Financial Analysis
Reading/How To
Repayment Analysis
Ratio: What it Tells You: Term Debt & Lease Coverage Ratio (Debt Coverage Ratio) The amount of cash generated this year which is available to pay your annual principal and interest payments Debt Coverage Ratio = 1.70 or 170 percent Indicates that you have generated $1.70 of cash this year for every $1 of principal and interest payments you have this year
Example:
How to Calculate: Procedure 1. Net Farm Income 2. Plus: Gross Non-Farm Earnings 3. = Subtotal 4. Plus: Depreciation & Interest Expense 5. = Earnings available for Family Living, Income Taxes, Principal & Interest Payments, & New Investments 6. Minus: Family Living Withdrawals & Income Taxes 7. = Capacity Available for Principal & Interest Payments & New Investments 8. Current Principal & Interest Payments, Operating Interest, and Capital Lease Payments 9. Term Debt & Lease Coverage Ratio (Line 7 / Line 8) 10. Capital Replacement & Term Debt Repayment Margin (Line 7 - Line 8) 11. Debt Payment/Income Ratio (Line 8 / Line 5) What’s Good?: Generally, the higher the better! Green Light: Greater than 150 percent Yellow Light: 110 - 150 percent Red Light: Less than 110 percent How to improve a poor Debt Coverage Ratio: 1. Increase Farm Revenues - increase production, better marketing for higher prices 2. Decrease Farm Expenses - look to reduce your top 5 expenses 3. Increase Non-farm Income - second job, spouse gets job 4. Decrease Income Tax Liability - proper tax management 5. Decrease Family Living Withdrawals - Hard to Do!!! 6. Restructure Debt - lengthen payback periods, refinance at lower interest rate
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Source Income Statement Cash Flow Statement, W-2 Income Statement
Cash Flow Statement
Cash Flow Statement
Financial Analysis
Reading/How To
Repayment Analysis (Cont.)
Ratio: What it Tells You: Debt Payment / Income Ratio (Debt/Income Ratio) The percent of your gross household income that is being used for principal and interest payments. Debt Payment / Income Ratio = 0.25 or 25 percent Indicates that $0.25 of every $1.00 of gross income is going towards principal and interest payments. That leaves $0.75 for living expenses, income taxes, and new investment (cash purchases or new loans).
Example:
How to Calculate: Procedure Source Net Farm Income Income Statement Plus: Gross Non-Farm Earnings Cash Flow Statement, W-2 = Subtotal Plus: Depreciation & Interest Expense Income Statement = Earnings available for Family Living, Income Taxes, Principal & Interest Payments, & New Investments 6. Current Principal & Interest Payments, Operating Cash Flow Statement Interest, and Capital Lease Payments 7. Debt Payment/Income Ratio (Line 6 / Line 5) [or Line 8 / Line 5 from Repayment Analysis Worksheet] 1. 2. 3. 4. 5. What’s Good?: The lower the better! Green Light: Less than 25 percent Yellow Light: 25 - 50 percent Red Light: Greater than 50 percent How to improve a poor Debt Payment / Income Ratio: 1. 2. 3. 4. 5. 6. 7. Increase Farm Revenues - increase production, better marketing for higher prices Decrease Farm Expenses - look to reduce your top 5 expenses Increase Non-farm Income - second job, spouse gets job Decrease Income Tax Liability - proper tax management Decrease Family Living Withdrawals - Hard to Do!!! Restructure Debt - lengthen payback periods, refinance at lower interest rate Pay down existing debt
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Financial Analysis
Reading/How To
Repayment Sensitivity Analysis
Measure: What it Tells You: 5-5-3 Analysis Percent decrease in farm revenues, percent increase in farm expenses, or percent increase in variable interest rates that your operation can handle and still be able to meet your annual principal and interest payments.
How to Calculate: Procedure Percent Decrease in Farm Revenues 1. Capital Replacement & Term Debt Repayment Margin 2. Gross Farm Revenues 3. Percent Decrease in Farm Revenues (Line 1 / Line 2) Percent Increase in Farm Expenses 1. Capital Replacement & Term Debt Repayment Margin 2. Total Farm Expenses 3. Percent Increase in Farm Expenses (Line 1 / Line 2) Percent Increase in Interest Rate 1. Capital Replacement & Term Debt Repayment Margin 2. Total Farm Liabilities 3. Percent Increase in Interest Rate (Line 1 / Line 2) What’s Good?: The higher the better! “Normal” Operations Revenues: Greater than 5 percent Expenses: Greater than 5 percent Interest: Greater than 3 percent How to improve poor Sensitivity Measures: Improve Repayment Capacity as described for Debt Coverage Ratio and/or Debt/Income Ratio.
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Source
Repayment Analysis Worksheet (Wks 1, Line 10) Income Statement
Repayment Analysis Worksheet (Wks 1, Line 10) Income Statement
Repayment Analysis Worksheet (Wks 1, Line 10) Balance Sheet
For New/Expanding Operations: Greater than 10 percent Greater than 10 percent Greater than 6 percent
Financial Analysis
Reading/How To
Liquidity Analysis
Liquidity is the ability to cover your short-term obligations as they come due, without disrupting the normal operations of the business.
