Key Financial Ratios (2015/16)

Some key indicators based on predicted EBIT (earnings before interest and tax) have been calculated on the 2015/16 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:

It is interesting to observe that the top 20% of clients ranked on Return on Assets, are at the top end of the target range, while the group average 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.

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

The top 20% of clients ranked on Return on Assets have only 3% more capital employed in their business than average, despite having an effective area managed of 31% higher than average.  Scale is important in this analysis.

It can be seen that there is a greater difference between the Sales/Assets ratio than there is between the EBIT Margin for the two groups, indicating that the top 20% group own land valued at closer to its productive capacity, have machinery value better matched to the size of operation, and/or they have leveraged their investment in land by leasing a significant portion of the area managed.