Agriculture Reference
In-Depth Information
portion of production costs. Agribusiness managers must study their own operations and use
those fi nancial ratios that are best suited for the unique business involved.
Just a few of the more commonly used and most helpful ratios are discussed below.
These ratios will be related to the balance sheet and the income statement for BF&G
(review
Tables 9.1
and
9.2
i
n
Chapter 9
)
. From a manager's point of view, there are four key
criteria to monitor, and hence four types of ratios to explore:
1.
Profi tability ratios
2.
Liquidity ratios
3.
Solvency ratios
4.
Operating or effi ciency ratios
Profi tability ratios
Profi tability ratios
include several different indicators that help assess a fi rm's profi tability
and record of performance. The net sales fi gure is used in three of the fi ve ratios rather than
the gross sales fi gure because sales, after returns, allowances, and discounts provides a more
accurate measure of the true sales for a fi rm. The net sales fi gure is not infl ated by amounts
that were ultimately returned to customers in the form of discounts and allowances, or
refunds for returned merchandise.
Earnings on sales ratio
:
net operating income divided by net sales
. The relationship between
net operating income that BF&G generated and net sales (the
earnings on sales
ratio)
are shown here:
(
)
(1)
Net Operating Income
/
Net Sales
=
EOS Earnings on Sales
$
469
19
0
13 41
$
0 000
=
0 0
35 or 3 5
%
(
)
From Income Statement w
,
and a
The earnings on sales ratio (Equation 1) focuses on management decisions that refl ect
operating effi ciency and pricing policy. Earnings may be increased by changes in pric-
ing policy. Low prices may generate increased sales, but could produce zero profi ts,
while higher prices might reduce sales signifi cantly. The pricing strategy must be devel-
oped after careful consideration of the competitive environment. Sales forecasts can be
helpful in this area, and ratios may be used to improve sales projections. Likewise, a low
EOS ratio may indicate costs are out of line. BF&G can attempt, through management
decisions, to reduce such things as labor, administrative expenses, and selling costs.
Return on sales ratio
:
net income after taxes divided by net sales
. Managers often fi nd it
helpful to look at income after all business expenses, including interest and taxes. The
return on sales ratio
is:
(
)
(2)
Net Income After Taxes
/
Net Sales
=
ROS Return on Sales
$
196
65
0
/ $
13 41
0 000
=
0 0
147 or 1 5
%
(
)
From Income Statement bb
,
and a
