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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.