Key Performance Indicators for Truckstops

It’s often said that there is more than one road to heaven, which for me I hope is a truism. Similarly, when it comes to metric formulas there are sometimes more than one road to a like result. In the last issue of Stop Watch, I discussed the importance of key performance indicators. In this issue, I will share details on some of the top indicators and how you can apply them to your business.

I’d like to thank David M. Nelson, PhD., Professor of Economics at Western Washington and Presi­dent of FRMC/Study Groups, Bellingham, Wash., for sharing the following formulas and examples.

Return on Capital Employed
Return on Capital Employed (also commonly referred to as Return on Invested Capital) is one of the most important return on investment metrics to analyze. It looks at the return being earned before the payment of interest divided by the net capital employed in the business. Net capital employed is the por­tion of total assets financed by interest bearing debt or the owner’s own equity. It is a purer measure of return than either return on assets (7) or return on equity (9) since it is computed without regard to how a business finances its assets. This allows for more meaningful comparison between firms. It represents how productively the firm is earning a return on the capital employed from whatever source that capital has come from. The return on capital earned in a business should be compared with alternative returns that can be earned elsewhere. High returns on capital will add value to the firm. Adjusted earnings (29) have been used in the numerator rather than net profit before tax to take into account additional ways in which owners reward themselves from the profitability of a business.

Here is the formula for ROCE:

                  

Return on Capital Employed

=

(Pretax Income(Loss) + Salaries-Owners +

Perk Differential + Actual Lease-Market Value Lease-Estimated Hired Manager Salary(ies) + Interest Expense) * 12

(Total Assets – Accounts Payable (including taxes payable))

 

 

 

 

 

 

 

Let's look at an example to show how to calculate ROCE:

Assume a firm with pretax income of $1.5 million and interest expense of $500,000. Adding these together gives the return the company has earned on the debt and equity employed by the firm of $2 million. A look at the company balance sheet shows 5 million of owner's equity was used during the previous 12 months and 10 million of debt was employed. Adding these together gives $15 million of permanent capital employed by the firm. To calculate pretax ROCE (book) take the return the company has earned on debt and equity of $2 million and divide this by the $15 million of permanent capital employed to get .133 which expressed as a percentage is a 13.3 percent pretax ROCE (book). 

Does the 13.3 percent pretax ROCE fairly reflect the ROCE actually earned by the company? Not necessarily. The pretax book earnings of a closely held company may not reflect the actual earnings of the company if the owners’ compensation is above or below market for the functions they perform as employees in the company and/or if the lease payments made to company owner's for assets used by the company are above or below a market-value lease.

Let's see how this works. In our example, suppose the owner's estimate that they pay themselves salary and benefits and perks of $200,000 in excess of what they would be paying non-owner hired managers to perform the functions they perform in the company. Let's also assume that the lease payments made on assets used in the business but owned outside the business are $300,000 in excess of what an arm's length market lease would be. In this case we would add $500,000 to the reported earnings of $2 mil­lion to get "adjusted" earnings of $2.5 million. Adjusted Pretax ROCE (book) would then be $2.5/$15 million or .167 or 16.7 percent. These adjustments can go up or down depending on whether owners are over- or under-compensating themselves for the resources they are provided to the company.

For companies that have assets held in the company whose market value is substantially different from their book values a further adjustment is called for in order to calculate Adjusted Pretax ROCE (mar­ket). Suppose that in our example the $5 million of book owner's equity is estimated to be $10 million when a $5 million market-value adjustment is applied to the value of assets on the company's books.

To calculate Adjusted Pretax ROCE (market) we take the $2.5 million of adjusted earnings and divide it by the $20 million of permanent capital employed ($10 million of debt + $5 million book equity + $5 million market value adjustment) to get .125 or 12.5 percent. 

Breakeven Pool Margin reflects the number of cents a marketer needs to earn on each gallon of fuel sold to breakeven. A firm can improve (lower) its Breakeven Pool Margin by increasing non-fuel gross profit dollars, lowering total expenses or increasing the number of total gallons of fuel sold.

Breakeven Pool Margin

=

Fuel Gross Profit Dollars – Pretax Income(Loss)

Total Gallons Sold

x 100

Example:  Gross profit dollars earned from fuel are $18 million. Pretax income is $10 million. Total gallons sold are 100 million. In this case breakeven pool margin is 8 cpg.  ($18M-$10M/100M) x 100.

In addition to the above metrics, trend analysis of earnings before interest, taxes, depreciation and amortization, pre-tax income, pre-tax income growth, same-store sales for all categories (fuel volume, inside sales, food, facility revenue and other income) were valued high.

Labor productivity ratios were also listed as a key metrics for operators to monitor. Operators may also choose to look at key labor metrics and productivity ratios. 

NovDec2013StopWatchCover.jpg

This article originally ran in Stop Watch magazineStop Watch provides in-depth content to assist NATSO members in improving their travel plaza business operations.

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Tom Heinz's photo

Tom Heinz

Tom Heinz is President of Heinz, Inc. and Coffee Cup Fuel Stops & Convenience Stores, Inc. Tom’s thirty-seven year business career has been in different segments of the petroleum industry. Tom’s primary business and day job began 31 years ago as co-founder/owner of Coffee Cup Fuel Stops www.coffeecupfuelstops.com. Tom received the following degrees: Bachelor of Science in Business Administration, Master of Science in Human Resources, and Master of Business Administration from Beacom School of Business at the University of South Dakota. Presently, Tom serves on the University of South Dakota Foundation Board of Directors, Vermillion, South Dakota, NATSO Foundation Board of Directors, Alexandria, VA, Dakota Hospital Board of Directors, Vermillion, SD., and is a member of David Nelson Petroleum Marketers 300 Study Group.More
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