Financial Analysis

1
Financial Analysis

• Chapter 3

2
Introduction

• Success of a farm or ranch depends upon the
  managers ability to analyze the financial
  situation of the operation
• Credit and financing have become a major part of
  farming and ranching

3
Net Worth Statement

• snapshot of an operation
• Net Worth Assets Liabilities
• Three parts
• Assets
• Liabilities
• Net worth

4
Assets

• Current assets
• Checking or savings
• Receivable
• Inventory for sale
• Securities, stocks and bonds, cash value on life
  insurance

5
Assets

• Intermediate assets
• Used in the production process
• Equipment, machinery, and breeding livestock
• Fixed or long term assets
• Real estate
• Improvements on buildings

6
Liabilities

• Current liabilities
• Notes and accounts payable
• Rent
• Taxes
• Interest
• Principle payments due the next 12 mon.

7
Liabilities

• Intermediate liabilities
• Loan terms are normally for 12 months or more,
  but less than 10 years
• Improvements to real estate
• Equipment purchases
• Breeding livestock and dairy stock
• Long- term liabilities
• Mortgages and land contracts on real estate minus
  principle due within 12 months

8
Net Worth

• Total liabilities subtracted from total assets
• Owners equity
• May include agricultural and personal assets and
  liabilities as separate categories

9
Kinds of Financial Analysis

• Comparative analysis- measuring and analysis of
  trends
• Projected analysis- used to estimate future
  changes in equity
• Ratio analysis- used to measure financial
  condition by comparing own enterprise to others

10
Financial analysis from the net worth statement

• Liquidity (the ability to convert to cash)
• Solvency (the ability to pay debts)
• Equity (the owners share of the business)

11
Liquidity

• Current ratio CA/CL
• Intermediate ratio (CAIA)/(CLIL)

12
Solvency

• Net Capital RatioTA/TL
• Debt-equity ratioTL/OE

13
Income Statement

• Evaluate or analyze the profitability of the farm
  business
• Profit and loss statement

14
Receipts

• Money received from the sale of crops, livestock,
  and livestock products during the year
• Includes government payments and miscellaneous
  farm income

15
Expenses

• Money paid out to operate the business
• Seed, feed, and fertilizer
• Taxes, insurance, and interest

16
Net Cash Income

• Net cash incomeGR-CE
• CE cash expenses
• GR gross receipts

17
Adjustments

• Expenses payable
• Prepaid expenses
• Adjustments in inventories

18
Net Farm Income

• Net farm income Net cash income Noncash
  adjustments
• Noncash adjustments include crops raised, other
  accounts recievable

19
Analysis of Income Statements

• Comparative Analysis- find trends in receipts and
  expenses
• Ratio Analysis (compared to gross income)
• Operating ratio
• Fixed ratio
• Gross ratio
• Projected Analysis

20
Distribution of Net Farm Income

• Return to Equity Capital
• Net farm Income- Operator Allowance
• Return on Total Capital
• Net Farm Income Interest Operator Allowance
• Return on Equity Capital
• Return to equity capital and management/ average
  net worth

21
Rate of Return on Borrowed Capital

• Return to Total Capital-Return to Equity Capital
• Average Capital Investment- Average Net Worth
• If Borrowed Capital rate 10.7
• And Equity Capital rate 10.1
• It maybe profitable to borrow money
• If Borrowed Capital rate 12
• And Equity Capital rate 13
• You should not borrow money