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Key Financial Ratios (July 2018)

Management should focus on costs rather than income, is the key message from the following analysis.

Some key indicators based on predicted EBIT (earnings before interest and tax) have been calculated on the 2018/19 client budget data.  EBIT is a measure of profitability used across various businesses and industries.

The average results for both the top 20% of clients plus average for the client group, ranked on Return on Assets, along with the desired range are as follows:

The values for the four parameters in the table have all dropped slightly since last year, for both the top 20% and average of clients. It is not surprising that Sales to Assets has dropped with increasing land prices and the EBIT margin has dropped due to increasing costs not reflected by increased income.  The group average ranked on Return on Assets is very close to the midpoint of the target range.

The first ratio is a measure of operating efficiency and capital utilisation, the second a measure of debt servicing ability (comfort factor), while the last two are a measure of profitability.  EBIT Margin is also a reflection of the risk profile of the business, with a high figure representing low costs relative to income. Mixed farms generally have a higher EBIT Margin than those who crop exclusively.

The results above show that the top performing clients can achieve financial ratios comparable to other medium – to – large businesses outside agriculture.

This table reinforces that costs are the biggest driver of risk and profitability, plus Return on Assets, as there is little difference between the Sales/Asset ratio of the two groups. Lower risk and greater profitability is depicted by the significantly higher EBIT Margin for the group having the highest Return on Assets.

The top 20% of clients ranked on Return on Assets have 8% more capital employed in their business than average, which is a reflection of them having an effective area managed of 8% higher than average. This should result in a slight benefit of scale in diluting fixed costs.