FINANCIAL RATIOS

A horticulture firm may measure its financial and earning potential by calculating different ratios that serve as quantitative guides. Ratios can be applied to the analysis of balance sheets and income statements to compare relationships among the different values. Typical financial ratios used by horticulture businesses include:

• Profitability ratios: These ratios relate profits to total assets, or gross income, or other quantities.

• Liquidity ratios: Liquidity is the ability of a company to pay its bills when they are due. This ratio reveals that ability.

• Leverage ratios: A comparison of the company’s debt with parameters such as total assets or net worth.

Some examples of ratios are given below, based on the data taken

Sample Profit-and-Loss Statement

GARLAND’S NURSERY AND GREENHOUSES Profit-and-Loss Statement / Final for Year December 31, 2009

Sales

Nonperishable

$ 87,000

Labor

60,000

Plant materials

153,000

Total sales

$300,000

Cost of goods sold

Cost of goods sold-nonperishable

$ 30,000

Cost of goods sold-plant materials

8,500

Total cost of goods sold

$38,500

Gross profit

$261,500

Expenses

Wages

$98,500

Payroll taxes

8,700

Seeds and propagative stock

47,300

Gasoline and oil

6,000

Utilities

2,300

Postage metering

800

Office supplies

600

Interest on debts

3,600

Taxes

1,500

Advertising

7,300

Legal fees

1,800

Accounting fees

2,220

Total expenses

$180,620

Net profit

$80,880

pr TABLE 25-3. Sample Balance Sheet

GARLAND’S NURSERY AND GREENHOUSES Balance Sheet / Year Ending December 31, 2009

Assets

Current Assets

Cash in bank

$18,500

Cash on hand

500

Petty cash

250

Accounts receivable

37,000

Inventory

50,000

Total current assets

$106,250

Fixed Assets

La n d

$80,000

Retail store

30,000

Garage

25,000

Greenhouses

30,000

Equipment

102,500

Less depreciation

-27,300

Total fixed assets

$240,200

Total assets

$346,450

Liabilities

Current Liabilities

Accounts payable

$7,530

FICA payable

1,800

Withholding payable

2,300

Total current liabilities

$11,630

Long-Term Liabilities

Notes payable

$7,530

Total long-term liabilities

$17,000

Total liabilities

$28,630

Capital

Garland’s Nursery and Greenhouses, capital

$317,820

Total liabilities and capital

$346,450

———– =- 4.84

11.630

$106,250 = 9.14

11.630

$28,630

———– =- 0.09

318.090

$240,200 = 0.76

318.090

These ratios are only a sampling of the financial ratios that a com­pany may use, depending on the nature of the business and the infor­mation sought. The figures used in the examples should not be regarded as anything more than examples for the reader. However, in a real busi­ness, the ratio of quick assets to current liabilities tells the horticulture businessperson whether there is enough money available to cover the current indebtedness. A business has liquidity and can pay its bills when the ratio is at least 1.0.

The ratio of current assets to current liabilities tells the business owner whether the business can meet its current obligations in the short term. The higher the ratio is, the better off is the business.

Sometimes called the debt-to-equity ratio, the total liabilities to net worth ratio indicates the level of investment in the business held by creditors and owners. A low ratio is desirable here.

The fixed assets to net worth ratio is a measure of how much of the company’s assets are tied up in fixed assets and not available as working capital.