November 1999 Insert
Special Financial Management Insert
(Author: by: Joe Parcell, Assistant Professor and Extension Economist
= Total current farm assets / Total current farm liabilities
= Total current farm assets Total current farm liabilities
Solvency: is the ability of your business to pay all of its debts if it were sold tomorrow. Solvency is important in evaluating the financial risk and borrowing capacity of the business.
Farm Debt-to-Asset Ratio: is the banks share of the business. It compares total farm debt to total farm assets. A higher ratio is an indicator of greater financial risk and lower borrowing capacity.
= Total farm liabilities / Total farm assets
Farm Equity-to-Asset Ratio: is your share of the business, It compares farm equity to total farm assets. If you add the debt-to-asset ratio and the equity-to-asset ratio you must get 100%
= Farm net worth / Total farm assets
Farm Debt-to-Equity Ratio: compares the banks ownership to your ownership. It also indicates how much the owners have leveraged (i.e., multiplied) their equity in the business.
= Total farm liabilities / Farm net worth
Profitability: is the difference between the value of goods produced and the cost of the resources used in their production.
Net Farm Income: represents return to 3 things:
= Gross cash farm income Total
cash farm expense + Inventory changes +
= (Accrual Net farm income +
Interest Expense Unpaid family labor)
Rate of Return on Farm Equity: represents the interest rate being earned by your investment in the farm. This return can be compared to returns available if your equity were invested somewhere else, such as a certificate of deposit.
= (Accrual Net farm income
Value of operators labor and management)
Operating Profit Margin Ratio: shows the operating efficiency of the business. For instance, if expenses are low relative to the production, the business will have a healthy operating profit margin. A low profit margin can be caused by low product prices, high operating expenses, of inefficient production.
Term-Debt Coverage Ratio: tells whether your business produced enough cash to cover all (both farm and non-farm) intermediate and long-term debt payments. A ratio of less than 100% indicates that a business has run up open accounts, borrowed money, or sold assets to make scheduled payments to the bank.
Capital-Replacement Margin: is the amount of money remaining after all operating expenses, taxes, family living costs and scheduled debt payments have been made. It is really the money left, after paying bills, that is available for purchasing or financing new machinery, equipment, land or livestock.
|[This Month in Ag Connection] [Ag Connection - Other
From All The Financial Statements
Financial Efficiency: shows how effectively your business uses assets to generate income. Past performance of the business could well indicate potential future accomplishments.
It also questions:
= Gross farm income / Total farm assets
Operating-Expense Ratio: shows the proportion of farm income that is used to pay operating expenses, not including principle or interest.
=(Total farm operating expense Depreciation Farm interest) / Gross farm income
Depreciation-Expense Ratio: indicates how fast the business wears out capital. It tells what proportion of farm income is needed to maintain the capital used by the business. It is important to remember that this ratio should be looked at over time. This measure is likely to be misleading during major expansions and contractions, or if you use depreciation on your 1040F to adjust your tax liability.
= Depreciation & other capital adjustments / Gross farm income
Interest-Expense Ratio: shows how much of gross farm income is used to pay for borrowed capital.
= Farm interest / Gross farm income
Net Farm Income Ratio: compares profit to gross farm income. It shows how much is left after all farm expenses, except for unpaid labor and management, are paid.
=Accrual net farm income / Gross farm income
Click here for Farm Finance Scorecard
Ag Connection - November 1999 Insert