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Profitability RatiosROR on Total Capital Income + loan interest obligations – value of unpaid labor and management – business income taxes divided by total business assets Interpretation The higher the value, the more profitable the business Agricultural Extension Service The University of Tennessee * Profitability RatiosROR on Total Capital Agricultural Extension Service The University of Tennessee * Profitability RatiosROR on Equity Capital Income – value of unpaid labor and management – business income taxes divided by total business net worth Interpretation The higher the value, the more profitable the business Agricultural Extension Service The University of Tennessee * Profitability RatiosROR on Equity Capital Agricultural Extension Service The University of Tennessee * Key Budget Assumptions Expected selling prices Expected input prices Expected input productivity Pro forma operating budget Production costs and sales objectives Pro forma financial budget Cash receipts and disbursements Family living budgets Agricultural Extension Service The University of Tennessee * Financial Statement Analysis Ratio analysis Alleviates the unit of measure problems incurred when comparing raw numbers Four different types of ratios can be examined Liquidity ratios – can current debts be met Solvency ratios – can all debts be met Efficiency ratios – how efficient is the operation Profitability ratios – how profitable is the operation Agricultural Extension Service The University of Tennessee * Keys to Ratio Analysis Ratios don’t mean anything by themselves They must be compared over time and with similar companies Look at industry standards through trade magazines, Standard Poore’s, RMA analysis, etc. Agricultural Extension Service The University of Tennessee * Liquidity RatiosCurrent Ratio Current assets divided by current liabilities Interpretation Relatively high ratio values mean that the business is liquid, but cash is not working If the current ratio is greater tha