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Improving Financial Performance: What Is the Payoff?

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Improving Financial Performance: What Is the Payoff? Objectives Understanding determinates of operating performance (ROA) Understanding determinates of financial ... – PowerPoint PPT presentation

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Title: Improving Financial Performance: What Is the Payoff?


1
Improving Financial Performance What Is the
Payoff?
2
Objectives
  • Understanding determinates of operating
    performance (ROA)
  • Understanding determinates of financial
    performance (ROE)
  • Links between managerial decisions and financial
    performance

3
Determinants of Operating Performance (ROA)
  • Operating profit margin
  • Asset turnover ratio

4
Determinants of Financial Performance (ROE)
  • Operating profit margin
  • Asset turnover ratio
  • Leverage

5
Profitability Analysis
  • AKA The DuPont Model

6
DuPont Analysis
Operating Performance
7
Implications
  • If ROE gt ROA
  • Interest rate less than ROA
  • Making money on borrowed money
  • Increase ROE by borrowing more (but be careful)

8
Implications
  • If ROE lt ROA
  • ROA less than interest rate
  • Losing money on borrowed money
  • Reduce interest cost
  • Reduce debt
  • Improve operating performance (ROA)

9
Improving 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

10
Data for Profit Analysis
  • Gross Revenue
  • Fixed Costs
  • Variable Costs
  • Interest Costs
  • Total Assets
  • Equity

11
Example 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

12
Worksheet 1 Cost Basis Inputs
13
Worksheet 4
Spreadsheet for MBC Farms Case
14
Worksheet 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
15
Complete Worksheet 4
16
Worksheet 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
17
Worksheet 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
18
Reduced 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

19
Complete Alternative on Worksheet 4
20
Reduced 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
21
Reduced 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
22
Earlier 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

23
Earlier 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
24
Earlier 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
25
Summary
  • 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

26
Key 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?

27
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 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.

28
Strategic Business Planning for Commercial
Producers
29
Worksheet 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
30
Reduced 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
31
Earlier 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
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