Title: Improving Financial Performance: What Is the Payoff?
1Improving Financial Performance What Is the
Payoff?
2Objectives
- Understanding determinates of operating
performance (ROA) - Understanding determinates of financial
performance (ROE) - Links between managerial decisions and financial
performance
3Determinants of Operating Performance (ROA)
- Operating profit margin
- Asset turnover ratio
4Determinants of Financial Performance (ROE)
- Operating profit margin
- Asset turnover ratio
- Leverage
5Profitability Analysis
6DuPont Analysis
Operating Performance
7Implications
- If ROE gt ROA
- Interest rate less than ROA
- Making money on borrowed money
- Increase ROE by borrowing more (but be careful)
8Implications
- If ROE lt ROA
- ROA less than interest rate
- Losing money on borrowed money
- Reduce interest cost
- Reduce debt
- Improve operating performance (ROA)
9Improving performance
- Ways to enhance operating performance (ROA)
- Increase operating profit margin
- Increase volume per dollar invested or capital
turnover - Ways to enhance equity return (ROE)
- Enhance operating performance
- Reduce financing costs
- Leverage more debt
10Data for Profit Analysis
- Gross Revenue
- Fixed Costs
- Variable Costs
- Interest Costs
- Total Assets
- Equity
11Example Case MBC Farms
- Operated by Mike, Betty, and Craig
- Enterprises
- Crops, dairy
- Operate 3,000 acres, 250 milking cows
- Own 1,800 acres, cash rent remainder
- Six full-time employees
12Worksheet 1 Cost Basis Inputs
13Worksheet 4
Spreadsheet for MBC Farms Case
14Worksheet 4 MBC Farms (cost value)
Financial Data
1. Gross Revenue 1,796,651
2. Fixed Costs 385,638
3. Variable Costs 1,280,494
4. Net Income 130,519
5. Total Farm Assets 2,408,799
6. Owner's Equity 1,287,360
7. Interest Expense 98,716
15Complete Worksheet 4
16Worksheet 4 MBC Farms (cost value)
Operating Profit Margin 12.8
Asset Turnover Ratio 74.6
Return on Assets 9.5
Interest Cost of Assets 0.041
Financial Structure 1.87
Return on Equity 10.1
17Worksheet 4 MBC Farms (market value)
Operating Profit Margin 12.8
Asset Turnover Ratio 38.6
Return on Assets 4.9
Interest Cost of Assets 0.021
Financial Structure 1.32
Return on Equity 3.7
18Reduced interest
- Opportunity to refinance term debt at a 1 lower
interest rate - 91,648 in intermediate debt and 799,573 term
- Saves about 8,913
19Complete Alternative on Worksheet 4
20Reduced Interest
Actual Projected
1. Gross Revenue 1,796,651 1,796,651
2. Fixed Costs 385,638 376,725
3. Variable Costs 1,280,494 1,280,494
4. Net Income 130,519 139,432
5. Total Farm Assets 2,408,799 2,408,799
6. Owner's Equity 1,287,360 1,287,360
7. Interest Expense 98,716 89,803
21Reduced Interest Results
Actual Projected
Operating Profit Margin 12.8 12.8
Asset Turnover Ratio 74.6 74.6
Return on Assets 9.5 9.5
Interest Cost of Assets 0.041 0.037
Financial Structure 1.87 1.87
Return on Equity 10.1 10.8
22Earlier soybean planting
- Has been planting about half of soybeans after
June 23 - Pushing harder would result in about a 10
increase in soybean revenue - No change in costs
23Earlier Planting
Actual Projected
1. Gross Revenue 1,796,651 1,832,087
2. Fixed Costs 385,638 385,638
3. Variable Costs 1,280,494 1,280,494
4. Net Income 130,519 165,956
5. Total Farm Assets 2,408,799 2,408,799
6. Owner's Equity 1,287,360 1,287,360
7. Interest Expense 98,716 98,716
24Earlier Planting Results
Actual Projected
Operating Profit Margin 12.8 14.4
Asset Turnover Ratio 74.6 76.1
Return on Assets 9.5 11.0
Interest Cost of Assets 0.041 0.041
Financial Structure 1.87 1.87
Return on Equity 10.1 12.9
25Summary
- Measurement of performance
- Operating ROA
- Financial ROE
- Determinants of rates of return
- Operating profit margin
- Asset turnover ratio
- Cost of debt
- Leverage
- Links among managerial decisions rates of return
26Key Points?
- What are the 2 key elements of operating
performance? - Overall financial performance is measured by what
ratio? - With respect to financial performance, when is
debt a good thing?
27References
- 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 37-43), - Miller, Alan, Michael Boehlje, and Craig Dobbins,
Key Financial Performance Measures for Farm
General Managers, Department of Agricultural
Economics, Purdue University, ID-243, June 2001.
28Strategic Business Planning for Commercial
Producers
29Worksheet 4
Financial Data MBC Farms
1. Gross Revenue
2. Fixed Costs
3. Variable Costs
4. Net Income
5. Total Farm Assets
6. Owner's Equity
7. Interest Expense
30Reduced Interest Results
Actual Projected
Operating Profit Margin 12.8
Asset Turnover Ratio 74.6
Return on Assets 9.5
Interest Cost of Assets 0.041
Financial Structure 1.87
Return on Equity 10.1
31Earlier Planting Results
Actual Projected
Operating Profit Margin 12.8
Asset Turnover Ratio 74.6
Return on Assets 9.5
Interest Cost of Assets 0.041
Financial Structure 1.87
Return on Equity 10.1