Different types of farming operations legitimately produce differing ratios. When one operation is being compared with another, it is important to make comparisons with like-type and comparable size businesses. For example, below is an illustration of five distinct types of farming operations and the acceptable thresholds for some of the ratios. Notice that an acceptable ratio for one type of operation may not be acceptable in another. The value of using financial ratios for analysis is twofold.
Ratios provide a common denominator relationship that allows for ease of multi-year analysis.
Also, combining information from the balance sheet and income statement to produce ratios allows one to understand how the statements influence each other. 1.25 Trend is important. Need access to cash to pay bills on current basis and continue business. There are many reasons for unprofitable operations, and ratio analysis cannot fully explain any of them. Unless the asset values are altered, the balance sheet cannot look profitable and equity cannot increase without actually producing a profit.