Financial Strength (Updated In-Year)
ESFA Financial Health Assessment Metrics
The performance ratio measures the underlying operating strength of the college. The higher the percentage measure, the stronger the operational performance.
The performance ratio measurement changed in 2015-16 following the introduction of a new accounting standard FRS 102, but the maximum 100 points were historically awarded for a performance ratio above 9% prior to this and above 10% from this date.
The college's operational performance is sector leading and has been ranked as 'Outstanding' since 2013-14. However the college's operating performance further increased and scored the maximum 100 points in 2015-16 and again in 2016-17, and is forecast to remain at this highest level of performance over the next two years.
The current ratio is a measure of current assets against current liabilities and is used as an indicator of a college's liquidity. The higher the percentage measure, the better a college's liquidity. The maximum 100 points are awarded for a current ratio above 200%, which means that current assets have to be at least double current liabilities.
With the £50m plus development of the Dudley Learning Quarter, which commenced in 2011-12, the college's cash and liquidity position has been stretched since then and is weaker than it would otherwise have been, because cash generated from the college's operations has been invested in these new capital projects. 2016-17 saw further new capital investment into Advance II, the Construction Apprenticeship Training (CAT) Centre and the 3G sports pitch. As planned, these projects reduced cash reserves in year and increased the level of capital creditors at year-end, which reduced the current ratio as forecast. With the completion of Advance II and the CAT Centre early in 2017-18, the college's current ratio is forecast to start increasing again over the next two years due to the high levels of cash generated (of approximately £4m per year) from operating activities.
Gearing (also known as leverage) used to be a measure of total borrowings compared to net assets (excluding the pension liability) prior to 2015-16 but changed to borrowings as a percentage of income from this date. Gearing is used to measure the proportion of assets invested in a college that are financed by longer-term borrowing and is also concerned with liquidity as it provides an indicator to the longer term financial stability of a college, because the higher the level of borrowing (gearing), the higher the risk to a college since more cash will have to be set aside to meet debt and interest repayments. The lower the percentage measure, the better a college's gearing and its prospects for long term stability. The maximum 100 points are awarded for gearing of 0%.
Following the repayment of bank loans and leases in 2016-17 the college's 2016-17 gearing ratio reduced (which is a good occurrence) resulting in an improvement in the gearing ratio from 'Satisfactory' to 'Good'. The college's level of gearing is forecast to continue to reduce over the next two years through the planned repayment of loans and leases.
ESFA Overall Financial Health Assessment Grade
Through measuring the three ratio's above, the ESFA adds up the individual scores and provides an overall financial health assessment grade for a college, based on the banding structure illustrated above.
Historically, the college has been graded 'Satisfactory'. As forecast, the college's overall financial health assessment score reduced a little in 2016-17 due to the lower current ratio following new capital investment in year as planned and outlined above, but remained within the upper end of the 'Satisfactory' band again.
With the operating performance set to remain outstanding, a reduction in the level of borrowing and improving liquidity following completion of recent large-scale capital projects, the college's financial health grade is forecast to increase to 'Good' in 2017-18, and further improve towards the upper end of the 'Good' band in 2018-19.
The college is forecasting to remain ‘Satisfactory’ in 2016-17 and increase to ‘Good’ in 2017-18 following the opening of Dudley Advance II in September 2017.
College Financial Metrics
Operating Performance - Education Specific EBITDA
The sector measure for operating performance is now the education specific EBITDA as a % of income following its use by the ESFA in the financial health assessment. EBITDA stands for Earnings (Profit) Before Interest Tax Depreciation and Amortisation. This is a more appropriate measure of underlying operating performance as it includes items which are largely within the control of the college.
The college's operating performance is sector leading, achieving an outstanding rating from the ESFA again in 2016-17 due to the college's ability to increase learner and Apprenticeship numbers (some of which is funded on a lagged basis) whilst closely managing costs, albeit that inflationary cost pressures, particularly pay cost pressures remain a constant risk. The reduction in EBITDA in 2016-17 compared to the previous year is largely due to recruitment of staff for Advance II ahead of its opening, putting in place the infrastructure to meet the needs arising from the change in the Apprenticeship funding model and inflationary cost pressures.
We forecast that the college's outstanding operating performance will continue at a sustainable level around 10% of EBITDA over the next two years.
Total college income has grown steadily every year since 2011-12 and reached £38.5m in 2016-17, principally due to growth in core 16-18 year old ESFA income and Apprenticeships. This growth in income reverses the general trend being experienced elsewhere in the sector.
The college anticipates that income will continue to grow over the next two years to approximately £42m and £43m respectively, principally due to the start of a new capacity building contract in Saudi Arabia, growth in Apprenticeship and full cost income following the opening of Advance II and the CAT Centre and growth in 16-18 year old learner numbers in 2017-18 increasing income in 2018-19.
Grant Funded Income
Combined grant funding income from the main funding bodies - Education and Skills Funding Agency (ESFA) and Higher Education Funding Council for England (HEFCE) has increased again in 2016-17, principally due to the growth in the number of 16-18 year old learners which is funded on a lagged basis and Apprenticeships.
This growth in Apprenticeships is forecast to continue over the next two years with the opening of Advance II and the CAT Centre, and from the opportunities that exist with the introduction of the Apprenticeship levy and transition from frameworks to standards. Strong 16-18 learner numbers in 2017-18 will also result in growth in income in 2018-19 due to the lagged funding methodology in place.
Although the two main funding bodies, the EFA (funding 16-18 year old learners) and SFA (funding Apprenticeships and the adult education budget), have now combined into the ESFA, the funding streams are still distinct and can be measured separately.
Growth in the number of 16-18 year old learners, as well as reductions in the level of funding available for adult education resulted in the historical EFA funding becoming the college’s most significant grant funded partner over recent years. Both historical income streams are set to grow over the next two years, but with stronger growth anticipated in Apprenticeships largely as a result of opening Advance II and the CAT Centre.
Other income grew by approximately £0.7m in 2016-17 following a relatively stable three year period. The growth was largely due to a combination of additional full cost work, new ESF funded work and a growth in catering income following the decision to bring catering back in-house after outsourcing this service for a number of years.
Other income is set to rise significantly in 2017-18 by £2m and remain at this increased level in 2018-19 principally due to the start of a new project in the Kingdom of Saudi Arabia in September 2017.
Staff costs increased in 2016-17 to approximately 60% of income through greater levels of investment into existing and new staff in order to retain and recruit top quality staff, which formed the bedrock of the college's Ofsted Outstanding grade in 2017.
Pay costs specifically increased due to the recruitment of staff for Advance II ahead of its opening, putting in place the infrastructure to meet the needs arising from the change in the Apprenticeship funding model and inflationary cost pressures.
Although no sector average is available yet, we believe that the college pay costs as a % of income will be significantly below the sector average in 2016-17 with the recent trend over the last couple of years of rising pays costs set to continue across the sector.
The college re-financed its borrowings with Santander in September 2015. Since then the borrowing level has decreased, falling to 37% of income in 2016-17 due to the repayment of bank loans and asset leases as scheduled.
The borrowing ratio is set to continue to decrease over the next two years to 32% in 2018 and 30% in 2019 as the college pays down its borrowings, which is well within the target of 35% set by Corporation by 2019.