ND Farm and Ranch Business
Management Education Association
ND Farm and Ranch Business
|
|
|
Press Release (for immediate release) April 19, 2005 Financial
Ratios Mark Holkup, Farm Business Management, Bismarck State College Bismarck, N.D. - Understanding ratios is a valuable tool for the farmer or rancher. A balance sheet is a snapshot of all assets and liabilities at a specific point in time. Understanding ratios helps to establish the relationship between assets and liabilities. One commonly used ratio is the debt to asset ratio. It is the total farm liabilities divided by the total farm assets. This ratio expresses what share of the farms assets are owned by the creditors. In other words, a 60 percent debt to asset ratio indicates the creditors own 60 percent of the business and the farmer owns 40 percent. The ratio is one way to express the risk exposure of the farm. There are several ratios that deal with the relationship between assets, liabilities, and equity. The equity to asset ratio is the total dollars of farm equity divided by the total dollars of farm assets. The debt to equity ratio is the amount of total farm liabilities divided by the total dollars of farm equity. Both ratios measure financial position much the same as does the debt to asset ratio. Ratios should always be qualified by the age of the
operator and the number of years he or she has been farming. A beginning farmer is more likely have a higher debt to asset
ratio because he or she has simply not been in business long enough to accumulate
a large base of assets. There
isn’t a specific number as to what is an acceptable debt to asset ratio since
different types of farms service debt better than others. The North Dakota Farm Business Management program compiles
financial averages from over 500 farms enrolled in the statewide program and
publishes them in groups based upon such things as farm size, profitability
levels, age of the operators, size of the farm and other characteristics. The numbers for the past 5 years indicate an average or typical debt to asset ratio of about 50 percent. This means that for every dollar in assets the typical farmer in the program had 50 cents in liabilities. The farms are also divided based on profitability, into the upper 20 percent and the lower 20 percent. The high profit group had an average debt to asset ratio over the past 5 years of about 37 percent and the low profit group had a ratio of approximately 66 percent. While one cannot assume the debt to asset ratio will determine farm profit it must be acknowledged that it does play a significant role. When taking on additional debt, a farmer should always test to see how much the additional debt will influence the debt to asset ratio. If a farm has too much debt, cash flow can become extremely difficult. If the debt payments become too high, the farm cannot service those needs and can experience cash flow problems, even while being profitable. For further information about the ND Farm Business Management Program visit the website at www.ndfarmmanagement.com or contact Steve Zimmerman, ND Supervisor for Agricultural Education at 701-328-3162. -###-
|
|
Send mail to bethbakke@btinet.net with
questions or comments about this web site.
|
