Consider two hypothetical residential aged care facilities. Save for the following distinctions, all other operational costs and revenues are the same.
Facility 1 is a not-for-profit that is heavily reliant on donations to supplement its income and takes in exclusively supported residents.
Facility 2 is favoured by high net worth individuals who exclusively chose to pay their accommodation charges by a Refundable Accommodation Deposit (RAD) on entry to the residential care facility.
If you include donations, then Facility 1 will have a much higher operating result than Facility 2.
In fact, Facility 2 may even show a loss because its income is lower than Facility 1 by the difference between the Daily Accommodation Payment (DAP) it does not get, and the interest it earns on the RAD it does receive.
So how can the relative financial performance of these two facilities be appropriately compared?
This was the first question RSM faced when looking to understand the factors influencing final performance of residential aged care providers.
To solve this problem we did three things:
- We separated non-operating income from operating income, which meant we excluded the interest on the RAD for Provider 2 and the donations received by Provider 1;
- We included notional income on the RAD’s received by Provider 2 using the RAD / DAP equivalent interest rate, and
- We removed other items of expense that could be inconsistent between these two providers.
We called the resulting measure of financial performance Operating Earnings Before Interest Taxation Depreciation and Amortisation (OEBITDA).
To us, OEBITDA represents a measure that can be consistently applied to any provider to measure their operational financial performance against any other provider / service or group of providers.
A common way to assess performance is to consider operational performance against the investment. This can be expressed using a number of numerators with gross assets or equity as the denominator.
In the same way, including non-operating and inconsistent items in the calculation of the operating performance using inconsistent measures of gross and net assets can distort comparative returns. To demonstrate this, consider in the above example that one facility is new and has assets of $250,000 per bed, while the other is 20 years old and the book value (after depreciation) of its assets is only $50,000.
At first glance the second facility is likely to show a higher return on assets, however this fails to recognise that the second facility will shortly need a total rebuild to bring it to current resident expectations.
Consistent with our approach to measuring financial performance, we used Net Operating Profit Before Tax (NOPBT), which is OEBITDA less depreciation, and compared this to Net Operating Assets.
Combining these two measures provided a metric that allows for the comparison of any provider/ service or group of providers on a consistent basis.
Further detail on how these measures were used can be found on page 87 of the RSM Report Factors Influencing The Financial Performance of Residential Aged Care Providers.
The standard measures of Earnings Before Interest Tax Depreciation & Amortisation (EBITDA) and EBITDA to total assets are used to monitor the change in performance of providers over time.
Further details of these measures can be obtained from page 50 of ACFA Report on the funding and financing of the aged care industry 31 July 2014.
We are interested in your views on the value and circumstances where the following measures are appropriate:
- EBITDA to total assets
- NOBPT to net operating assets