Agriculture Reference
In-Depth Information
too low. Costs of goods or raw product and shrinkage may be pinpointed for further
study. This ratio is crucial. Any drop in gross margin is a signal for immediate manage-
rial action. Small changes here have a great impact on the bottom line.
Liquidity ratios
Liquidity refers to the ability of the fi rm to meet fi nancial obligations as those obligations
come due. Hence the focus of
liquidity ratios
is on assets that can be easily converted to
cash, and liabilities that must be paid in the short term, which is often defi ned as one year but
could be a month or quarter. Liquidity ratios are another comparison tool in fi nancial ratio
analysis that can be used to help agribusiness professionals more clearly determine short-
term cash fl ow problems. Let's consider some of the most common liquidity ratios that are
useful in determining BF&G's ability to meet its short-run obligations. Often fi rms refer to
the amount of working capital needed in their businesses.
Net working capital:
total current assets minus total current liabilities
.
(
)
(6)
Total Current Assets
-
Total Current Liabilities
=
NWC Net Work
ing Capital
$,
4 287
,
000
-$,
1 862
,
000
=
$,
2 425
,
000
(
)
From Balance
Sheet h and gg
,
However, this is a dollar fi gure and, for reasons discussed earlier in this chapter, a ratio
of two numbers may provide a better measure of liquidity.
Current ratio
:
total current assets divided by total current liabilities
. The current ratio is
probably the most popular liquidity ratio. It is calculated as shown below:
(
)
(7)
Total Current Assets
/
Total Current Liabilities
=
CR Current R
atio
$,
4 287 1 862 2 3
From Balance Sheet h and
,
000
/$,
,
000
=
.
(
)
,
gg
This ratio indicates BF&G's ability to meet its current obligations. In this case, there is
$2.30 of current assets for every $1.00 of current debt. In most cases, a current ratio
somewhere around 2.0 signifi es ample liquidity for the fi rm.
There is concern among many fi nancial analysts that the current ratio may have some
limitations as an indicator of a fi rm's ability to meet current obligations. The need to
quickly liquidate inventories, accounts receivable, marketable securities, etc., to raise
cash may cause a sharp decrease in their value. Therefore, managers often use a second
ratio that more clearly delineates a fi rm's ability to meet immediate cash needs.
Quick ratio
:
total current assets minus inventory divided by total current liabilities
.
(
)
/
=
(
)
Total Current Assets
−
Inventory
Total Current Liabilities
QR Quick Ratio
(8)
(
)
$,
4 287
,
000
−
$,
2 5
00 000
,
/$,
1 862
,
000
=
0
.
96
(
)
Fr
om Balance Sheet h e and gg
,,,
