RS Group plc – Annual report – 31 March 2022
23 Financial risk management (extract)
The Board’s policy is to always maintain a strong capital base, with an appropriate debt to equity mix, to ensure investor, creditor and market confidence and to support the future development of the business. The Board monitors the return on capital employed (ROCE), which the Group defines as adjusted operating profit as a percentage of monthly average net assets excluding net debt and retirement benefit obligations, and the level of dividends to ordinary shareholders.
The Group seeks to raise debt from a variety of sources and with a variety of maturities. As at 31 March 2022, the Group had a £300 million sustainability-linked loan, with an accordion of up to a further £100 million, which has a maturity of November 2024 with an option for the Group to extend for up to one further one-year term subject to individual lender approval; and private placement loan notes of €18 million with a maturity of October 2026, US$80 million with a maturity of December 2026, €13 million with a maturity of October 2029, US$35 million with a maturity of March 2030 and US$50 million with a maturity of October 2031.
The Group’s debt covenants are EBITA to interest to be greater than 3 times and net debt to adjusted EBITDA to be less than 3.25 times. At the year end the Group comfortably met these covenants with net debt to adjusted EBITDA of 0.1x (2020/21: 0.5x) and EBITA to interest of 44.6x (2020/21: 26.7x).
There were no significant changes in the Group’s approach to capital management during the year.
3 Alternative Performance Measures (APMs) (extracts)
Adjusted profit measures
These are the equivalent UK IAS measures adjusted to exclude amortisation of intangible assets arising on acquisition of businesses, acquisition-related items, substantial reorganisation costs, substantial asset write-downs, one-off pension credits or costs, significant tax rate changes and, where relevant, associated tax effects. Adjusted profit before tax is a performance measure for the annual bonus and adjusted earnings per share is a performance measure for the Long Term Incentive Plan (LTIP). Adjusted operating profit conversion, adjusted operating profit margin and adjusted earnings per share are financial key performance indicators (KPIs) which are used to measure the Group’s progress in delivering the successful implementation of its strategy and monitor and drive its performance.
1. Operating costs are distribution and marketing expenses plus administrative expenses.
2. Operating profit margin is operating profit expressed as a percentage of revenue.
3. Operating profit conversion is operating profit expressed as a percentage of gross profit.
Acquisition-related items comprise transaction costs directly attributable to the acquisition of businesses and deferred consideration payments relating to the retention of former owners of businesses acquired.
Earnings before interest, tax, depreciation and amortisation (EBITDA) and net debt to adjusted EBITDA
EBITDA is operating profit excluding depreciation and amortisation. Net debt to adjusted EBITDA (one of the Group’s debt covenants) is the ratio of net debt to EBITDA excluding acquisition-related items, substantial reorganisation costs, substantial asset write-downs and one-off pension credits or costs.
Earnings before interest, tax and amortisation (EBITA) and EBITA to interest
EBITA is adjusted EBITDA after depreciation. EBITA to interest (one of the Group’s debt covenants) is the ratio of EBITA to finance costs including capitalised interest less finance income.
Return on capital employed (ROCE)
ROCE is adjusted operating profit expressed as a percentage of monthly average net assets excluding net debt and retirement benefit obligations and is an underpin for the LTIP and a financial KPI.