Asset turnover ratios for typical farms are about 30 to 40 percent, but they can range from 20 to 30 percent for low profit farms, up to 40 to 50 percent for high profit farms. The asset turnover ratio measures the efficient use of investment capital while the operating profit margin ratio measures the efficient use of operating capital. Since they are substitutes for each other (owned and rented land, for example), farms that are high in one measure may be low in the other.
Farms with mostly rented land should have higher ratios than farms with mostly owned land, generally around 50 percent. Rented farms also will have higher operating expense ratios, since rent paid is included in operating expenses. Likewise, rented farms will tend to have lower depreciation and interest expense ratios than owned farms. Typically, about 60 to 70 percent of gross revenue goes for operating expenses, and 5 to 10 percent each for depreciation and interest.
The average net farm income ratio for Iowa farms has been in the 15 to 30 percent range in the last decade. High profit farms have averaged from 30 to 40 percent, and low profit farms less than 15 percent.
The farm record data that was available did not contain enough information to calculate historical repayment capacity measures. However, the repayment capacity ratio should be at least greater than one, and the repayment capacity should be large enough to cover any possible shortfalls in cash flow that cannot be paid from savings or other sources of short-term liquidity.
If comparisons show that a farm’s financial performance is below average, further analysis should be done to determine the sources of the problem. Areas of possible concern are production efficiency, marketing, purchasing of inputs, and the scale of the operation in relation to the size of the work force. Enterprise analysis and production records can help identify problems that contribute to poor financial performance.
Calculating these financial performance measures for several years will reveal a great deal about the financial health of a farm business. Particular attention should be paid to any trends that are developing. Any decisions about investments or borrowing, however, also should consider current and future economic conditions, availability of collateral, and the experience and character of the farm operator.
The worksheet at the end of this publication shows the basic information needed to compute the financial measures. Asset and liability values should be recorded as close to the beginning and ending of the accounting year as possible. Include only farm assets and liabilities. Farm assets include any property or investment that generates returns which are included in farm income.