Agriculture Reference
In-Depth Information
10
Analyzing fi nancial statements
Objectives
•
Discuss how different viewpoints are possible depending on who evaluates agribusiness
fi nancial statements
•
Explain the importance of establishing benchmarks for fi nancial relationships in the
fi rm
•
Calculate and interpret fi nancial ratios in the four major areas of analysis
•
Illustrate how fi nancial ratios can aid the decision-making process for an agribusiness
manager
•
Outline and discuss the limitations of fi nancial ratio analysis
•
Describe the profi tability analysis system and understand its role in decision-making in
the agribusiness fi r m
Introduction
The fi nancial statements of any agribusiness provide a wealth of information for managers,
owners, lending institutions, and the government. Some of this information requires little
interpretation, but much of it is meaningless unless it is put into proper perspective. Many
managers who look at a fi nancial statement are like the explorer who sees an iceberg for the
fi rst time and fails to realize that what is seen is only the tip and that 90 percent of the iceberg
is hidden under water. Highly useful information can be found in fi nancial statements,
but this is not always apparent to the casual observer. Without proper analysis, fi nancial
statements can be meaningless scraps of paper.
Financial analysis might be compared to a person's medical checkup, where much
more is expected than a superfi cial glance from the physician. For physicians to understand
if or where a problem may exist, a series of tests must be performed and many questions
must be asked. Those who are interested in the fi nancial well being and progress of the
business must follow the same procedure. Agribusiness fi rms that survive and prosper must
have managers who use the tools of fi nancial analysis to check the vital fi nancial functions
and health of the fi rm and then prescribe the changes needed to keep the business on course
to meet its goals and remain viable and competitive in the future. Tools which allow those
who are interested in the business to use fi nancial analysis in determining how successful the
business performance has been, what problems or opportunities exist, and what alternative
or remedial courses of action might improve performance in the future are discussed in this
chapter.
