Financial Ratio Analysis Essay

The use of financial ratios and margins in assessing, benchmarking and monitoring business performance is important for the owner and the bank. As all production, operating and financial decisions are eventually reflected in the financial statements, analyzing financial statements can reveal some useful insights into the strengths and weaknesses of an operation.
As a credit analyst you have to have an understanding of the various components of financial statements and have a sound knowledge and understanding of accounting principles as well as application of these principles. Understanding of the principles helps to create a structured approach in analyzing financials and to validate if reliance can be placed on the financial information provided

There are a few comments to keep in mind when interpreting the value for a ratio:
• In the interpretation and analysis of financial statements, one of the key elements is to have an understanding of the client’s business, industry of operation, ownership make up and management, current business life cycle, desired state of the business (current, medium and long term strategic objectives) and swot analysis.
• It is important to understand the client’s customer value chain (suppliers, distribution channels, outlets and customer base) as well as the industry norms.
• All this information will help to understand and be able to correctly interpret the trends and figures presented in the financial statements and ratios applied will make good sense.

Financials statements are a snapshot of the business at a particular point in time. Latest financial information provides the latest state of the business. Historical financial information is helpful for performance comparisons and trend analysis and therefore the following 4 key ratios has been identified, how to apply it and to mitigate potential risks for the

They are concerned with the levels of equity and debt in the farm. o Debt Ratio: = Total Farm Liabilities / Total Farm Assets
 This ratio represents a level of debt to assets for a farm. This type of ratio is often referred to as a leverage ratio. It is a good indicator of the level of financial risk associated with the farm. o Gearing Ratio: = Total Farm Liabilities / Total Farm Equity
The real strength in these ratios are in trend analysis. If the trend is up ward, this implies that the debt load is increasing at a greater rate than farm income and this trend cannot be sustained over the long run and is a warning signal of future financial stress. The comparative analysis is useful and can help to determine if the farm’s trend is due to individual farm factors or is caused by general economic or weather factors.
Profitability Ratios:
• Ratios in this category measure a firm’s ability to generate profit. o Net Farm Income (NFI): = Sales – Cost of Sales – Operating expenditure
 This ratio represent the bottom line for farm. o Gross margin: NFI –