Financial measures are not a substitute for informed judgment. Financial measures are simply a convenient way to evaluate large amounts of financial information and enable the user to compare the financial position and financial performance of an individual firm over time and to other firms within an industry. In the agricultural realm, one of our most difficult tasks is dealing with the rest of the world who deals in black and white. There are so many variables in our entire equation which we have zero control over, what so ever, that it becomes virtually impossible to make a set formula work for every given situation.
If there were words of encouragement and advice that I could share with you, I would make the following suggestions… Remember that financial measures help in ASKING the right questions, but they do not provide answers. Judgment and common sense should be linked to INFORMED application of the formula. Be selective in the choice of financial measures. Different measures are appropriate in different industries, or enterprises, or given situations. Make the one fit in your given situation to your advantage. A benchmark is needed to assess a firm’s financial performance and financial position. It is useful to compare new financial measures with the firm’s measures from earlier years. While it is also useful to compare a firm’s measures against other firms in the same industry group, or areas, just make sure that you compare “oranges to oranges” not “apples to oranges”. Financial measures derived from incomplete or poorly prepared financial statements are usually misleading and will frequently lead to bad business decisions by the owner and bad credit decisions by the lender.