Analyzing Financial Performance

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Analyzing Financial Performance
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Analyzing Financial Performance
Outline

• Why analyze financial performance?
• Categories
• Analyzing Liquidity
• Analyzing Solvency
• Analyzing Profitability
• Repayment Capacity
• Financial Efficiency

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Analyzing Financial Performance
Why analyze financial performance

• Improve decision making. By conducting regular
  financial checkups and taking timely actions you
  are more likely to identify the CAUSES of the
  problems rather than the SYMPTOMS. Be
  PROACTIVE!!!
• To assess the TREND of your business by comparing
  past with present business performance

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Analyzing Financial Performance
Why analyze financial performance

• Financial institutions will analyze your
  financial performance in order to determine your
  risk and repayment capacity
• To have a clear understanding of how your
  business is doing and to also have the ability to
  compare yourself against the generally accepted
  business good practices and against the
  Industry

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Analyzing Financial Performance
Categories
Liquidity Measures the ability of a business
to meet financial obligations as they come due
Solvency Represents the amount of borrowed
capital used relative to the amount of owners
equity capital invested in the business
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Analyzing Financial Performance
Categories

• Profitability Measures the extent to which a
  business
• generates profit from the use of labor,
• management and capital
• Repayment Capacity Measures the ability to
  repay debt
• from both farm and non-farm income
• Financial Efficiency Measures the degree of
  efficiency of
• using labor, management and capital

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Analyzing Financial Performance
Analyzing Liquidity
Liquidity Measures
Working Capital Total current assets Total
current liabilities
Always gt 0
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Analyzing Financial Performance
Analyzing Liquidity
Liquidity Measures
Current Ratio Total current assets
Total current liabilities
Represents the extent to which current assets
would cover current liabilities
Greater than 11 1.51 or 21
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Analyzing Financial Performance
Analyzing Liquidity
Liquidity Measures
Cash Flow coverage ratio
Total cash available Total cash required
Used with projected statement of cash flows or
with a cash flow budget
Greater than 11
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Analyzing Financial Performance
Analyzing Solvency
Solvency Measures
Debt to Asset Ratio
Total Liabilities Total Assets
It measures the proportion of total assets owed
to creditors. Is one way to express financial
risk exposure. The higher the ratio, the higher
the exposure to risk.
Generally below 0.51
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Analyzing Financial Performance
Analyzing Solvency
Solvency Measures
Equity to Asset Ratio Total Equity
Total
Assets
It measures the proportion of total assets
financed by an owners equity capital
If ratio is below 0.51 the creditors have more
money in the business than the owner does
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Analyzing Financial Performance
Analyzing Solvency
Solvency Measures
Debt to Equity Ratio Total Liabilities

Total Equity
It measures the proportion of total equity owed
to creditors
If ratio is below 11 then creditors have less
money in the business than the owner does.
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Analyzing Financial Performance
Analyzing Profitability
Profitability Measures
Net Farm Income INCOME STATEMENT
Represents the return to the farmer for unpaid
operator and family labor and management.
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Analyzing Financial Performance
Analyzing Profitability
Profitability Measures
Return on Assets (ROA) Net Farm Income
Interest Expense - Value of unpaid labor/mgmt.
Total
Assets
The higher the ROA, more profitability
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Analyzing Financial Performance
Analyzing Profitability
Profitability Measures
Return on Equity (ROE)
Net Farm Income - Value of unpaid labor/mgmt.

Total Equity
ROE measures the rate of return on an owners
equity capital employed in the business. It
differs from ROA, which considered the return on
both owned and borrowed capital. The higher the
ROE gt increased profitability
If ROE is less than ROA, the business is paying
more interest on borrowed money than the money is
earning in the business. You may still be
profitable BUT youre losing money on borrowed
capital.
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Analyzing Financial Performance
Analyzing Profitability
Profitability Measures
Operating Profit Margin Net Farm Income
Interest Expense - Value of unpaid labor/mgmt

Gross Revenues
It measures the rate of return to capital per
dollar of gross farm revenue Here, interest
expense is added back in order to compare
performance between businesses without
considering the impact of different levels of
debt
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Analyzing Financial Performance
Analyzing Profitability
Surviving without profitability?
Only 3 possible scenarios

• Enough non-farm income to offset farm losses
• Inherited or gifted money comes faster than
  losses
• Farm assets are appreciating faster than losses

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Analyzing Financial Performance
Repayment Capacity Measures
Term debt and capital leases coverage ratio
It measures the ability of a borrower to cover
all required term debt and capital lease payments
If the ratio is above 11, the greater is
the margin to cover payments
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Analyzing Financial Performance
Repayment Capacity Measures

• Net Farm Income Total non-farm Income
• Depreciation/Amortization Expense
• - Income and SS tax expense
• Withdrawals for family living
• Capital replacement and
  
  term debt
  repayment capacity
• Payments on unpaid operating
• debt from a prior period
• Principal payments on current
• portions of term debt
• Principal payments on current
• portion of capital leases
• Total annual payments on
• personal liabilities not included in withdrawals
• Capital replacement and
  term debt
  repayment margin

Repayment Capacity
Capital replacement and term debt repayment
margin
This measure is used to evaluate the ability to
generate the funds needed to service existing
debts and to replace capital assets
In order to evaluate only the business portion of
the operation, eliminate the 2 stared lines
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Analyzing Financial Performance
Financial Efficiency Measures
Asset Turnover Ratio
Gross Farm Revenues Average total assets
It measures the how efficiently farm assets are
being used to generate revenue
The higher the ratio, the better. Generally low
for AG
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Analyzing Financial Performance
Financial Efficiency Measures
Operating Ratios
Total op. expense Depreciation expense
Gross Farm Revenue
Operating Expense Ratio
Depreciation expense Gross Farm Revenue
Depreciation Expense Ratio
Total Interest expense Gross Farm Revenue
Interest Expense Ratio
Less than 0.151
The sum of these 3 ratios reflect the total
direct farm expenses per dollar of gross revenue
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Analyzing Financial Performance
Financial Efficiency Measures
Operating Ratios
Net Farm Income from Operations Ratio
Net Farm Income from Operations Gross
Farm Revenue
Collectively, the previous 4 ratios represent the
total composition of gross revenues In percentage
terms, the 4 ratios reflect the allocation of
100 of a business gross farm revenues
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Analyzing Financial Performance
Financial Efficiency Measures
Other Efficiency Measures
Labor Productivity Ratio
Gross Farm Revenues Labor and Salary Expenses
Value of Unpaid operator And family labor and
management
Machinery and Equipment Productivity Ratio
Gross Farm Revenues Average Investment in Farm
Machinery and Equipment
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Analyzing Financial Performance