Profitability Ratios
Profitability can be measured in several ways. One approach
measures profitability as the relationship between the level of
profits earned during an accounting period (here, 1 year) and the
level of resources committed to earn those profits. An example is
the rate of return on farm assets from current income (or returns
to farm assets/average value of farm business assets).
Other approaches relate the level of profits to the volume of sales,
such as the operating profit margin (or returns to farm assets/gross
cash farm income).
Rates of return on assets:
-
Current income: (Returns to farm assets from current
income/farm business assets)—Measures how efficiently
the farm business uses its assets; the per dollar return
on farm
assets from current income only.
-
Real capital gains: (Real capital gains on farm
business assets/farm business assets)—Measures the per
dollar return on farm assets from real capital gains.
Rates of return on equity:
-
From current income: Returns to equity capital employed
in farm business from current income, less interest (excluding
operator dwellings).
-
From real capital gains: (Real capital
gains on farm business equity/farm business equity)—The
per-dollar return on farm equity from real capital gains.
Operating profit margin: (Returns to farm assets/gross
cash farm income)—Measures profits earned per dollar of gross
cash income.
|
