3 ratios for assessing Canada’s (and your) agriculture balance sheet
2015, total liabilities on Canadian farms increased at faster pace than asset values for the first time in over 5 years: farm debt increased 8.9% while asset appreciation was 6.2%. This is a trend that was consistent across all provinces.
Statistics Canada’s Balance sheet of agriculture signals a softening in an otherwise very healthy financial picture for Canadian farms.
Here are three popular ratios for evaluating the overall health of Canadian agriculture. These financial measures are also useful for benchmarking individual operations.
Liquidity indicates Canadian agriculture’s ability to meet financial obligations. A widely accepted ratio is the current ratio: it compares current assets such as cash, accounts receivable, and inventory to current liabilities. In 2015, the current ratio decreased from 263% to 238% – its lowest point since 2009. The most recent five-year average is 264%. Canadian farms are in a weaker position to meet short-term financial commitments.
The debt-to-asset ratio indicates whether a farm has sufficient assets to cover all liabilities. In 2015, total farm debt increased faster than total assets. As a result, the debt-to-asset ratio increased and points in a different direction than the last six years. Despite the small increase, the debt-to-asset ratio remains historically low at 15.5%, compared to the previous five-year average of 15.9% and the 10-year average of 16.5%.
Return on assets indicates how profitable a farm is relative to its total assets. This is calculated by comparing net income to total assets. In 2015, record net income resulted in an increase in the profitability ratio to 2.3% from 2.0% in 2014; however, this is well below the 3.9% in 2013. The five-year average is 2.7%. Canadian farms appear to achieve a slightly lower return on the value of their assets.
Overall, Canadian agriculture is strong. Liabilities are currently increasing faster than asset values, which softens overall farm health and that spells a bit of caution moving forward.
How does your operation stack up to the national trends and figures?