Key Performance Indicator #13 | Rate of Return on Assets
Many thanks go to Stan Bevers, a long-time economist with Texas A&M AgriLife Extension Service and popular speaker at Cattle Raisers Conventions, for sharing with The Cattleman readers this year what he calls “Key Performance Indicators (KPI) for Beef Cow-calf Operations.”
Bevers says the KPIs will work for any size operation. Target levels have been identified through analysis of herd data from several sources, including hundreds of herds in the Beef Cow-calf SPA, along with his own research and experience working with individual ranch owners and managers.
“It is important that you calculate KPIs correctly and base them on good data. Be honest with yourself. In some instances, ranchers find that their financial recordkeeping isn’t as good as it should be. The most accurate KPIs are calculated from financial accrual-adjusted records. Remember that no single KPI assures success. As with a ranch’s resources, the ranch manager must balance the use of these indicators. To focus on one KPI, at the expense of another, will not improve the overall performance of the ranch. As an example, increasing the pounds weaned per exposed female does no good if the nutritional base expense indicator is too high. KPIs have to be in balance for overall performance to be excellent. Finally, most ranches are involved in multiple enterprises. The KPIs we have discussed are strictly for the cow-calf segment of a ranch.”
Rate of Return on Assets (Market Basis) – Greater than 1.5 Percent
Managers depend on the rate of return on assets to evaluate their performance. The manager’s charge is to use the ranch’s assets to generate positive net income. In this way, ranch managers are like fund managers on Wall Street. The difference, however, is the expected ROA. While the long-term return from Wall Street may be greater than 6.0 percent, the long-term return from breeding beef cows is closer to 0.5 percent. When calculated correctly, the ROA can be compared to any other asset management business including your savings account at the local bank.
To calculate this KPI, start with the net income and add to it the interest expenses for the year. Then, divide this figure by the average value of the assets from the balance sheet. In this case, we use the market value basis as opposed to the cost basis of the assets. Successful ranches have an ROA greater than 1.5% over time.
The year in review
- Pounds Weaned per Exposed Female – Greater than 460 pounds per Exposed Female
- Revenue per Breeding Female – Greater than $950 per Breeding Female
- Nutrition Base Expense as a Percent of Total Expenses – Between 30.0 and 45.0 Percent
- Labor and Management Expense as a Percent of Total Revenue – Less than 15 Percent
- Operating Expense as a Percentage of Total Revenue – Less than 75 Percent
- Net Income Ratio – Greater than 5 Percent
- Cost per Cwt. of Weaned Calf – Less than $170.00 per Cwt.
- Current Ratio – Greater than 2.0
- Total Investment (Market Basis) per Breeding Female – Between $7,500 and $12,500
- Debt per Breeding Female – Less than $500 per Breeding Female
- Equity to Asset Ratio (Market Basis) – Greater than 50 Percent
- Asset Turnover Ratio (Cost Basis) – Greater than 15 Percent
The KPIs presented here are not the only measures that a ranch should consider. However, these KPIs provide an excellent starting point for evaluating the financial targets for which a ranching operation should strive. Remember, each ranch is unique and possibly involved in multiple enterprises that all contribute to the financial well-being of the operation. These variations may alter how certain KPIs are viewed.
Says Bevers, “The KPIs can help any rancher evaluate whether the operation is fulfilling his or her goals. In a sense, they are a report card that can be used to identify weaknesses in a given operation.”
For more information about KPIs, what it takes to be a successful rancher, or to schedule a consultation, visit ranchkpi.com
“Key Performance Indicators” is excerpted from the December 2017 issue of The Cattleman magazine. Join today to start your subscription.