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

2. 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

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

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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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