Various financial tests or ratios are calculated on the basis of balance sheet

a) Current ratio :

–  Current assets / current liabilities  ( 2 to 3) or > 1

– Reflects the liquidity within one month.

– Indicates the capacity of the farmers to meet immediate financial obligation (liquidity).

– Current ratio indicates ability to pay back its liabilities (debt and account payable) with its assets ( cash, marketable securities, inventory, account receivable)

b) Working ratio:

– (Current assets + working assets) / (Current liabilities + working liabilities)

– Indicates the liquidity position of farm business over an intermediate period of time ( 1 month to 1 year)

c) Net capital ratio = Total assets / Total liabilities

– Indicates the capacity of farm to meet its short term and long term liabilities (financial obligation) or indicates the solvency position of the farmers.

Note :

I) Capital ratio greater than 1 indicates solvent position.

ii) Similarly capital ratio less than 1 indicates bankrupt and capital ratio equal to 1 indicates just solvent.

Iii) If this ratio is greater than 1, then the funds of institutional agencies are safe.

d) Quick ratio or acid test ratio = (cash receipts + accounts receivable + marketable securities available) / current liabilities

  or quick ratio = (Current assets – inventories) / current liabilities

– Indicates how well the company can meet its short term liabilities

– If quick ratio value is 1.5 then it indicates that a farm or company has Rs. 1.50 of liquid assets available to cover each Rs. 1 of the current liabilities.

– Higher the quick ratio, better the company’s liquidity position.

Note:

I) The higher the quick ratio, the better the position of the company.

ii) The commonly acceptable quick ratio is 1.

iii) A company with a quick ratio less than 1 cannot currently pay back its current liabilities; it’s the bad sign for investors and partners.

e) Current liability ratio = Current liability / owner’s equity

– Reflects the farmer’s immediate financial obligation against net worth.

– Ratio smaller indicates consistently good performance.

f) Debt-Equity ratio ( leverage ratio ) = Total debt / owner’s equity

– Reflects the farmer’s total financial obligation against net worth

– A falling ratio indicates good performance of farming and ability of farmer to reduce dependence on borrowing.

g) Equity Value ratio = Owner’s equity / Value of assets

– Indicates the productivity gained by the farmer in relation to the assets he has.

– Improvement in the ratio over years makes it crystal clear regarding the increased strength in the financial position  of the farm business.