Agriculture Reference
In-Depth Information
While ROE is certainly not a ratio that can be compared from agribusiness to agribusiness
on an unqualifi ed basis, it does offer a more easily compared measure of different fi rms'
resources than almost any other ratio. For this reason, ROE is considered the most accurate
measure of effective resource use by managers, boards of directors, lending institutions,
investors, and others interested in the business. The ROE is sensitive enough so that even
small changes in trends should cause the manager to be pleased (if it is improving) and try
more of the same, or to be concerned (if it is declining) and begin searching for methods of
improvement.
Changes in fi gures on the asset turnover, return on sales, or leverage ratios, can also point
to or help identify places where problems or opportunities arise. For example, BF&G might
note a drop in its ROE fi gure and see that the asset turnover fi gure was up slightly, but the
ROS ratio was down somewhat. In this instance, the fi rm could concentrate its management
efforts on such areas as sales expenses or administrative costs or the selling price. Careful
use of ROE through the profi tability analysis model can be the single most helpful indicator
of complete fi rm performance available to the agribusiness manager. By classifying expenses
into categories on the income statement (sales, administration, etc.), and by combining
income statement and balance sheet data into an easily understood format, problems and
opportunities can be more easily located to take corrective action.
Graphing to increase understanding
Simple graphs of fi nancial ratios often enhance the ability of managers to interpret fi nancial
data and information. Graphing of important ratios, for example, allows additional periods
and time spans to be compared and the more time, or periods, or ways in which something
can be compared, the more meaningful the data become ( Figure 10.2) .
The graph illustrates the impact of a period when BF&G lowered prices from period 5 to
period 11. Asset turnover increased (the solid line in Figure 10.12), but at the same time,
5.0%
2.3
4.5%
2.2
4.0%
2.1
Asset
turnover
BF&G
ratio No.12
Earnings
on sales
BF&G
ratio No.1
3.5%
2.0
3.0%
1.9
2.5%
1.8
2.0%
1.7
0
1.6
1
2
3
4
= Asses turnover
5
6
7
8
9
10
11
12
= Earnings on sales
Figure 10.2 Graph of key ratios for Brookstone Feed and Grain company
 
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