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