3 Liquidity The ability to meet current financial obligations Structural liquidity relates to the relationship between current assets and current liabilitiesOperational liquidity relates to cash flow measures
4 Liquidity Measures WORKING CAPITAL Current Assets-Current Liabilities CURRENT RATIOCurrent Assets/Current LiabilitiesCASH FLOW COVERAGE RATIOThe total cash available divided by the projected total cash required
5 Working CapitalA 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 SolvencyEvaluates 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 RatioEXPRESSES TOTAL LIABILITIES AS A PROPORTION OF TOTAL ASSETSINFLUENCED BY THE VALUE PLACED ON THE ASSETSA 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 CAPITALA RATIO OF LESS THAN 1:1 MEANS THAT CREDITORS HAVE LESS MONEY IN THE BUSINESS THAN THE OWNER.
12 Equity to Asset RatioEXPRESSES THE PROPORTION OF TOTAL ASSETS FINANCED BY THE OWNER’S EQUITY CAPITALTHE MIRROR IMAGE OF THE DEBT-TO- ASSET RATIO
13 Profitability RETURN ON ASSETS RETURN ON EQUITY OPERATING PROFIT MARGIN RATIO
14 Return on AssetsMEASURES THE RATE OF RETURN ON ASSETS AND IS OFTEN USED AS AN OVERALL MEASURE OF PROFITABILITYNET FARM INCOME FROM OPERATIONS + INTEREST EXPENSE - UNPAID OPERATOR AND FAMILY LABOR AND MANAGEMENT DIVIDED BY AVERAGE TOTAL ASSETS
15 Return on EquityMEASURES THE RATE OF RETURN ON OWNER’S EQUITY EMPLOYED IN THE BUSINESSNET 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 REVENUENET 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 MARGINDEBT-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 REVENUETHE HIGHER THE RATIO THE MORE EFFICIENT ASSETS ARE BEING UTILIZEDWHEN 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 PRODUCEDORINCREASE 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 EXPENSESOTHER EXPENSE RATIOS ARE:DEPRECIATION EXPENSE RATIOINTEREST EXPENSE RATIO
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