1. Financial Statement Analysis
Chapter 6

2. Financial Statement Analysis -- Chapter 6
Financial Criteria
Liquidity
Solvency
Profitability
Repayment Capacity
Financial Efficiency

3. Liquidity The ability to meet current financial obligations
Structural liquidity relates to the relationship between current assets and current liabilities
Operational liquidity relates to cash flow measures

4. Liquidity Measures WORKING CAPITAL Current Assets-Current Liabilities
CURRENT RATIO
Current Assets/Current Liabilities
CASH FLOW COVERAGE RATIO
The total cash available divided by the projected total cash required

5. Working Capital
A measure of the amount of funds that would be available to purchase inputs and inventory items after the sale of all current assets and payment of all current liabilities.

6. Current Ratio Current Assets Divided by Current Liabilities.
The higher the ratio, the more liquid the business.

7. Cash Flow Coverage Ratio
The total cash available divided by the projected total cash required.

8. Solvency
Evaluates what would happen if the assets are sold and all liabilities are paid.
A longer-term measure of the ability of the business to meet financial obligations.

9. Solvency Measures DEBT-TO- ASSET RATIO DEBT-TO- EQUITY RATIO
EQUITY-TO- ASSET RATIO

10. Debt to Asset Ratio
EXPRESSES TOTAL LIABILITIES AS A PROPORTION OF TOTAL ASSETS
INFLUENCED BY THE VALUE PLACED ON THE ASSETS
A REASONABLE STANDARD FOR THE RATIO WILL VARY FROM ONE TYPE OF ENTERPRISE TO ANOTHER

11. Debt to Equity Ratio LEVERAGE RATIO
REFLECTS THE EXTENT TO WHICH FARM DEBT CAPITAL IS BEING COMBINED WITH EQUITY CAPITAL
A RATIO OF LESS THAN 1:1 MEANS THAT CREDITORS HAVE LESS MONEY IN THE BUSINESS THAN THE OWNER.

12. Equity to Asset Ratio
EXPRESSES THE PROPORTION OF TOTAL ASSETS FINANCED BY THE OWNER’S EQUITY CAPITAL
THE MIRROR IMAGE OF THE DEBT-TO- ASSET RATIO

13. Profitability RETURN ON ASSETS RETURN ON EQUITY
OPERATING PROFIT MARGIN RATIO

14. Return on Assets
MEASURES THE RATE OF RETURN ON ASSETS AND IS OFTEN USED AS AN OVERALL MEASURE OF PROFITABILITY
NET FARM INCOME FROM OPERATIONS + INTEREST EXPENSE - UNPAID OPERATOR AND FAMILY LABOR AND MANAGEMENT DIVIDED BY AVERAGE TOTAL ASSETS

15. Return on Equity
MEASURES THE RATE OF RETURN ON OWNER’S EQUITY EMPLOYED IN THE BUSINESS
NET FARM INCOME FROM OPERATIONS - UNPAID OPERATOR AND FAMILY LABOR AND MANAGEMENT DIVIDED BY AVERAGE TOTAL EQUITY

16. Operating Profit Margin Ratio
MEASURES THE RETURNS TO CAPITAL PER DOLLAR OF GROSS FARM REVENUE
NET FARM INCOME FROM OPERATIONS + INTEREST EXPENSE - UNPAID OPERATOR AND FAMILY LABOR AND MANAGEMENT DIVIDED BY GROSS FARM REVENUES

17. Long Run Un-profitability
THERE ARE ONLY THREE WAYS THAT A BUSINESS CAN REMAIN UNPROFITABLE AND SURVIVE IN THE LONG-RUN:
(1) USE NON-FARM INCOME TO OFFSET FARM LOSSES,
(2) THE BORROWER IS INHERITING OR BEING GIFTED MONEY FASTER THAN THE BUSINESS IS LOSING IT,
(3) THE VALUE OF THE BUSINESS ASSETS ARE APPRECIATING FASTER THAN THE BUSINESS IS LOSING MONEY.

18. Repayment Capacity TERM DEBT AND CAPITAL LEASE COVERAGE RATIO
CAPITAL REPLACEMENT AND TERM DEBT REPAYMENT MARGIN
DEBT-TO-INCOME RATIO

19. Term Debt and Capital Lease Coverage Ratio
PROVIDES A MEASURE OF THE ABILITY OF A BORROWER TO COVER ALL REQUIRED TERM DEBT AND CAPITAL LEASE PAYMENTS

20. Financial Efficiency ASSET TURNOVER RATIO
MEASURES HOW EFFICIENTLY ASSETS ARE BEING USED TO GENERATE REVENUE
THE HIGHER THE RATIO THE MORE EFFICIENT ASSETS ARE BEING UTILIZED
WHEN THE ASSET TURNOVER RATIO IS MULTIPLIED BY THE OPERATING PROFIT MARGIN THE RESULT IS THE RATE OF RETURN ON ASSETS

21. A BUSINESS HAS TWO WAYS TO INCREASE TOTAL BUSINESS PROFITS:
INCREASE PROFITS PER UNIT PRODUCED OR
INCREASE THE VOLUME OF PRODUCTION WHILE MAINTAINING THE PROFIT PER UNIT

22. ONE OF THE PROBLEMS IN AGRICULTURE IS THAT THE INDUSTRY AS A WHOLE HAS A LOW ASSET TURNOVER RATIO AND LOW OPERATING PROFIT MARGIN, RESULTING IN A LOW RETURN ON ASSETS

23. OPERATING EXPENSE RATIO
MEASURES THE PROPORTION OF GROSS FARM REVENUES BEING SPENT FOR OPERATING EXPENSES
OTHER EXPENSE RATIOS ARE:
DEPRECIATION EXPENSE RATIO
INTEREST EXPENSE RATIO