Financial AnalysisFinancial Analysis

Chapter #3

Net Worth Statement

• (Balance Sheet)

• Net Worth = Assets - Liabilities

• Net Worth (Owner's equity)

Current Assets

• can be converted to cash in less than one year– checking/savings

– money owed you

– inventory for sale

– stocks, bonds, life insurance

Intermediate Assets

– resources or production items with a life 1 to 10 years• equipment• machinery• breeding livestock• generally depreciable

Fixed Assets

– (long term) permanent items :• real estate• improvements on buildings

Current Liabilities

• debts due within one year– bank notes

– accounts payable

– rent, taxes, interest

Intermediate Liabilities

• non real estate debt of 1 to 10 years

Long-Term Liabilities

• Mortgages and land contracts on real estate minus principal due within 12

months

Financial Tools

• Comparative Analysis - compare statements from one year to another

• Projected Analysis - compare statements to expected statements

• Ratio Analysis - compare statements to another farm

Financial Terms

• Liquidity - ability to generate cash

• Current Ratio = Current Assets / Current Liabilities

• Intermediate Ratio = (CA + IA) / (CL + IL)

• Solvency - if assets exceed liability– Net Capital Ratio– Debt-Equity Ratio

Ratios

• Net Capital Ratio = Total Assets / Total Liabilities

• Debt-Equity Ratio = Total Liabilities / Owners Equity

Terms

• Income Statement (Profit / Loss Statement)– list receipts and expenses

• Receipts - money received from sales during year– all incomes

• Expenses - money paid to operate abusiness

More Terms

• Net Cash Income = Gross Receipts - Expenses

• Adjustments to Income:– Expenses Payable– Prepaid Expenses– Adjustments in Inventories– Products grown & used at home

• Net Farm Income = Net cash income + Noncash adjustments

Ratios• Operating Ratio = Total Operating Expenses /

Gross Income– relates amount of gross income spent on operating

expenses

• Fixed Ratio = Fixed Expenses / Gross Income– relates amount of gross income spent on fixed

expenses

• Gross Ratio = Total Expenses / Gross Income– relates amount of gross income spent on all

expenses

Even More Terms

• Capitol Turnover = (Unadjusted Gross Income + Noncash Adjustment)/ Average Capitol Investment or (Total Assets) – higher rates mean a greater chance of profit or a

quicker turnover of money invested– 20% per year is good

Terms

• Return to Equity Capital = Net Farm Income - Operator Labor Allowance

• amount of income for your labor

Return to Equity Capital

• Return On Total Capital = Net Farm Income+ Interest Paid- Operator Allowance--------------------------------- Return to Total Capital

• Return on Equity Capital = Return to Equity Capital / Avg Net Worth

Return to Equity Capital

• Compare this rate to the cost of borrowing money

• if interest rate is lower, it may be profitable to borrow money

• if interest rate is higher, do NOTborrow money