Farm Financial Ratios
Forming a clear financial picture of your operation is important. One way to get the information you need is to calculate your operation's liquidity, solvency and profitability – three measurements that will help you evaluate your financial situation.
Current Ratio
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A current ratio above 1.5 is ideal because it shows current assets are greater than current liabilities. But be mindful that a ratio which is too high can also suggest you aren't putting your money to work.
Interpreting ratio numbers
The current ratio measures a business's ability to meet financial obligations as they come due, without disrupting normal operations.
There are no hard-and-fast rules about current ratios, but the financial literature suggests a ratio higher than 1.5 is healthy. If an operation’s current ratio is too high, it may not be using cash as efficiently as possible. A current ratio of 1.0 to 1.5 indicates a farm or business is technically liquid, but it could be exposed to financial challenges if market conditions worsen.
A current ratio less than 1.0 means that a farm or business lacks the current assets to cover short-term liabilities. If working capital is the first line of defence, its absence can force an operation into secondary means of repayment (refinancing of debt) or possibly even selling assets.
Related
Are you on top of your farm financial fitness? Find out more about Canadian farm income, asset values and debt and what you can do to stay strong in 2019.
Debt-to-Assets Ratio
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| Debt-to-Assets Ratio | 0.00 |
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A lower debt-to-asset ratio brings flexibility to an operation if it has to withstand unexpected challenges, or to seize opportunities that arise in the marketplace (such as expansion, diversification, etc.).
Interpreting ratio numbers
The Debt-to-Assets Ratio (DAR) indicates the extent to which assets are funded by debt (and not equity). A low DAR brings flexibility such as borrowing more if opportunities arise.
Operations funding future asset purchases with more debt than equity run a greater risk of pay-back problems. Because agricultural prices are prone to cyclical behaviour and cash flows are subject to seasonal pressures, a healthy year-round DAR is critical.
Related
The updated balance sheet of ag shows the changes in profitability, solvency, and liquidity of Canadian ag.
Return-on-Assets Ratio
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| Return-on-Assets Ratio | 0.00 |
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A higher return-on-assets ratio is an indication that a farm is more profitable, and is better able to leverage assets to turn a profit.
Interpreting ratio numbers
The return-on-assets ratio measures how profitable a company is relative to its total assets and provides insight into how efficiently it uses its assets to generate earnings.
There is no ideal return-on-assets ratio (ROA). A higher ROA is preferred when debt levels are increasing as it makes it easier to service debt.