It is exciting to share some tips on completing the FVRA Tool that I have learned over time. These tips will help you get an acceptable result. I will also discuss financial metrics listed on the tool's 'Risk Setting & Weightings' tab.
Earnings Before Interest and Taxes (EBIT):
This ratio analyses RTO's operational performance without capital and income tax costs. The purpose is to ensure that the provider can generate enough surplus to sustain the education operations in the long run. The Ratio is calculated by dividing the EBIT by the total revenue. A ratio of .10 or higher is a healthy ratio.
Interest Coverage:
The Ratio calculates how easily an RTO can pay interest on its debts. It is calculated by dividing the EBIT by the Interest expense. The higher the Ratio, the better. It is even better if the RTO has access to interest-free director or related party loans.
Employee Costs (Trainer & Admin) to Total Revenue:
Employee cost is significant for an RTO and should ideally be .3 or less of the total revenue.
Debt Ratio:
The debt ratio measures the extent of RTOs' leverage, comparing its debt (excluding related party loans) to its assets. A ratio of .25 or less is a good debt ratio. Again, higher equity contributions or access to related party loans improve this Ratio.
Operating Cash Flow:
This Ratio calculates the RTO liquidity in the short term to ensure that the RTO can generate enough cash to cover its payables (other than the related party loans). This is measured by dividing the cash generated from operations with the payables other than the associated parties. A ratio of 2 or higher is a healthy result.
Book a meeting with me if you need help completing the FVRA Tool or have any questions.
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