Because the trucking industry is tied to the shipment of consumer goods, it's very sensitive to economic conditions. The trucking industry is often the first industry that experiences a recession and the first to recover. To avoid valleys and peaks, trucking companies should attempt to diversify their assets and services. For example, light commercial vehicles such as minivans and pickup trucks can help increase profitability on light loads. Another thing that helps trucking companies is tracking relevant financial ratios.
Return on Assets
A company's fleet of trucks has a substantial impact on the bottom line. Trucking companies looking to recoup costs during a recession may use older vehicles. Other companies may pay more to secure vehicles with higher capacity. To ensure the asset strategy is successful, managers should monitor return on assets. The return-on-assets ratio measures percentage of profit relative to total assets. The higher the ratio, the more income the company is bringing in in terms of the value of their trucks. To calculate return on assets, divide net income after tax by total assets. For example, if a company has after-tax net income of $5,000 and assets of $10,000, the return on assets is 0.5, or 50 percent.
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Since trucking is closely tied with retail, trucking revenue tends to be seasonal. Trucking companies will experience a rise in demand during the fourth-quarter holiday sales. If the company doesn't have substantial capital, it could end up financing operations during the slower seasons. Debt ratios can help managers detect unhealthy levels of debt. The debt ratio measures a company's debt relative to total assets. The lower the ratio, the more likely the company can pay off all long-term debts. To calculate the debt ratio, divide total liabilities by total assets. For example, a company with liabilities of $4,000 and assets of $9,000 has a debt ratio of 0.44.
Market Value Ratios
Because the trucking industry is so sensitive to economic conditions, it can be considered a high-risk investment. To entice potential investors, trucking companies should ensure market value ratios portray the company in the best possible light. The price-to-earnings ratio measures the market price of the company relative to earnings. To calculate the price-to-earnings ratio, divide price per share by earnings per share. The higher the ratio, the more bang the investor gets for his buck. For example, a company with a stock price of $2 per share and earnings of $3 per share has a ratio of 0.67.
Trucking companies must consider a variety of factors when pricing their services. Maintenance on vehicles, length of trip and the weight of the load can all affect profitability. To ensure the company is pricing services correctly, it's helpful to periodically examine the net profit margin ratio. Net profit margin measures how much profit the company keeps relative to revenue. Managers can perform this ratio on a variety of trip types to compare profitability. To calculate net profit margin, divide after-tax profit by revenue. For example, if a company has profit after tax on short trips of $3,000 and $4,000 in short-trip revenue, it has a net profit margin of 0.75. The higher the ratio, the more profitable the trip.