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.
