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Measures of Financial Performance

Guidelines to help provide a more complete financial picture of your farm or ranch.

"Sweet 16" ratios

The following 16 financial ratios are designed to provide critical financial information that can assist your decision-making process.

LIQUIDITY
 
1. Current Ratio = Current Farm Assets    
Current Farm Liabilities    

Desirable Range

=

Greater than 2.0.

    
2. Working Capital = Current Farm Assets - Current Farm Liabilities

Desirable Range

=

Positive, stable.

SOLVENCY
 
3. Debt/Asset Ratio
(Debt Ratio) 		= Total Farm Liabilities X 100
Total Farm Assets

Desirable

=

Less than 40% and does not exceed 50%.
4. Equity/Asset Ratio
(Equity Ratio) 		= Total Farm Equity X 100
Total Farm Assets

Desirable

=

Greater than 60%.
5. Debt/Equity Ratio
(Leverage Ratio) 		= Total Farm Liabilities X 100
Total Farm Equity

Desirable

=

Less than 66%.

PROFITABILITY
 
6. Rate of Return on
Farm Assets (ROA) 		= (Net Farm Income + Farm Interest Expense – Family Living) X 100
Total Farm Assets

Desirable

=

Greater than 6%.
7. Rate of Return on Farm Equity = (Net Farm Income – Family Living) X 100
Total Farm Equity

Desirable

=

Greater than Rate of Return on Farm Assets (ROA).
8. Operating Profit Margin = (Net Farm Income + Farm Interest Expense – Family Living) X 100
Gross Revenue

Desirable

=

Greater than 30%.
9. Net Farm Income = No standard formula

 

REPAYMENT CAPACITY
 
10. Term Debt and Capital Lease Coverage Ratio = (Net Farm Income + Total Non-Farm Income + Depreciation Expense + Interest on Term Debt and Capital Leases – Total Income Tax Expense – Family Living)
Principal and Interest Payments on Term Debt and Capital Leases

Desirable Range

=

Greater than 1.5.

 

11. Capital Replacement and Term Debt Repayment Margin =   Net Farm Income
+ Total Non-Farm Income
+ Depreciation Expense
– Total Income Tax Expense
– Family Living (including Total Annual Payments on Personal Liabilities)
– Payment on Prior Unpaid Operating Debt
– Principal Payments on Current Portion of Term Debt and Capital Leases

Desirable

=

At least 25% more dollars than scheduled payments on debt and leases.

FINANCIAL EFFICIENCY
 
12. Asset Turnover Ratio = Gross Revenue    
Total Farm Assets    

Desirable Range

=

Varies by industry. The higher the ratio the more productive you are at utilizing your assets.
 
13. Operating Expense Ratio = (Operating Expense –
Depreciation – Interest)
Gross Revenue

Desirable Range

=

Less than 65%.
 
14. Depreciation Expense Ratio = Depreciation Expense
Gross Revenue

Desirable Range

=

Less than 15%.
 
15. Interest Expense Ratio = Interest Expense
Gross Revenue

Desirable Range

=

Less than 10%.
 
16. Net Farm Income from Operations Ratio = Net Farm Income
Gross Revenue

Desirable Range

=

Greater than 15%.

 

References: Farm Financial Ratios and Guidelines. Farm Financial Standards Council.
Understanding Key Financial Ratios and Benchmarks. Dr. David Kohl and Troy Wilson.