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Prairie Farmer - December 2007

Check Ratios

Garrett Stoerger
Department of Agricultural and Consumer Economics
University of Illinois at Urbana-Champaign

Change is good. In fact, change can be great. After a year like 2007, financial statements are destined to change for farmers and landowners across the Midwest . The question is, how do you interpret those numbers?

The financial performance of a farm is best analyzed using ratios that represent liquidity, solvency, profitability and repayment capacity. Two different FAST spreadsheets – the Ratio Calculator and Benchmark Ratio Analysis tool – can help you make those analyses. Both spreadsheets are available for free download at www.farmdoc.uiuc.edu/fasttools .

Much like the name implies, the Ratio Calculator will help you calculate the financial ratios for your operation. Furthermore, the tool allows you to store up to 15 years of records, making historical performance evaluations as easy as the click of a button.

Using numbers from your balance sheet, input the required fields for the given year and then step back and view your trend analysis. Each financial ratio is calculated and displayed using a graph with a color-coded scheme that corresponds to the overall performance level for that ratio.

Another feature of the Ratio Calculator is that it provides you with the definition of each ratio calculation, as well as a summary of the corresponding benchmark ratio levels. For example, the tool explains that a debt-to-equity ratio is total farm liabilities to total farm equity, and a farm demonstrating high performance would have a ratio of 0.25 or less.

Find where you rank

The Benchmark Ratio Analysis tool takes what we have calculated using the Ratio Calculator to the next level. Now that you have calculated your ratios, you can now compare the performance of those ratios based on different criteria. Categories include gross sales, age, farm type and tenure. This is especially beneficial for those individuals who find themselves to be at an extreme end of the grouping.

For example, a 25-year-old farmer will not have the asset base of a 60-year-old farmer, so it is rather meaningless to compare their ratios. However, this tool gives them the flexibility to compare themselves with farmers under the age of 30. Furthermore, grain farm vs. hog farm operations can be quite different in financial structure. This will again allow you to set the appropriate parameters to view your situation.

By default, the Benchmark Ratio Analysis tool displays data in 10-year increments, including an average. What's more, you have the ability to view the analysis based on peer group changes. Therefore, suppose you wanted to know how the average farmer's debt to asset ratio changes from the time they are in their 20s until they are in their 50s.

Stoerger is FAST coordinator with University of Illinois Extension.