Agriculture Reference
In-Depth Information
Equation 2 indicates how profi table BF&G was when all costs and other income of the busi-
ness have been included and compared to overall sales. This ratio is one on which all those
interested in BF&G will place a priority, and any deviations will be monitored carefully.
ROS is a key ratio for management as it addresses virtually every aspect of their job: market-
ing and setting prices, purchasing, and cost management.
Return on equity ratio
:
net income after taxes divided by owner's equity
. This ratio is prob-
ably the most widely used profi tability ratio and takes the investor's point of view of the
fi rm. The
return on equity ratio
, which determines the return on investor ownership, is
particularly valued by owners when comparing investment opportunities.
(
)
Net Income After Taxes
/
Owner s Equity
'
=
ROE Return on Equity
(3)
$,
196 65
0
/ $,
3 665
,
000
=
0 0
bb and Balance Sheet qq
.
537 or 5 4
. %
)
(
From Income Statement
,
,
,
This ratio is useful in determining the wisdom of investment in BF&G. It can be invaluable
in encouraging additional investment of equity capital if greater cash fl ow is needed in the
business. Stockholders also use this ratio as an indicator of the relative value of their stock.
Return on assets ratio
:
net income after taxes plus interest expense divided by total assets
.
A slightly different profi tability ratio is called the return on assets ratio. This ratio meas-
ures the net profi t generated on the total investment in the business. The return to the
total investment would include not only the return to owners, but also the return to
creditors' investment in the business. So interest costs must be added to the net profi t.
Thus, this ratio is more inclusive than the ROE ratio discussed above. It measures net
returns relative to both outsider and insider investment in the business.
(
)
(
)
Net Income After Taxes
+
Interest
/
Total Assets
=
ROA Return o
n Assets
(4)
(
)
$,
196 65
0
+
23
$,
0
84
0
/ $,
6 677
,
000
=
0 0
.
64 or 6 4
.
%
(
)
From Income Statement bb and y and Balance Sheet s
,
,
,
Gross margin ratio
:
gross margin divided by net sales
. Depending on how the fi rm's income
statement is set up, this may also be called the gross profi t ratio. The gross margin ratio
shows how much BF&G has left from each dollar of net sales to pay operational and
other business expenses plus make a profi t.
(
)
Gross Margin
/
Net Sales
=
GM Gross Margin Ratio
(5)
(
)
$,
1 685
,
000 //$
13 41
,
0 000
,
=
0
.
1257 or 12 57
.
%
(
)
From Income Statement c and
,
a
Here BF&G has 12.57 cents of each sales dollar left to cover expenses and go to profi t.
As prices and BF&G's product mix (combination of products sold) change, gross margin
will also change. More detailed analysis may be needed here if the gross margin is