Ratio: What it Tells You:
Current Ratio How many dollars of current assets you have that are available to meet all payments/obligations which are due within the next 12 months. Current Ratio = 2.5 Indicates that you have $2.50 in current assets for every $1.00 of current liabilities (payments due within the next 12 months)
Example:
How to Calculate: Procedure 1. Total Current Assets 2. Total Current Liabilities 3. Current Ratio (Line 1 / Line 2) Source Balance Sheet Balance Sheet
What’s Good?: Generally, the higher the better. But it can be too high! A current ratio that is very high indicates that you have a lot of current assets just sitting around when they could be invested elsewhere more profitably. Green Light: Greater than 1.5 Yellow Light: 1.0 - 1.5 Red Light: Less than 1.0 How to improve a poor Current Ratio: 1. 2. 3. 4. 5. 6. 7. Increase Farm Revenues - increase production, better marketing for higher prices Decrease Farm Expenses - look to reduce your top 5 expenses Increase Non-farm Income - second job, spouse gets job Decrease Family Living Withdrawals - Hard to Do!!! Restructure Debt - lengthen payback periods, refinance at lower interest rate Pay down existing debt Sell unneeded intermediate or long term assets - use the proceeds to pay down existing debt. 8. No new borrowing, either loans, credit cards, or accounts payable!
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Financial Analysis
Reading/How To
Solvency Analysis
Solvency is the ability to cover all of your obligations.
Ratio: What it Tells You:
Debt/Asset Ratio How much you have borrowed for every dollar of assets you have in your operation. Debt/Asset Ratio = 0.35 or 35 percent Indicates that you have borrowed $0.35 for every $1 of assets you have in your operation.
Example:
How to Calculate: Procedure 1. Total Farm Liabilities 2. Total Farm Assets 3. Debt/Asset Ratio (Line 1 / Line 2) What’s Good?: Generally, the lower the better. Green Light: Less than 30 percent Yellow Light: 30 - 70 percent Red Light: Greater than 70 percent How to improve a poor Debt/Asset Ratio: 1. 2. 3. 4. 5. 6. 7. Increase Farm Revenues - increase production, better marketing for higher prices Decrease Farm Expenses - look to reduce your top 5 expenses Increase Non-farm Income - second job, spouse gets job Decrease Family Living Withdrawals - Hard to Do!!! Restructure Debt - lengthen payback periods, refinance at lower interest rate Pay down existing debt Sell unneeded intermediate or long term assets - use the proceeds to pay down existing debt. 8. No new borrowing, either loans, credit cards, or accounts payable! NOTE: Some lenders use the Percent Equity Ratio (Equity/Asset) or the Leverage Ratio (Debt/Equity) in place of the Debt/Asset Ratio. They provide basically the same information about solvency as the Debt/Asset Ratio. Source Balance Sheet Balance Sheet
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Financial Analysis
Reading/How To
Profitability Analysis
Ratio: What it Tells You: Rate of Return on Assets (Return on Assets, or ROA) How many dollars of profit (before interest and taxes) you are earning for every $1 of total assets you have in the operation. ROA = 0.045 or 4.5 percent Indicates that you are earning profits of $0.045 before interest and taxes for every $1 of total assets in your operation, or each $1 of total assets is generating profits of $0.045 (before interest and taxes).
Example:
How to Calculate: Procedure Net Farm Income Plus: Interest Expense = Subtotal Minus: Management Fee Source Income Statement Income Statement 5 percent of gross farm revenues plus $12,500 per operator Balance Sheet
1. 2. 3. 4.
5. = Return to Assets 6. Total Farm Assets 7. Rate of Return on Assets (ROA) (Line 5 / Line 6) What’s Good?: Generally, the higher the better. Green Light: Greater than 8 percent Yellow Light: 0 - 8 percent Red Light: Less than 0 percent How to improve a poor Rate of Return on Assets:
1. Increase Farm Revenues - increase production, better marketing for higher prices 2. Decrease Farm Expenses - look to reduce your top 5 expenses 3. Sell unneeded intermediate or long term assets - consider leasing, borrowing, or coowning certain pieces of equipment Note: Some lenders use Average Farm Assets in place of Total Farm Assets. Average Farm Assets is the average of Total Farm Assets from the beginning of the year and Total Farm Assets from the end of the year.
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Financial Analysis
Reading/How To
Financial Efficiency Analysis
Ratio: What it Tells You: Example: Operating Expense / Receipt Ratio (Operating Expense Ratio) How much cash you are spending to generate $1 of revenue. Operating Expense Ratio = 0.75 or 75 percent Indicates that you are spending $0.75 in operating expenses for every $1 of revenue you are generating.
How to Calculate: Procedure Total Farm Expenses Minus: Interest Expense Minus: Depreciation Expense = Total Cash Operating Expenses Gross Farm Revenues Operating Expense/Receipt Ratio (Line 4 / Line 5) Source Income Statement Income Statement Income Statement Income Statement
1. 2. 3. 4. 5. 6.
What’s Good?: Generally, the lower the better. Green Light: Less than 65 percent Yellow Light: 65 - 80 percent Red Light: Greater than 80 percent How to improve a poor Operating Expense/Receipt Ratio: 1. Increase Farm Revenues - increase production, better marketing for higher prices 2. Decrease Farm Expenses - look to reduce your top 5 expenses 3. Improve Cost Control - examine your record keeping system
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