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Slide Show #14

Slide Show #14. AGEC 430 Macroeconomics of Agriculture Spring 2010. Handout #23. Supplemental Slides enhancing this slide show. I will point to specific text from Handout #23 at the end of this show. Measures of Liquidity. 1. Current ratio :

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Slide Show #14

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  1. Slide Show #14 AGEC 430 Macroeconomics of Agriculture Spring 2010

  2. Handout #23 Supplemental Slides enhancing this slide show. I will point to specific text from Handout #23 at the end of this show

  3. Measures of Liquidity • 1. Current ratio: • Current assets divided by current liabilities. • Demonstrates ability to cover scheduled current liabilities for the • coming year out current assets and still have “cash” left over. • Should exceed 1.0 to be technically liquid. • Some firms fail despite exceeding this hurdle.

  4. Measures of Liquidity • 1. Current ratio: • Current assets divided by current liabilities. • Demonstrates ability to cover scheduled current liabilities for the • coming year out current assets and still have “cash” left over. • Should exceed 1.0 to be technically liquid. • Some firms fail despite exceeding this hurdle. • 2. Working capital: • Current assets minus current liabilities. • Expresses liquidity in dollars rather than ratio. • Should be positive. • Cash is King!

  5. Liquidity Trends Survived Failed Source: W. H. Beaver, “Financial Ratios and Predictors of Failure”, Journal of Accounting Research

  6. Liquidity Trends Survived Failed Minimum Source: W. H. Beaver, “Financial Ratios and Predictors of Failure”, Journal of Accounting Research

  7. Liquidity Trends Survived Failed Source: W. H. Beaver, “Financial Ratios and Predictors of Failure”, Journal of Accounting Research

  8. Measures of Solvency • 1. Debt ratio: • Total debt divided by total assets. • Demonstrates ability to liquidate the firm, cover all liabilities out • of all assets, and still have “cash” left over. • Should not exceed 0.50 to minimize financial risk exposure. • Some firms fail however at lower levels.

  9. Measures of Solvency • 1. Debt ratio: • Total debt divided by total assets. • Demonstrates ability to liquidate the firm, cover all liabilities out • of all assets, and still have “cash” left over. • Should not exceed 0.50 to minimize financial risk exposure. • Some firms fail however at lower levels. • 2. Leverage ratio: • Total debt divided by equity or net worth. • Often a credit standard in loan approval decisions. • Should not exceed 1.0 to minimize financial risk exposure. • Effects of rising interest rates.

  10. Solvency Trends Failed Survived Source: W. H. Beaver, “Financial Ratios and Predictors of Failure”, Journal of Accounting Research

  11. Solvency Trends Failed Maximum Survived Source: W. H. Beaver, “Financial Ratios and Predictors of Failure”, Journal of Accounting Research

  12. Measures of Profitability • 1. Rate of return on assets: • Net income plus interest divided by total assets. • Demonstrates the after-tax return to the total capital invested • in the firm. • Should be positive; the higher the better.

  13. Measures of Profitability • 1. Rate of return on assets: • Net income plus interest divided by total assets. • Demonstrates the after-tax return to the total capital invested • in the firm. • Should be positive; the higher the better. • 2. Rate of return on equity: • Net income divided equity. • Demonstrates the after-tax return on owner equity invested • in the firm. • Should be positive; the higher the better.

  14. Profitability Trends Survived Failed Source: W. H. Beaver, “Financial Ratios and Predictors of Failure”, Journal of Accounting Research

  15. Profitability Trends Survived Minimum Failed Source: W. H. Beaver, “Financial Ratios and Predictors of Failure”, Journal of Accounting Research

  16. Measure of Debt Coverage • 1. Term Debt and Capital Lease Coverage Ratio: • Cash available from operations to cover scheduled payments • (net income plus depreciation and interest payments less • withdrawals)divided by scheduled principal and interest • payments on term loans and capital leases. • After provision for taxes and withdrawals. • Should be greater than 1.0. • Non-farm income often factored in by lenders.

  17. Measure of Debt Coverage • 1. Term Debt and Capital Lease Coverage Ratio: • Cash available from operations to cover scheduled payments • (net income plus depreciation and interest payments less • withdrawals)divided by scheduled principal and interest • payments on term loans and capital leases. • After provision for taxes and withdrawals. • Should be greater than 1.0. • Non-farm income often factored in by lenders. • 2. Debt Burden Ratio: • Total debt outstanding divided by net income. • Number of years required to retire total debt if net income • remains constant and used entirely for this purpose • Should be low; the lower the better.

  18. Debt Repayment Capacity Inverse of debt burden ratio assuming use of depreciation allowances to retire debt. Survived Failed Source: W. H. Beaver, “Financial Ratios and Predictors of Failure”, Journal of Accounting Research

  19. Some Conclusions…. • Indicators of growth/survival: • Increasing liquidity • Increasing solvency • Increasing debt repayment capacity • Increasing profitability

  20. Some Conclusions…. • Indicators of potential failure: • Declining liquidity • Declining solvency • Decreasing debt repayment capacity • Decreasing profitability

  21. Indicators of growth/survival: Increasing liquidity Increasing solvency Increasing debt repayment capacity Increasing profitability Indicators of potential failure: Declining liquidity Declining solvency Decreasing debt repayment capacity Decreasing profitability Some Conclusions….

