Measuring Financial Performance: How Do I Measure It? - PowerPoint PPT Presentation

Loading...

PPT – Measuring Financial Performance: How Do I Measure It? PowerPoint presentation | free to download - id: 505692-YzBmZ



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

Measuring Financial Performance: How Do I Measure It?

Description:

This measure is frequently the bottom line of an income statement and is used as the starting point for calculating the profitability measures of rate of ... – PowerPoint PPT presentation

Number of Views:100
Avg rating:3.0/5.0
Slides: 41
Provided by: cabst
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: Measuring Financial Performance: How Do I Measure It?


1
(No Transcript)
2
Measuring Financial Performance How Do I Measure
It?
3
Objectives
  • Introduce the measures of financial performance
    Liquidity, Solvency, Profitability and Financial
    Efficiency
  • Describe the calculations used
  • Interpret the measures using benchmarks

4
Measures of Financial Position and Performance
  • Profitability
  • Liquidity
  • Solvency
  • Financial efficiency
  • Repayment capacity

5
Four Questions
  • Are the returns adequate?
  • How liquid is the business?
  • How is the business financed?
  • How efficient is the business?

6
Benchmarking
  • Comparing our business to those that are the best
    to learn how they achieve success
  • Minimum performance is above average
  • Financial benchmarks can come from
  • past performance
  • projected performance
  • performance of similar farms

7
Benchmark data
  • Farm business associations are good sources of
    benchmarks
  • Illinois, Iowa, Kentucky, Tennessee and others
  • Know your data source
  • methods for summarization
  • period in which data was collected
  • calculations used for performance measures

8
Profitability
  • Measures the extent to which a business generates
    a profit from the use of land, labor, management,
    and capital.
  • Measured by
  • Net farm income from operations (NFIFO)
  • Rate of return on farm assets (ROA)
  • Rate of return on farm equity (ROE)
  • Operating profit margin (OPM)

9
Net farm income from operations
  • Net revenues available from normal operations
    after fixed and variable expenses have been
    deducted
  • For accuracy, calculate on an accrual basis
  • For a sole proprietor farm operation, this income
    is available to compensate unpaid family labor,
    management, and equity capital

10
Rate of return on assets
  • Net income generated by all assets, after labor
    has been compensated but before interest payments
  • Operating profitability per dollar of assets
  • Allows comparison between different sizes and
    types of businesses

11
Rate of return on equity
  • The return after all labor and interest expenses
  • Measures the return to the owner of the business
    for their capital investment
  • Can be compared to alternative investments

12
Operating Profit Margin
  • Proportion of earnings or revenues that is
    operating profit
  • Reflects ability to generate revenues and control
    costs
  • Revenue available to compensate debt and equity
    capital

13
Net Farm Income
  • Gross Revenue ___________
  • Interest Expense - ___________
  • Other Expense - ___________
  • Net Farm Income ___________

14
Return to assets
Net farm income ___________
Interest expense ___________
Family living - ___________
Net return ___________
Total assets ? ___________
Return to assets _________
15
Return to equity
Net farm income Net farm income ___________
Family living Family living - ___________
Equity return Equity return ___________
Total equity Total equity ? ___________
Return to equity Return to equity __________

16
Operating Profit Margin
Net farm income ___________
Interest expense ___________
Family living - ___________
Net income ___________
Gross Revenue ? ___________
Operating profit margin _________
17
Profitability Scores
Benchmark Benchmark
Measure Average High Profit Our Grade
Net Farm Income
Operating profit margin 16 32
Return on assets 7 14
Return on equity 6 18
18
Liquidity
  • Ability of a farm business to meet financial
    obligations as they come due in the short term,
    without disrupting the normal operations of the
    business.
  • Measured by
  • Current ratio

19
Current ratio
  • Basic indicator of short-term debt servicing
    and/or cash flow capacity.
  • Indicates the extent to which current assets,
    when liquidated, will cover current obligations

20
Solvency
  • Gauges the farms ability to
  • pay all financial obligations if all assets are
    sold
  • continue viable operations after financial
    adversity
  • Measured by
  • Debt to asset ratio
  • Debt to equity ratio
  • Equity to asset ratio

21
Debt to asset ratio
  • Proportion of total assets owned by creditors

22
Liquidity Score
Current Ratio
Current assets
Current liabilities ___________

23
Liquidity Scores
Benchmark Benchmark
Measure Average High Profit Our Grade
Current Ratio 3.1 3.3
24
Solvency Score
Debt-to-Assets Ratio

___________

x 100
25
Solvency Scores
Benchmark Benchmark
Measure Average High Profit Our Grade
Debt to Asset 32 26

26
Financial Efficiency
  • Measures the intensity with which a business uses
    its assets to generate gross revenues and the
    effectiveness of production, purchasing, product
    pricing, financing decisions

27
Financial Efficiency Measures
  • Measured by
  • Asset turnover ratio
  • Operating expense ratio
  • Depreciation expense ratio
  • Interest expense ratio
  • Net farm income ratio

28
Asset turnover ratio
  • Reflects how efficiently farm assets generate
    revenue
  • Indicates the volume of business generated by the
    asset base

29
Revenue per full-time laborer
  • Reflects the productivity of labor
  • Indicates if revenue generated is sufficient for
    full-time employment

30
Operating expense ratio
  • Proportion of total revenues absorbed by
    operating expenses

31
Depreciation expense ratio
  • Proportion of total revenues absorbed by
    depreciation

32
Interest expense ratio
  • Proportion of total revenues absorbed by interest
    expense

33
Net farm income ratio
  • Proportion of total revenue that remains as net
    income after all expenses have been paid
  • Income that remains for unpaid labor compensation
    and equity capital

34
Account for each dollar of gross revenue
  • Operating expense ratio
  • Depreciation expense ratio
  • Interest expense ratio
  • Net farm income ratio

35
Asset Turnover Ratio

___________

36
Financial Efficiency Scores
Benchmark Benchmark Benchmark
Measure Average High Profit High Profit Our Grade
Asset Turnover Ratio 35 43 43

Revenue per FTE

37
Operating Expense Ratio
Other expenses ___________
Depreciation - ___________
Oper. expense ___________
Gross revenue ? ___________
Ratio _________

38
Where does the revenue go?
Benchmark Benchmark Benchmark
Measure Average High Profit High Profit Our Grade
Operating Expense Ratio 63 52 52
Depreciation expense ratio 8 7 7
Interest expense ratio 8 8 6
Net farm income ratio 20 20 37
39
Summary
  • Key financial measures assess
  • Profitability
  • Liquidity
  • Solvency
  • Financial efficiency
  • Calculations
  • Interpretation

40
References
  • Boehlje, Michael, Craig Dobbins, Alan Miller,
    Dawn Miller, Freddie Barnard, Measuring and
    Analyzing Farm Financial Performance, Department
    of Agricultural Economics, Purdue University,
    EC-712, 1999 (pages 7-10), ltwww.agecon.purdue.edu/
    ext/financegt
  • Dobbins, Craig, Michael Boehlje, Alan Miller,
    Freddie Barnard, Financial Performance
    Measurement and Analysis, Purdue Agricultural
    Economics Report, March 2000, pages 14-18.
  • Oltmans, Arnold W. Danny A. Klinefleter, and
    Thomas L. Frey, AFRA - Agricultural Financial
    Reporting and Analysis, Doane Agricultural
    Services Company, St. Louis, 1998.
  • Miller, Alan, Michael Boehlje, Craig Dobbins, Key
    Financial Performance Measures for Farm General
    Managers, Department of Agricultural Economics,
    Purdue University, ID-243, June 2001.
About PowerShow.com