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Name

Instructor

Course

Date of Submission

Case Analysis: Financial Ratio Analysis of Farm ABC

The following are the ratio computations of the Farm:

Liquidity measures Formula Ratios

current farm assets/current
Current ratio farm liabilities 2.195961697
current farm assets-current
Working capital farm liabilities 347330
Working capital per $ of working capital/gross farm
gross revenue income 0.431211932

Solvency Measure
total farm liabilities/total
Total debt to asset ratio farm assets 0.282138252
farm net worth/total farm
Farm equity to asset ratio assets 0.717861748
total farm liabilities/farm
Farm debt to equity ratio not worth 0.39302589

Profitability measures
GI-expenses+-inventory
Net farm income changes + interest-salaries 56635
Rate of return on farm return on farm
assets assets/average farm assets 0.034839432
return on farm
Rate of return on farm equity/average farm net
equity worth 0.030693799

Financial efficiency
measures
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value of farm
production/average farm
Asset turnover ratio assets 0.318400821
(total farm operating
expense excluding interest-
depreciation)/gross farm
Operating expense ratio income 0.802520007
Depreciation/gross farm
Depreciation expense ratio income 0.08805995
farm interest/gross farm
Interest expense ratio income 0.039107408
net income/gross farm
Net farm income ratio income 0.070312636

Liquidity measures

The current ratio is a liquidity metric that compares the current assets to the current

liabilities of a firm. The ratio is used by creditors and investors to see whether a firm can pay its

debts as and when they fall due. Generally, a ratio of greater than one indicates that the firm has

more current assets than liabilities and can thus comfortably pay the current debts. In ABC, the

farm has a ratio of 2.2 indicating that it has more current assets than the current liabilities by a

great margin. The ratio is also supported by the working capital which computes the difference

between the current assets and the current liabilities. The farm has a working capital of $347,330.

The farm has additionally a working capital ratio compared to the gross revenue of 0.43.

Although the farm has posted strong results, the results have declined this year compared to 2016

when the current ratio was 3.3, the working capital was $350,595 and the ratio of working capital

to gross revenue was $0.60. it shows that the farm’s performance is declining and for it to be

improved, the farm has to improve its current assets holding relative to the current liabilities.

Solvency Measure
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The total debt to total assets is a solvency ratio that compares the farm assets to the farm

debts to determine the proportion of the firm assets which are debt funded. In Farm ABC, the

ratio is 0.28 indicating that 28% of the farm assets are funded by debt. The ratio is consequently

supported by the equity to asset ratio which shows the level of funding of the assets from equity.

The equity funding on the assets is 0.72 indicating that 72% of the asses are equity funded. It

shows that most of the assets are funded by equity compared to the assets funded by debt. The

ratio of debt to equity ratio compares the total liabilities to the equity of a firm. ABC’s ratio

indicates that the farm's debt makes up 39% of the total equity held. It shows that the owners

have more stake in the farm than the creditors and so the farm creditors could all receive

payment before the investors (Berk & Demarzo 61). However, based on the 2016 financial

analysis which showed the debt-asset ratio at 22%, the firm has added more debt relative to the

equity added. The position has weakened as more debt proportion in relation to the equity when

the two periods are compared. The position can be improved if the farm sought more equity to

finance its activities instead of seeking more debt in the coming years.

Profitability Measure

The net income is a measure of what remains after the firm has paid for all its expenses

and costs of goods sold. ABC had a net income of $56,635 compared to last year $45,597. The

profitability has improved and as a result, the rate of return on farm assets and on-farm equity

has increased from 1.7% to 3% and from 1.0% to 3% respectively. The profitability of the farm

can be increased if the farm managed to lower its operating expenses and increased its revenues

(Berk and Demarzo 59).

Financial Efficiency Measures

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The asset turnover compares the farm production to the value of the farm’s assets and

gauges whether the firm’s assets are being efficiently used. ABC has a 0.32 ratio compared to

0.22 last year indicating that its efficiency has improved this year compared to last year. The

ratio can be improved by the firm using the least amount of assets to attain the maximum sales.

Operating expense ratio is 80.25% compared to last year’s 77% indicating that the firm increased

its operating expenses relative to the assets. The ratio can be improved by cutting on the

operating expenses and increasing the sales revenues. The depreciation and the interest expense

ratios stagnated at 9% and 4% respectively indicating that the firm did not significantly change

the depreciation method nor did it add long-term assets. The net income to the gross income

ratio, however, declined from 10% to 7% which can be attributed to the increased operating

expenditure. However, the firm has posted strong results which can be improved by reducing the

operating expenses.
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Works Cited

Berk, Jonathan and Demarzo, Peter. Corporate Finance. Edinburgh: Pearson, 2017.