All values in this sheet are calculated and require no input. A summary of the income statement and balance sheet can be found on the left. Further to the right there are five groups of financial ratios that measure the performance of your farm.
Margin Ratios: Measure your farm’s operational earnings. Benchmark values for grain and oilseed farms are found in the top-right corner of each measure.
- Gross Margin Ratio: The gross margin ratio compares the gross profit of a company to its net sales to show how much profit a company makes after paying its cost of goods sold. Gross margin is revenue minus cost of goods sold, and the gross margin ratio is gross margin divided by revenue. Gross margin is what’s left from revenue after paying for the costs of production materials.
- Contribution Margin Ratio: Contribution margin is calculated by subtracting direct operating expenses from gross margin, and %CM is contribution margin divided by revenue. It is what remains from each dollar of sales after paying all variable input and operating expenses.
- Operating Efficiency Ratio: Operating efficiency ratio is EBITDA divided by revenue. EBITDA is a measure of operating income that has long been used, especially outside of agriculture, to understand the ability of an operation to generate cash after paying operating expenses.
- EBIT Ratio: The EBIT ratio determines whether the fixed costs of the company are too high for the production volume. Earnings before interest and taxes (EBIT) is calculated by subtracting financing costs (cost of capital) from EBITDA. Interest expenses are then subtracted to get earnings before taxes (EBT). The EBIT ratio is found by dividing EBIT by revenue.
- Profit Ratio: The profit ratio measures the amount of net income earned with each dollar of sales generated. It is calculated as net profit divided by total sales.
Cost Ratios: Measure how much you spend relative to your sales. Benchmark values for grain and oilseed farms are found in the top-right corner of each measure.
- Cost of Goods Sold Ratio: The cost of goods sold ratio measures the relationship between cost of goods sold and sales. It is used to check the efficiency of a business and is calculated as cost of goods sold divided by gross revenue.
- Direct Operating Expenses Ratio: The direct operating expense ratio shows how efficient a company’s management is at keeping costs low while generating revenue or sales. It is calculated direct operating expenses divided by gross revenue.
- Operating Overhead Ratio: The operating overhead ratio is the comparison of operating expenses and the total income which is not related to the production of goods and service. It is calculated as operating overhead divided by gross revenue.
- Cost of Capital Ratio: Calculated as cost of capital divided by gross revenue.
- Interest Expenses Ratio: The interest coverage ratio is used to determine how easily a company can pay their interest expenses on outstanding debt. It is calculated as interest expenses divided by gross revenue.
Liquidity Ratios: Measure your ability to pay off your current debts, i.e. your short-term financial risk.
- Working Capital: Calculated as current assets – current liabilities.
- Working Capital Ratio: The working capital ratio is a measure of the business’s ability to meet its payment obligations as they fall due. It is calculated as working capital divided by total operating costs (operating overheads, cost of goods sold, and direct operating expenses).
- Current Ratio: The current ratio measures a company’s ability to pay off short-term liabilities with current assets. It is the standard measure of short-term liquidity, along with working capital (current assets – current liabilities), for most types of business.
Solvency Rations: Measure your ability to pay off your long-term debt. Measures your general financial risk.
- Debt to Equity Ratio: The debt to equity ratio calculates the weight of total debt and financial liabilities against shareholders’ equity. It is calculated as total liabilities divided by owner’s equity.
- Debt to EBITDA Ratio: The debt/EBITDA is a measure of long-term solvency risk. It is similar to debt service ratio, but since precise payments are not generally part of financial statements, it can be calculated from what is always included.
- Bank Debt to EBITDA Ratio: The bank debt/EBITDA Ratio reveals how easily a company can pay its bank debt obligations. It is calculated as operating credit and long-term bank debt divided by EBITDA.
- Asset Turnover Ratio: The asset turnover ratio measures a company’s ability to generate sales from assets. It is calculated as total sales divided by total assets.
- Return on Equity Ratio: Calculated as net operating profit divided by owner’s equity.
- Return on Assets Ratio: The return on equity ratio measures how efficiently a company is using its equity to generate profit. It is calculated as net operating profit divided by total assets.
Debt Service Coverage Ratio: This ratio is important as it is what banks use to assess loans. The concept is straight forward: it is the ratio of how much money the business has to service your annual debt obligations (after paying operating expenses)
- Debt Service Ratio: The debt service coverage ratio reveals how easily a company can pay its debt obligations. It is calculated as EBITDA divided by all debt (interest, principal, rental, and lease).