Key Financial Ratios (2019/20)
Some key indicators based on predicted EBIT (earnings before interest and tax) have been calculated on the 2019/20 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:
Management should focus on costs rather than income, is the key message from this analysis.
Other than interest cover, the parameters in the table have all increased slightly since last year for the top 20% of clients, while average clients have seen a slight reduction in business performance.
It is a little surprising that Sales to Assets has increased with increasing land prices, however clients with a significant amount of lease country dominate the top 20%.
EBIT margin has increased due to a slight reduction in costs, particularly reduced P and N fertiliser rates following the limited nutrient removal in 2018.
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 minimal 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.