You are here: Business Management Calculating the "Sweet 16" Calculating The "Sweet 16" Farm Financial Measures Financial ratios can be used to help evaluate the financial efficiency of the business. The "Farm Financial Task Force, 2" has recommended the following 16 measures and definitions. Desirable ranges and guidelines vary significantly by type of farm, ownership pattern, time of year and technology. Trends on individual farms are important in identifying management strengths and weaknesses. Liquidity 1. Current ratio = total current farm assets/total current farm liabilities range desirable    1.5 - 2.0 2. Working capital = total current farm assets - total current farm liabilities range desirable    positive, stable Solvency 3. Debt/asset ratio = total farm liabilities/total farm assets range desirable less than 0.4 4. Equity/asset ratio = total farm equity/total farm assets range desirable greater than 0.6 5. Debt/equity ratio = total farm liabilities/total farm equity range desirable less than 0.66 Profitability 6. Rate of return on farm assets = (net farm income from operations + farm interest expense - value of operator and unpaid family labor)/average total farm assets range desirable over 4% 7. Rate of return on farm equity = (net farm income from operations - value of operator and unpaid family labor)/average total farm equity range desirable greater than ROR on FA 8. Operating profit margin = (net farm income from operations + farm interest expense - value of operator and unpaid family labor)/gross revenue range desirable 20% - 30% 9. Net farm income no standard Repayment Capacity 10. Term Debt and Capital Lease Coverage Ratio = (net farm income from operations + total non-farm income + depreciation expense + interest on term debt and capital leases - total income tax expense - family living withdrawal)/principal and interest payments on term debt and capital leases range desirable greater than 1.25 11. Capital replacement and term debt repayment margin = net farm income from operations + total non-farm income + depreciation expense - total income tax expense - family living withdrawal (including total annual payments on personal liabilities) - payment on prior unpaid operating debt - principal payments on current portion of term debt and capital leases range desirable at least 25% more dollars than scheduled payments on debts & leases Financial Efficiency 12. Asset turnover ratio = gross revenue/average total farm assets range desirable greater than 25% - 30% 13. Operating expense ratio = operating expense-depreciation/gross revenue range desirable less than 65% 14. Depreciation expense ratio = depreciation expense/gross revenue range desirable less than 15% 15. Interest expense ratio = interest expense/gross revenue range desirable less than 15% 16. Net farm income from operations ratio = net farm income from operations/gross revenue range desirable greater than 15% John Berry, Agricultural Marketing Agent Penn State Cooperative Extension Return to the top.

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