**Rate
of Return on Farm Assets (ROA)**

__Computation__: Net
farm income from operations plus farm interest payments less unpaid labor charge
for operator and family divided by average total farm assets (fair market value).

__Interpretation__: This
ratio measures the pre tax rate of return on farm assets and can be used to
measure the effective utilization of assets on the profitability of the business.

**Rate of Return on Farm
Equity (ROE)**

__Computation__: Net
farm income from operations less unpaid labor charge for operator and family
divided by average farm equity (fair market value).

__Interpretation__:
This ratio relates the pre tax returns to the level of equity capital employed
in the farm business. Caution should be used when interpreting this ratio. A
high ratio, normally associated with a profitable farm, may indicate an under
capitalized farm while a low ratio, which normally indicates an inefficient
or unprofitable farm, may indicate a more conservative, high equity farm. This
measure, like many of the other ratios, should be used in conjunction with other
ratios when analyzing a farm business.

**Profit Margin Ratio
**

__Computation__: Net
farm income from operations plus farm interest payments less unpaid operator
and family labor divided by value of farm production.

__Interpretation__:
This ratio is an efficiency measure that shows the return to capital and management
as a percent of adjusted gross production (VFP).

**LIQUIDITY
RATIOS**

**Current Ratio**

__Computation__: Current
assets divided by current liabilities.

__Interpretation__: This ratio is a measure of the farmers' ability to meet short run obligations
without disrupting the ongoing business. The higher the ratio, the more "cushion" the farmer has in meeting his or her current obligations. This ratio may be
limited by the quality of the assets and/or the ability to quickly convert the
specific current assets into cash.

**Current plus Intermediate
Ratio**

__Computation__: Current
plus intermediate assets divided by current plus intermediate liabilities.

__Interpretation__: This ratio measures farmers' utilization of short and intermediate term assets
as reserves relative to debt claims against these assets. Many contractually "short term" notes are actually longer term in the expected repayment
period. Thus, the classification between short and intermediate may be somewhat
arbitrary. Also, many farmers obtain most of their short and intermediate term
financing from the same lender. This ratio supplies beneficial information on
collateral availability and secondary repayment capacity for both the borrower
and the lender.

**Working
Capital to Value of Farm Production**

__Computation__: Working
capital (Current assets - Current liabilities) divided by value of farm production
(VFP)

__Interpretation:__
Working capital (current assets - current liabilities) is a measure of the amount
of funds available to purchase inputs after the sale of current assets and the
payment of all current liabilities. Working capital compared to VFP relates
the amount of working capital to the size of the operation. The higher the ratio,
the more liquidity the farm operation has to meet current obligations. The ratio
varies across farm types and other farmer characteristics.

**Debt Servicing Ratio**

__Computation__: Farm
interest expense plus annual scheduled intermediate and long term principal
payments divided by value of farm production.

__Interpretation__: The
proportion of value of farm production that must be used to meet financing costs
and debt obligations.

**SOLVENCY
AND COVERAGE RATIOS**

**Debt to Equity (leverage)**

__Computation__: Total
liabilities divided by net worth.

__Interpretation__:
This ratio expresses the extent to which debt capital is combined with equity
capital. It shows the inherent risk to creditors, but at the same time may reveal
the farm's potential for future growth if operating earnings exceed the fixed
commitments associated with debt.

__Computation__: Total
debt divided by total assets (fair market value).

__Interpretation__: This
ratio is another way of expressing the risk exposure of the farm business

(debt/(debt+equity)).

**Interest Coverage**

__Computation__: Net
farm income from operations plus interest payments divided by interest expense.

__Interpretation__: This
ratio is a measure of a farm's ability to meet interest payments. As the value
of the interest coverage ratio increases, the farmer's exposure to financial
risk decreases. The interest coverage ratio is analogous to an asset to debt
ratio taken from the balance sheet. The coverage ratio relates asset returns
to debt obligations for a period of time while the asset to debt ratio relates
total assets to total debt at a point in time.

REPAYMENT CAPACITY

**Term
Debt and Capital Lease Ratio**

__Computation__: (Net
farm income from operations plus non-farm income plus depreciation plus interest
on term debt plus interest on capital leases less income taxes less family living
withdrawals) divided by annual scheduled principal and interest payments on
term debt and capital leases

__Interpretation__:
The measure provides a measure of the ability of the borrower to cover all term
debt and capital lease payments. The greater the ratio, the greater the margin
to meet all term debt and capital lease payments.

**FINANCIAL EFFICIENCY RATIOS**

**Asset Turnover**

__Computation__: Value
of farm production divided by total average farm assets (fair market value).

__Interpretation__:
This is a general measure of the farm's efficiency of asset utilization. The
higher the ratio, the more effectively assets are used to generate revenue.
This ratio typically shows wide variations across farm types.

**Operating Expense Ratio**

__Computation__: Total
operating expenses less depreciation divided by value of farm production.

__Interpretation__:
The relationship of operating expense to value of farm production. Measures
the farm's efficiency of operating expense management. The measure typically
varies by farm type.

**Depreciation Expense Ratio**

__Computation__: Total
farm depreciation divided by value of farm production.

__Interpretation__:
The relationship of depreciation expense to value of farm production. The measure
typically varies by farm type and will vary from year to year, especially when
accelerated tax depreciation methods are used to estimate depreciation.

**Interest Expense Ratio**

__Computation__: Total
farm interest expense divided by value of farm production.

__Interpretation__: The
relationship of interest expense to value of farm production. Often used as
a measure of the financial risk of the farm operation.

**NFI from Operations
Ratio**

__Computation__: Net
farm income from operations divided by value of farm production.

__Interpretation__:
A pre-tax efficiency measure that measures the return to labor, capital and
management as a percent of value of farm production.