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
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GARLAND’S NURSERY AND GREENHOUSES Profit-and-Loss Statement / Final for Year December 31, 2009 |
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Sales |
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Nonperishable |
$ 87,000 |
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Labor |
60,000 |
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Plant materials |
153,000 |
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Total sales |
$300,000 |
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Cost of goods sold |
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Cost of goods sold-nonperishable |
$ 30,000 |
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Cost of goods sold-plant materials |
8,500 |
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Total cost of goods sold |
$38,500 |
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Gross profit |
$261,500 |
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Expenses |
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Wages |
$98,500 |
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Payroll taxes |
8,700 |
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Seeds and propagative stock |
47,300 |
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Gasoline and oil |
6,000 |
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Utilities |
2,300 |
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Postage metering |
800 |
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Office supplies |
600 |
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Interest on debts |
3,600 |
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Taxes |
1,500 |
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Advertising |
7,300 |
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Legal fees |
1,800 |
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Accounting fees |
2,220 |
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Total expenses |
$180,620 |
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Net profit |
$80,880 |
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pr TABLE 25-3. Sample Balance Sheet |
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GARLAND’S NURSERY AND GREENHOUSES Balance Sheet / Year Ending December 31, 2009 |
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Assets |
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Current Assets |
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Cash in bank |
$18,500 |
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Cash on hand |
500 |
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Petty cash |
250 |
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Accounts receivable |
37,000 |
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Inventory |
50,000 |
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Total current assets |
$106,250 |
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Fixed Assets |
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La n d |
$80,000 |
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Retail store |
30,000 |
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Garage |
25,000 |
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Greenhouses |
30,000 |
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Equipment |
102,500 |
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Less depreciation |
-27,300 |
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Total fixed assets |
$240,200 |
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Total assets |
$346,450 |
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Liabilities |
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Current Liabilities |
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Accounts payable |
$7,530 |
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FICA payable |
1,800 |
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Withholding payable |
2,300 |
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Total current liabilities |
$11,630 |
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Long-Term Liabilities |
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Notes payable |
$7,530 |
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Total long-term liabilities |
$17,000 |
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Total liabilities |
$28,630 |
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Capital |
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Garland’s Nursery and Greenhouses, capital |
$317,820 |
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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.
