Profitability Ratio

The profitability ratio is calculated by dividing agricultural income (SE420) by the opportunity costs of the entrepreneurial family’s own production factors, that is, by the sum of the wage and interest claims.

When the profitability ratio is 1.0, total revenue is sufficient to cover all costs, including the costs of own production factors, meaning that entrepreneurial profit is zero. As a relative indicator, the profitability ratio is well-suited for comparisons across years, as well as for comparing farms of different sizes and different types of production.

Using the profitability ratio, agricultural income can be proportionally divided into returns on the entrepreneurial family’s own production factors (i.e., returns on labour and capital). By multiplying the hourly wage claim and the interest claim by the profitability ratio, the return on labour per hour and the return on capital (%) are obtained. This approach values labour and capital equally as production factors.