VAE 511: Livestock Entrepreneurship (1+0)

TEST RATIOS

• The balance sheet is analysed by estimating various ratios to understand the exact financial position and stability of the farm business.
• Current Ratio
  • Current Ratio = Total current assets/ Total current liabilities
  • Current ratio indicates the capacity of the farmer to meet immediate financial obligations (liquidity).
  • A ratio of more than one indicates a favourable position of the farm business.
• Intermediate or working Ratio
  • Intermediate Ratio =Total current assets+Total intermediate assets/ Total current liabilities+ Total intermediate liabilities.
  • Working ratio indicates the liquidity position of the farm business over an intermediate period of time, ranging from 2 to five years.
  • Here, there is time for the farmer to build up the farm business to improve his liquidity position.
  • The ratio should be more than one.
• Net Capital Ratio
  • Net Capital Ratio= Total assets/ Total current liabilities.
  • NCR indicates the solvency position of the farmers and more than one indicates that the funds of the institutional agencies are safe.
  • A consistently increasing ratio over the years reveal the sound financial growth of the farm business.
• Acid test ratio or Quick ratio
  • Acid test ratio or Quick ratio= Cash receipts+Accounts receivable+marketable securities available in more than one year/ Total current liabilities.
  • Indicates adequacy of cash and income surpluses to cover all current liabilities during the period of one to two years.
• Current liability Ratio
  • Current liability Ratio = Current liabilities/Owner’s equity which indicates the farmer’s immediate financial obligations against the net worth and a ratio of less than one indicates a healthy performance of the farm business.
• Debt-equity Ratio (Leverage Ratio)
  • Debt-equity Ratio = Total debts/Owner’s equity which reflects the capacity of the farmer to meet the long term commitments also.
• Equity-value Ratio
  • Equity-value Ratio = Owner’s equity/Value of assets.
  • Highlights the productivity gained by the farmer in relation to the assets.