Advanced Financial Analysis Help-Sheet
For advanced financial analysis you will need an update to date balance sheet and income
statement.
Advanced Ratio 1: Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization
(EBITDA)
Adjusted EBITDA = Net Profit + Interest Expense + Taxes – Depreciation Expense – Taxes –
Distribution/Draws
Where do I find my information?
 Net Profit – also called Net Farm Income. Can be found on the Income Statement.
 Interest Expense – also called Interest Paid, do not include accrual adjustement. Can be
found on the Income Statement.
 Taxes – Can be found on the Income Statement.
 Depreciation Expense – Can be found on the Income Statement.
 Distribution/Draws – also called Family Living Expenses.
Adjusted EBITDA can be used to:
 Compare profitability between companies because it eliminates the effects of accounting
decisions.
 Calculate the DCR and FCCR.
Warning: the Adjusted EBITDA should be used to compare profitability between similar
farming operations, not measure cash flow. Also, non-adjusted EBITDA includes distributions
and taxes.
Advanced Ratio 2: Debt Coverage Ratio (DCR)
𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐸𝐵𝐼𝑇𝐷𝐴
DCR = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒+𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝐷𝑢𝑒
Where do I find my information?
 Adjusted EBITDA – calculated using the formula above.
 Interest Expense – also called Interest Paid, do not include accrual adjustment. Can be
found on the Income Statement.
 Principal Payments Due – also called Current Portion of LT Debt. Can be found on the
Balance Sheet under Current Liabilities.
DCR can be used to:
 Determine the amount of cash flow available to meet annual interest and principle
payments.
 Determine if the amount of business leverage is sustainable during investment or growth.
Interpreting your DCR:
 Interpreted as a percentage. For example, a DCR of 1.2 means that the business has
enough net operating income to cover 120% of its annual debt payments.
 A DCR of 1 or less indicates the business is over-leveraged. They may have enough to
cover income taxes, draws and distributions, and annual debt service requirements.
 A DCR of 1.2 or more is preferred. It indicates that the business can cover annual debt
service requirements, maintain capital expenditures, and allocate profit to build the
balance sheet for investment or growth.
Note: Most creditors will calculate your DCR during your application process since the DCR
indicates your ability to repay your loan.
Advanced Ratio 3: Fixed Charge Coverage Ratio (FCCR)
𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐸𝐵𝐼𝑇𝐷𝐴
FCCR = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒+𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝐷𝑢𝑒+𝑈𝑛𝑓𝑢𝑛𝑑𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑠
Where do I find my information?
 Adjusted EBITDA – calculated using the formula above.
 Interest Expense – also called Interest Paid, do not include accrual adjustment. Can be
found on the Income Statement.
 Principal Payments Due – also called Current Portion of LT Debt. Can be found on the
Balance Sheet under Current Liabilities.
 Unfunded Capital Expenditures – capital purchases that are not financed. Can be found
on your general ledger, machinery/building schedule, or estimated from the balance
sheet.
FCCR can be used to:
 Determine the firm’s ability to repay fixed financing expenses (including interest,
principal, and capital expenditures).
 Determine if the amount of business leverage is sustainable during investment or growth.
Interpreting your FCCR:
 Interpreted as a percentage. For example, a FCCR of 1 means that the business has
enough net operating income to cover 100% of its fixed financing expenses payments.
 A FCCR of 1 or less indicates the business is leveraged. They may have enough to cover
annual debt service requirements and some capital expenditures, but are not in a position
for growth or investment.
 A FCCR of 1.2 or more is preferred prior to investment or growth. It indicates that the
business is healthy and in the position to take on more risk through investment.
Steps for Advanced Financial Analysis:
1. Gather important financial statements like your balance sheet, income statement, and
cash flow budget.
2. Calculate and interpret your financial ratios from your current balance sheet and
income statement:
a. Liquidity Ratios: working capital, current ratio, working capital as a percentage of
operating expenses
b. Solvency Ratios: debt/asset, debt/equity, net capital ratio, debt structure ratio
c. Profitability Ratios: ROA, ROE, operating profit margin ratio
d. Advanced Financial Ratios: Adjusted EBITDA, DCR, FCCR
3. Identify your problem i.e. your growth or investment opportunity.
4. Answer the following questions based on the information in Steps 3 & 4.
a. What financial ratios should be improved before pursuing the growth or
investment opportunity?
b. What financial ratios are in a healthy position for pursuing the growth or
investment opportunity?
c. What areas of financial risk do I currently see in my business?
d. Do I have areas of concern in my cash flow?
e. How do I plan on financing the growth or investment opportunity?
5. Create a hypothetical balance sheet, income statement, and cash flow for your
business post-growth or investment opportunity. Use your answer in Step 4d to help
you complete this step. Make sure to address any new assets or liabilities on the balance
sheet and any new revenue or expenses on the income statement and cash flow.
6. Re-calculate and re-interpret the financial ratios from Step 2 using your hypothetical
balance sheet and income statement.
7. Answer the following questions based on the information in Steps 5 & 6.
a. How have my financial ratios changed?
b. What financial ratios are in maximum or marginal (red or yellow) areas after the
investment? How can I improve these ratios prior to the investment to keep them
from entering this area?
c. What financial ratios are in the sustainable or strategic (blue or green) areas after
the investment? How can I protect this position during/post growth or investment
opportunity?
d. What new areas of financial risk do I see in my business if I pursue this
opportunity?
e. How will my cash flow be impacted?
8. Look for other ways to pursue the growth or investment opportunity. Are there
better ways of pursuing the opportunity or a better alternative to the opportunity?
9. Identify additional information needed prior to pursuing the growth or investment
opportunity. Ask yourself if you feel comfortable pursuing this opportunity.
10. Create a strategic game plan to prepare your business for growth or investment.