Financial ratios can help analyze farm finances, but it’s important to consider their limitations and the context of the raw data to get their full value.
Current ratio
Manitoba Agriculture describes the current ratio as measuring a business’s ability to incur debt obligations as they come due without disrupting normal operations.
“A strong current ratio of greater than 2:1 indicates that the business is using its assets to meet obligations, while 1.5:1 is good,” says Sharon Ardron, a provincial farm management specialist.
A current ratio of less than one means there are insufficient current assets to cover short-term debt, says John Molenhuis, Ontario Ministry of Agriculture, Food and Rural Affairs’ business analysis cost production specialist.
In such a case, farmers would need to ask themselves if they’ll have the cash flow necessary to pay their bills, says Jeff Walkeden, FCC senior relationship manager in Weyburn, Sask.
Net worth ratio
This ratio represents a straight comparison of assets to liabilities, Walkeden says.
“The closer that is, the less net worth you have,” Walkeden says. “You’ll see more established farms with larger net worth, meaning they can take on more obligations if they want to.”
Ardron adds that a net worth statement provides a snapshot of the assets, liabilities and equity that exist in a business at any point in time.
“The net worth statement lets the business owner see the earned financial progress that the business has made within the fiscal year being considered,” says Ardron, recommending farmers update that statement every year.
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