Agriculture Reference
In-Depth Information
13,410,00
0
13,410,000
=
100%
1,685,000
13,410,000
=
12.57%
469,190
13,410,000
=
3.50%
Net sales $ = 100%
196,650
13,410,000
Gross margin %
=
1.47%
Net operating profit %
Interest expense %
11,725,000
13,410,000
=
87.43%
196,650
6,677,000
1,215,800
13,410,000
=
2.95%
=
9.07%
Return on
Sales %
230,840
13,410,000
Costs of goods sold %
=
1.72%
Operating expenses %
Rate of return
on investment %
+
Other in
come %
18,200
13,410,000
=
0.14%
X
Income tax %
59,900
13,410,000
$175,000
=
0.45%
196,650
3,665,000
Cash
Accounts receivable
=
5.37%
+
1,600,000
X
+
4,287,000
13,410.000
2,500,000
Inventory
2.01
Current assets
Net sales
Rate of return on owner equity %
+
7,000
Prepaid expense
Other
Asset turns
+
5,000
÷
+
1,150,000
+
Land
Buildings
450,000
Total assets
6,677,000
2,390,000
780,000
Equipment
+
Fixed assets
100,000
+
Other
1,862,000
3,012,000
Current
Liabilities
6,677,000
+
+
1.82
Total liabilities
and owners' equity
1,150,000
Long term
3,665,000
÷
Leverage
Owner equity
Owner equity
3,665,000
Figure 10.1
Profi tability analysis model for Brookstone Feed and Grain company
business, measured by the leverage ratio (total assets divided by owner's equity). These
three areas can be considered “paths to profi t” and anything that impacts one of the
three paths will impact ROE. One path, measured by the return on sales ratio, is the
operating path. Here managers worry about sales and expenses. The second path is the asset
effi ciency path, measured by the asset turnover ratio. On this path, managers worry
about making effi cient use of the assets invested in the fi rm. The fi nal path is the debt path.
This path is measured by the leverage ratio. Here, managers focus on using debt in a profi t-
able way. So, for a manager who wants to improve ROE, there are three possible paths
to pursue—operations, asset effi ciency, and debt. The step-by-step process for constructing
the profi tability analysis model is illustrated using the fi nancial statements for BF&G
(
Tables 9.1
and
9.2
)
.
Each of these paths to profi t is important to reaching the fi rm's profi t goal, and should
be carefully considered. The top part of
Figure 10.1
relates to the earnings picture and
helps the manager focus on operating problems related to personnel, pricing, product
mix, etc. Careful control of expenses is essential, and monitoring systems must be
implemented to deal with internal as well as external changes over time, i.e., internal person-
nel and management decisions versus decisions driven by external factors such as competi-
tion. As can be seen in
Figure 10.1
cost of goods sold (87.43 percent), operating expenses
(9.07 percent), interest expense (1.72 percent), other income (0.14 percent), and the tax
expense (0.45 percent) are all divided by net sales to calculate each as a percentage of net
sales.
The asset turnover concept, the second part of the profi tability analysis model, suggests
that the higher the sales volume produced with a given set of assets, the higher the fi rm's
ROE. For example, as more feed and grain are sold for BF&G, the associated assets are
being utilized more effectively, up to a point. A fi rm may attempt to push volume to a level
at which physical processing or handling capacity is reached. However, the cost of squeez-
ing out the marginal volume may be prohibitive as these capacity limits are approached.
