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.
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.
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.