Financial Strength (Updated In-Year)
ESFA Financial Health Assessment Metrics
Operating Performance Education Specific EBITDA as a % of Income
The education specific EBITDA as a % of income is a measure of the underlying operating strength of the college. The higher the percentage measure, the stronger the operational performance. A measure of 8% and above is recognised as outstanding under the ESFA grading system.
The £60m+ investment made by the college in our Dudley and Brierley Hill Learning Quarters has resulted in a growth in learner numbers and income. This has enabled the college to deliver a sector leading operating performance over the last few years, despite the challenging financial environment faced by the FE sector in that time. The college is not immune to the financial issues experienced by the sector however, and so although learner numbers and income increased in 2018-19 and are set to significantly increase in 2019-20 following the transfer of Stourbridge operations from BMet, government funding has not kept pace with the level of cost increases, which has seen our EBITDA reduce to 7.3% of income in 2018-19. Core 16-18 year old funding is set to increase for the first time in many years in 2020-21, which we anticipate will result in a marked upturn in our operating performance measure again, leading to an outstanding grade under the ESFA measures at nearly 10% of income.
Adjusted Current Ratio
The current ratio is a measure of current assets compared to current liabilities and is used as an indicator of a college's short term liquidity. Whilst not a direct measure of cash, the higher the percentage measure, the better a college's liquidity, which means the more cash, or assets that can be easily converted into cash, a college has got compared to its short term liabilities. 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 £60m+ development of the Dudley and Brierley Hill Learning Quarters, 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 capital projects.
The college re-structured its bank loan facilities in 2019, which transferred some short term debt into long term debt and increased the level of cash held by the college. This resulted in a strong improvement in our current ratio in 2018-19. The college's current ratio is set to continue increasing over the next two years due to the strong cash generation from operating activities and limited capital projects outside of the Institute of Technology.
Borrowing as a % of Income
Borrowing as a % of income (also known as gearing or leverage) is used to measure the proportion of assets invested in a college that are financed by borrowing. It also provides an indicator to the longer term financial stability of a college, because the higher the level of borrowing, the higher the risk to a college since more cash will have to be set aside to meet debt and interest repayments leaving less cash for everything else. 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 £nil borrowing.
Over the reported period, the college's level of borrowing as a % of income is on a decreasing trajectory (which is a good occurrence), although in 2018-19 the measure increased a little but remained below 40% within the same ESFA financial health score grade boundary. The increase was due to a re structure of the college's bank loan facilities in 2019, which transferred some short term debt into long term debt and increased the level of cash held by the college.
The college's level of borrowing is forecast 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 in the chart.
Historically, the college has been graded 'Satisfactory'. Over the three previous years the college's overall financial health assessment score reduced due to the lower current ratio following capital investment into large strategic college capital projects, but following the restructure of its bank facilities in 2019 the college significantly increased its current ratio score and moved back up to the upper end of the 'Satisfactory' band again.
With the operating performance set to increase, a reduction in the level of borrowing and improving liquidity through planned borrowing repayments, the college's financial health grade is forecast to increase to 'Good' in 2019-20 and move towards the upper end of the 'Good' band in 2020-21.
College Financial Metrics
Operating Performance - Education Specific EBITDA
Education specific EBITDA (£m)
The sector measure used by the ESFA in its financial health assessment for operating performance is the education specific EBITDA as a % of income. EBITDA stands for Earnings (Profit) Before Interest Tax Depreciation and Amortisation. This is an appropriate measure of underlying operating performance as it includes items which are largely within the control of the college.
Growth in learner numbers and income arising from the strategic capital projects undertaken by the college over recent years has enabled the college to deliver a sector leading operating performance over that time. However, the college has not been immune to the under funding experienced by the college sector over recent years, which has severely impacted the financial health of the wider FE sector. This has resulted in a reduction in our EBITDA over the last 3 years, to what we consider is now the low point in our operating performance cycle in 2018-19 at £3.2m. This still remains a very healthy 7.3% of Following the transfer of Stourbridge operations from BMet at the start of the 2019-20 year and an increase in core 16-18 year old funding for the first time in many years in 2020-21, we anticipate that our operating performance is set to start increasing again, culminating in a forecast EBITDA of over £5m, which would be almost 10% of income, in 2020-21.
Total Income (£m)
Total college income has grown steadily year on year since 2011-12 and reached £43.6m in 2018-19. This growth has been predicated on increasing learner numbers, and therefore income, following the strategic capital projects undertaken over recent years. The growth has principally been in the core 16-18 year old ESFA income and apprenticeships, although adult and other income has continued to rise every year too. 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 £51m in 2019 20 (over £7m growth on 2018-19) and £54m in 2020-21. This will arise principally from the transfer of Stourbridge operations from BMet at the start of the 2019-20 year, increases in core 16-18 year old funding in 2020-21, opportunities arising from the devolution of the adult budget to the West Midlands Combined Authority and the build up of activity at our construction centre in Waltham Forest, which started in February 2019.
Staff Cost as a % of Income
Annual inflationary pay pressures, additional employer National Insurance Contributions, pension cost rises and the recruitment of staff ahead of income generating activities following the opening of Advance II and from having to invest in the staffing infrastructure following the change in the apprenticeship funding and rules with the introduction of the levy, have increased the college's staff costs year on year. Austerity and the funding constraints that has brought to the FE sector, has meant that funding has not kept pace with the rate of increase of costs, particularly pay costs. This resulted in the college's staff costs as a % of income rising for 3 years in a row to 66% in 2017-18.
The upward trend was halted in 2018-19 and is set to start to decrease over the next 2 years to 64%, below the FE Commissioner's benchmark of 65%. This is primarily due to more efficient programme delivery arising from the increase in learners, leading to higher class sizes, increasing staff utilisation and an increase in core 16-18 year old funding from 2020 21. We anticipate that the college's existing and forecast staff costs as a % of income are below the sector average.
Cash Days at Year Ending 31 July
Cash days is the number of days that an organisation can continue to pay its operating expenses given its level of available cash. The FE Commissioner's benchmark is for colleges to have sufficient cash to cover 25 cash days.
The £60m+ development in to the Dudley and Brierley Hill Learning Quarters, which commenced in 2011-12, has stretched the college's cash reserves and resulted in the college's cash position being much lower than it otherwise would have been each year. This has meant that historically the college's cash day measure has been relatively weak and some way below the FE Commissioner's benchmark of 25 days.
Through strong cash generation from operating activities and by restructuring our bank loan facilities in 2019, which transferred some short term debt into long term debt and increased the level of cash held by the college, the college's cash days improved to 20 in 2018-19. We expect cash days to continue to rise over the next two years due to the strong operating cash flow generation and from the limited capital project spend outside of the Institute of Technology, with cash days set to increase to 28, above the sector benchmark of 25 days, by 2020-21.