Clubbing your way to ratio analysis

There’s been an interesting news piece recently that shows how ratio analysis is relevant to Britain’s biggest nightclub operator, Luminar.

Luminar, who operate the Oceana and Liquid branded nitespots have been in a spot of bother since the credit crunch. They have large debts and have lost some of their cool in clubland too (or so I am told).

The business has debts of £90m which it needs to refinance. This means that its current creditors are getting itchy and want to be repaid, whilst Luminar effectively want to consolidate all their debt into one large, new package. Now here’s the ratio analysis bit – how much will lenders be prepared to part with?

Lenders are using a ratio called ebitda to decide how much Luminar can safely borrow. This ratio is calculated by taking Luminar’s earnings. These are adjusted to take out interest and tax. As a final twist, depreciation of fixed assets is also stripped out, as is amortisation, which is rather like depreciation of intangible assets. An interesting job for the accountants there.

Creditors have said that they are willing to lend up to three times this adjusted earnings figure. Luminar are currently at 2.6, so there’s not much more room for extra borrowing. Especially as recent trading had “fallen well below budgeted levels”. Lower earnings directly implies less borrowing. With these falls estimated to be around 20%, it’s likely that Luminar are already at their borrowing limit. Industry watchers are expecting that Luminar will have to liquidate some of their assets to raise finance.

Selling extra shares doesn’t look a possibility as a way to raise the necessary funds. Their shares have fallen by more than 90% and you can pick them up for a princely 9.75p, making its market value only around £10m.

Will Luminar bounce back? Clearly, that question has something to do with marketing the brand, but a this blog shows, finance will be crucial too.