Ratios Defined: One number divided by another to express a relationship

Ratios Be Selective Now is the time to become familiar with financial ratios Select ratios that help focus attention on the most critical areas. Ratio analysis can be done on Historical Current Projected information

Balance Sheet Discussion questions Judgments are made based on balance sheets. What is a “good” balance sheet? What is a “good” financial situation?

Balance Sheet Analysis To remember. . . Basic equations  Assets = Debt + Equity  Assets minus debts = equity  Assets - equity = debt

Total Current Liabilities Current Ratio = Total Current Assets Total Current Liabilities Do I have enough current assets to cover current liabilities? Current portion of term debts included Ignores lines of credit available

Total Current Liabilities Current Ratio = Total Current Assets Total Current Liabilities 12 month planning horizon Value of current assets may change when sold Desired level varies by type of farm Dairy versus fruit or cash crop Value can vary during production cycle

Current % in Debt Total Current Liabilities (divided by) Total Current Assets (times 100 for percentage) Shows current farm assets relative to current farm liabilities Similar % ratios: Intermediate % in debt Current & intermediate farm % in debt Long term farm % in debt Nonfarm % in debt

Debt to Asset Ratio Total Liabilities (divided by) Total Assets What % of my business assets do I owe to creditors Measures financial position or solvency of the business Creditors claim against the business Measure risk exposure - “ability to take hits” a higher ratio indicates higher risk, don’t hit Should include deferred taxes if using market value versus cost basis

Equity to Asset Ratio Total Equity (divided by) Total Assets Measures financial position of the business Owner’s claim against the business Ratios add to one: (Equity  Asset) + (Debt  Asset) = 1 % owner finance + % debt finance = total capital

Debt to Equity Ratio Total Liabilities (divided by) Total Equity Measures financial position of the business Ratio gets high rapidly as debt increases Also called Financial Leverage Ratio Lenders tend to use it