (high risk) 0.5 2 3 (low risk) 4 5 (minimal risk)
Operating surplus/deficit < -4% -4% to 0% 0% to 3% 3% to 5% 5% to 7% 7% +
Core earnings < 3% 3% to 7% 7% to 9% 9% to 11% 11% to 13% 13% +
Net cash flow from operations < 104% 104% to 108% 108% to 111% 111% to 113% 113% to 115% 115% +
Liquid funds ratio (liquidity) < 2% 2% to 5% 5% to 8% 8% to 12% 12% to 15% 15% +
Ability to service debt (interest coverage ratio) < 1.0:1 x 1.0 to 1.5:1 x 1.5 to 3:1 x 3 to 6:1 x or no interest payments and core earnings ratio less than 7% 6 to 12:1 x or no interest payments and core earnings ratio 7% - 10% > 12:1 x or no interest payments and core earnings ratio greater than 10%
Quick ratio 0 to 0.5 x 0.5 to 1.0 x 1.0 to 1.5 x 1.5 to 2.0 x 2.0 to 2.5 x 2.5 + x

  

Financial sustainability -2 (high risk) 0.5 2 3 (low risk) 4 5 (minimal risk)
Debt equity ratio 25% + 15 to 25% 7.5 to 15% 0 to 7.5% 0% 0% and good debt service ability (10%+ core earnings)
Achievement of SAC domestic funded allocation ($) 0 to 85% 85 to 94% 94 to 97% 97 to 98% or 103%+ 98 to 99% or 101 to 103% 99% to 101%
Three-year average viability NA NA NA NA NA NA
Three-year average return on property, plant and equipment employed < 0% 0 to 2.5% 2.5 to 4.5% 4.5 to 6.5% 6.5 to 8.5% 8.5%+
Debt repayment > 1,000% 500 to 1,000% 200 to 500% 100 to 200% <100% No net debt
Trend and variability in financial viability indicators2 LTP <2 and HV and NT LTP between
2 to 3 and
HV and NT
(LTP <3 and either LV or FT) or (LTP >3 and HV & NT) (LTP <3 and both  LV and FT) or
(LTP >3 and either LV or FT)
LTP between
3 to 4 and
 LV and FT
LTP > 4 and LV and FT

2 LTP = last trend point, LV = Low variability in trend points, HV = High variability in trend points, FT = Favourable trend in trend points, NT = Negative trend in trend points

 

  • Last changed: 6 July 2015
  • Last verified: 6 July 2015