  22. Liquidity Trends Survived Failed Source: W. H. Beaver, “Financial Ratios and Predictors of Failure”, Journal of Accounting Research

  23. Liquidity Trends Survived Failed Minimum Source: W. H. Beaver, “Financial Ratios and Predictors of Failure”, Journal of Accounting Research

  24. Liquidity Trends Survived Failed Source: W. H. Beaver, “Financial Ratios and Predictors of Failure”, Journal of Accounting Research

  25. Solvency Trends Failed Survived Source: W. H. Beaver, “Financial Ratios and Predictors of Failure”, Journal of Accounting Research

  26. Solvency Trends Failed Maximum Survived Source: W. H. Beaver, “Financial Ratios and Predictors of Failure”, Journal of Accounting Research

  27. Profitability Trends Survived Failed Source: W. H. Beaver, “Financial Ratios and Predictors of Failure”, Journal of Accounting Research

  28. Profitability Trends Survived Minimum Failed Source: W. H. Beaver, “Financial Ratios and Predictors of Failure”, Journal of Accounting Research

  29. Debt Repayment Capacity Inverse of debt burden ratio Survived Failed Source: W. H. Beaver, “Financial Ratios and Predictors of Failure”, Journal of Accounting Research

  30. Indicators of growth/survival: Increasing liquidity Increasing solvency Increasing debt repayment capacity Increasing profitability Indicators of potential failure: Declining liquidity Declining solvency Decreasing debt repayment capacity Decreasing profitability Some Conclusions….

  31. Summary of Trends… Failed Source: W. H. Beaver, “Financial Ratios and Predictors of Failure”, Journal of Accounting Research

  32. Summary of Trends… Failed Failed Source: W. H. Beaver, “Financial Ratios and Predictors of Failure”, Journal of Accounting Research

  33. Summary of Trends… Failed Failed Failed Source: W. H. Beaver, “Financial Ratios and Predictors of Failure”, Journal of Accounting Research

  34. Summary of Trends… Failed Failed Failed Failed Source: W. H. Beaver, “Financial Ratios and Predictors of Failure”, Journal of Accounting Research

  35. #1:Historical Analysis • A look backwards like the Beaver study. • Comparison of current performance with past performance. • Recommend doing this at the enterprise level as well as for the farm as a whole.

  36. #1:Historical Analysis • A look backwards like the Beaver study. • Comparison of current performance with past performance. • Recommend doing this at the enterprise level as well as for the farm as a whole. • Why is ROA falling?

  37. #2:Comparative Analysis • Comparing current performance with similar operations like the Beaver study. Benchmark Your firm

  38. #2:Comparative Analysis • Comparing current performance with similar operations like the Beaver study. • Benchmark analysis at enterprise level when possible. Benchmark Your firm

  39. #2:Comparative Analysis • Comparing current performance with similar operations like the Beaver study. • Benchmark analysis at enterprise level when possible. • Address reasons why your firm is performing more poorly than other comparable operations before it is too late. Benchmark Your firm

  40. #2:Comparative Analysis • Comparing current performance with similar operations like the Beaver study. • Benchmark analysis at enterprise level when possible. • Address reasons why your firm is performing more poorly than other comparable operations before it is too late. Benchmark Your firm

  41. #2:Comparative Analysis • Comparing current performance with similar operations like the Beaver study. • Benchmark analysis at enterprise level when possible. • Address reasons why your firm is performing more poorly than other comparable operations before it is too late. Benchmark Your firm

  42. #2:Comparative Analysis • Comparing current performance with similar operations like the Beaver study. • Benchmark analysis at enterprise level when possible. • Address reasons why your firm is performing more poorly than other comparable operations before it is too late. Benchmark Your firm

  43. #2:Comparative Analysis • Comparing current performance with similar operations like the Beaver study. • Benchmark analysis at enterprise level when possible. • Address reasons why your firm is performing more poorly than other comparable operations before it is too late. Benchmark Your firm

  44. Presentation Model • The model given to each presentation team will calculate these financial ratios for you. • Your task will be to interpret these ratios for your business as conditions change in the Lower Slobovian economy.

  45. Table appearing on one of the worksheets in the class model.

  46. Four of the five graphs generated by the class model.

  47. Impact of a tighter monetary policy…what do you see?

  48. Weaker liquidity Weaker solvency Weaker profitability Weaker debt coverage Impact of a combination of tighter monetary and fiscal policy

  49. Handout #23 Here is the text in this handout

  50. Handout #23 contains an example income statement, balance sheet and cash flow information used to calculate these and other ratios.

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