Page 201 - Calculating Agriculture Cover 20191124 STUDENT - A

CH 21] Calculating Agriculture 21-13

Example: Van Dam’s Seed and Feed supplies local farmers and ranchers with a sundry
of inventory items and supplies. Last year Van Dam’s had its best year in
sales with net sales at $1,000,000 and a net income of $150,000. Calculate
the Return on Sales using the Profit Margin Equation.

Solution algorithm:
Net Income
Profit Margin Ratio = ——————
Net Sales
$150,000
= ——————
$1,000,000

= 0.15:1

Expressed as a percentage the Profit Margin Ratio % is (0.15 x 100% =) 15%.
This calculation of Profit Margin Ratio indicates that 15% of the sales for fishing
equipment and supplies was turned into profits.
Analysis: The profit margin ratio measures how much profits are produced at a certain
level of sales. This ratio indirectly measures how well a company manages its expenses
relative to its net sales. Managers and owners strive to achieve higher ratios. This can be 21
accomplished by either generating greater revenues through keeping revenues constant and
lowering expenses or keeping expenses constant and increasing revenues. Increasing
revenues can be more difficult depending on the product line and market environment so
managers tend to concentrate on lowering expenses.

Return on Assets Ratio – ROA. Using the income statement information the Return
on Assets Ratio is a profitability ratio that measures the net income produced from the
Average Total Assets. This ratio measures how efficiently a firm manages its assets to
produce a profit for the period of the Income Statement report.
Used by owners, managers and potential investors this ratio, ROA, indicates how well
the firm utilizes its investment in assets to generate profits. ROA can be viewed as return on
investment (ROI) ratio as capital assets are often the largest investment for any firm. The
firm invests in capital assets and the return is measured as profits.
The comparison is net income to the Average Total Assets. The information for this ratio
is derived from the Balance Sheet and Income Statement. The Balance Sheet provides the
Average Total Assets and the income state provides the Net Income. The equation for Return
on Assets Ratio is:
Net Income
Return on Assets Ratio = ——————————
Average Total Assets

Example: Roberta Carmona has a pig growing operation. Roberta’s balance sheet shows
beginning assets of $2,000,000 and an ending balance of $3,000,000 of assets.
During the current year her firm had a net income of $37,500,000. What is
Roberta Carmona’s Return on Assets Ratio as (a) a decimal and (b) a
percentage?
Solution algorithm:
Net Income
(a) Return on Assets Ratio = ——————————
Average Total Assets

37,500,000
= ———————————————
($2,000,000 + $3,000,000) ÷ 2
37,500,000
= ————————
($5,000,000) ÷ 2
37,500,000
= ———————
$2,500,000

Return on Assets Ratio = 15 : 1

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