Financial Ratio Analysis

Jovita M. Sim
• Financial efficiency is measured by five ratios: asset turnover
ratio, operating expense ratio, depreciation expense ratio,
interest expense ratio, and net farm income from operations
ratio. The last four of these ratios must add up to 100% as
these are the four parts of value of farm production.
What Are Financial Ratios?
•
Financial ratios are relationships between important financial data
that are expressed as fractions or as percentages. One way
entrepreneurs can see relationships, patterns, and trends is by using
charts. Pie charts and bar graphs are very helpful in illustrating
financial ratios. A pie chart has “slices” that represent portions of the
whole. A bar graph uses vertical or horizontal bars to show data.
What is financial analysis agriculture?
• A financial analysis of the farm operation is done to determine the
financial position and performance of the business. ... The financial
performance refers to the results of the farm business's production
and financial decisions over one or more periods of time.
Importance of Financial Analysis
• Significance of Agricultural Finance:

1) Agril finance assumes vital and significant importance in the agro –

socio – economic development of the country both at macro and
micro level. 2) It is playing a catalytic role in strengthening the farm
business and augmenting the productivity of scarce resources
Analysis Based on an Income Statement
• Entrepreneurs use income statements to show how their businesses
are performing.
• With Sales Data Analysis, an income statement is used to review
monthly sales totals in order to determine how much the business
can afford to spend. Monthly income statements are also used to
forecast future sales.
• Entrepreneurs also use income statements to measure how cost of
goods sold and operating expenses affect profits.
• Same-size analysis is a comparison of total revenue or other financial
data against that same data converted into percentages.
Income Statement Ratios
• Some financial ratios provide a “snapshot” of a specific aspect of a
business and are used to monitor expenses, compare performance
with the competition, to measure profitability.
• The operating ratio is the percentage of each dollar of revenue, or
sales, needed to cover expenses.
• Return on sales (ROS) is the financial ratio calculated by dividing net
income by sales.(Expenses ÷ Sales) x 100 = Operating Ratio (%)
• (Net Income ÷ Sales) x 100 = Return on Sales (%)
Ratios from Balance Sheets
• Entrepreneurs create ratios from the data on the balance sheets to
monitor debt, compare debt with equity, and make sure the business
has sufficient cash to pay its debts.
• The debt ratio is used to monitor the debts of a business. This is the
ratio of a business’s total debt divided by its total assets.
• The debt-to-equity ratio is the ratio of the total debts (liabilities) of
the business divided by its owner’s equity.(Total Debts ÷ Total Assets)
x 100 = Debt Ratio (%)(Total Debts ÷ Owner’s Equity) x 100 = Debt-to-
Equity Ratio (%)
Ratios from Balance Sheets
• The quick ratio is the comparison of cash to debt.
• The current ratio is current assets divided by current liabilities.
• Quick Ratio = (Cash + Marketable Securities ) ÷ Current Liabilities
• Current Ratio = Assets ÷ Current Liabilities
Return on Investment (ROI)
• Return on investment (ROI) is a financial ratio used to determine how
well the business is doing in relation to the amount of money
invested.
• Return on investment (ROI) shows the profit on the investment
expressed as a percentage of the total invested (when expressed as a
percentage, it is also referred to as the rate of return).
• Return on Investment (%) = (Net Income ÷ total Investment) x 100
Uses of financial ratio analysis
• Financial ratios offer entrepreneurs a way to evaluate their
company's performance and compare it other similar businesses in
their industry. Ratios measure the relationship between two or more
components of financial statements. They are used most effectively
when results over several periods are compared.
3 main uses of financial analysis
• These three core statements are of a business.
• They are mainly used by external analysts to determine various
aspects of a business,
• profitability,
• liquidity, and
• solvency.
Analysts rely on current and past financial statements to obtain data to
evaluate the financial performance of a company.
Four categories of financial ratios
• Profitability ratios.
• Liquidity ratios.
• Solvency ratios.
• Valuation ratios or multiples.
What is a good debt to equity ratio for a farm?

• Debt ratio = total farm liabilities / total farm assets. This indicates the
number of dollars of debt for every dollar of asset value. Generally a
ratio of less than 0.25 is considered very strong, a 0.25 to 0.40 ratio is
satisfactory and more than 0.40 is weak. Equity ratio = total farm
equity / total farm assets.
What ratio are applied to find out the efficiency of
performance of a farm?
• Financial efficiency measures how well the farm uses assets to
generate revenues, and how effective they are at cost control.
Financial efficiency is measured by five ratios: asset turnover ratio,
operating expense ratio, de- preciation expense ratio, interest
expense ratio, and net farm income from operations ratio.
What is a good current ratio for agriculture?
• Benchmarks for the current ratio vary, depending on the industry. For
agriculture I usually like to see a current ratio between 1.5 and 3.0.
What ratios are used for financial analysis?
7 important financial ratios
• Quick ratio.
• Debt to equity ratio.
• Working capital ratio.
• Price to earnings ratio.
• Earnings per share.
• Return on equity ratio.
• Profit margin.
What is a standard financial analysis plan?
• Financial analysis is used to evaluate economic trends, set financial
policy, build long-term plans for business activity, and identify
projects or companies for investment. ... A financial analyst will
thoroughly examine a company's financial statements—the income
statement, balance sheet, and cash flow statement.

• An financial analysis plan are actually projections of financial

statements.