Ratios can help determine where you stand financially

Intense competition has made the process of financial and strategic planning on the farm much more complicated.

There are basic indicators that might help you better understand how well you are performing compared to local and national levels.

Statistics Canada’s most recent farm financial data shows that in 2015 record net farm income and strong asset appreciation continued to support improved agriculture performance on a national scale.

Farm Credit Canada has listed indicators that can help you see where you are positioned in your industry and make strategic adjustments to improve your position or take advantage of your strengths.

Liquidity

Liquidity shows where your business operation is at on a daily basis and how to manage your cash flow to meet your obligations. The “current ratio” is a relatively simple tool that measures current assets to current liabilities.

As an aggregate, Canadian farmers had a current ratio of 2.38 in 2015, which means short-term obligations are easily serviceable. It was higher in 2014 at 2.63 but was consistent with the historical average. What is your current ratio?

Financial leverage

The ability to meet long-term financial obligations is essential to your financial health. The debt-to-asset ratio is the main tool that will help you read your financial solvency. This indicates if your farm has sufficient assets to cover all liabilities.

This ratio asks if you could cover all your existing debt obligations if you were to liquidate all your assets today. A low debt-to-asset ratio is good.

In 2015, the total national farm debt increased faster than total assets. As a result, the debt-to-asset ratio showed a modest increase for the first time in six years. Even with the slight increase, the debt-to-asset ratio in 2015 remained low at 15.5 percent compared to the previous five-year average of 15.9 percent and the 15-year average of 16.7 percent. What is your debt-to-asset ratio?

Profitability

Profitability shows how much money you generated after accounting for expenses. Here, the return-on-assets ratio, which is net income divided by total assets, provides a useful measuring stick.

It tells you how profitable your farm is relative to the total value of the assets you use to run the business.

The ratio tells how successful you are in deploying those assets to generate income. A higher return on assets indicates a stronger ability to generate income.

The return-on-assets ratio for Canada in 2015 rose to 2.3 percent from two percent in 2014, resulting largely from record net income levels. Although this fell well short of the recent peak of 3.9 percent in 2013, it came close to the 15-year average of 2.6 percent.

Keeping these indicators up to date may help you modify your tax position before your year-end.

For instance, if you have a low debt-to-equity ratio, you may be able to accelerate certain capital investment decisions.

Similarly, strong liquidity and profitability ratios may allow you to advance allowable operating expenses.

Both moves could defer taxes and allow you to keep control of funds that would otherwise have to be surrendered to government.

Farm Credit Canada has a breakdown of these ratios on a provincial basis at bit.ly/2pyd8OH.

Grant Diamond is a tax analyst in Saskatoon, SK., with FBC, a company that specializes in farm tax. Contact: fbc@fbc.ca or 800-265-1002.

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