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Evaluating Farm Financial Performance - Case Farm No-Till Drill Purchase

This case study evaluates the financial impact of purchasing a no-till drill for a farm operation, including its effect on ratios such as current ratio, debt-to-asset ratio, rate of return on farm assets, asset turnover ratio, and term debt coverage ratio. The analysis shows that the purchase may not be a wise decision due to deteriorating financial ratios and profitability issues.

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Evaluating Farm Financial Performance - Case Farm No-Till Drill Purchase

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  1. Evaluating Farm Financial Performance - Case Farm No-Till Drill Purchase Rodney Jones Rodney.jones@okstate.edu 405 744 6173

  2. Purchase No-Till Drill Rather Than Rent • Very nice drill, costs $56,500.00 • Sounds like a great idea, after all they can get 7 year financing from FSA at 2.25% interest. • Total payments approximately $9,024.00 per year • They save $2,250.00 in rental expenses, but they do expect repairs to increase by about $900.00 per year

  3. Impact On Financial Performance and Position • Current Ratio • (current farm assets) / (current farm liabilities)

  4. Impact On Financial Performance and Position • Debt-to-Asset Ratio • (total farm liabilities) / (total farm assets)

  5. Impact On Financial Performance and Position • Rate of Return on Farm Assets • {(net farm income from operations) + (interest expense) - (opportunity cost for unpaid labor)} / {total farm assets}

  6. Impact On Financial Performance and Position • Asset Turnover Ratio • {gross farm revenue} / {total farm assets}

  7. Impact On Financial Performance and Position • Term Debt (and Capital Lease) Coverage Ratio • (Net Farm Income from Operations + Non-farm Income + Depreciation Expense + Interest on Term Debt (and Capital Leases) – Taxes Paid – Family Withdrawals) / (Principle and Interest Payments to Be made on All Term Debt Next Year)

  8. Purchase Drill Rather Than Rent: Wisdom Of Decision • For the current size of the case farm operation, the $56,500.00 drill purchase does not look like a wise alternative • Feasibility issues • Current Ratio and Debt Coverage Ratios deteriorate significantly • Hard to make payments • Payback Period calculation (from Financing a Farm section) is about 42 years

  9. Purchase Drill Rather Than Rent: Wisdom Of Decision • For the current size of the case farm operation, the $56,500.00 drill purchase does not look like a wise alternative • Profitability issues • ROA (and ROE) deteriorate significantly • NPV (from Financing a Farm section) = $-26452.00 • IRR (from Financing a Farm section) = -10%

  10. Not Profitable, And Very Hard To Make Payments • Good thing we did some analysis and thought about this decision carefully before jumping in! • What might improve the profitability and feasibility considerations? • Much smaller or modestly priced alternative • More usage, etc. • Plan to take on custom work or have some other plan to better utilize the equipment

  11. Summary • Carefully evaluate major changes by predicting what will happen to basic financial position and performance measures • Liquidity • Solvency • Profitability • Financial Efficiency • Debt Repayment Ability

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