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

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