To see whether your debt fits what the farm earns, work out three ratios from the balance sheet and last year’s figures, write them on one dated sheet, and act on the one that comes out weakest. The formula matters: the example farm in a Mississippi State guide scores 1.063 on term-debt coverage with the guide’s full formula, a weak result, and 1.22, stable, with a shorter one.
With debt over assets you see how much of what you own is already owed. With term-debt coverage, whether the year’s cash pays the year’s loan payments. With the current ratio, whether what turns into cash within a year covers what falls due within a year.
The three can disagree: the example farm below is stable on debt over assets at 0.50, almost out of room on coverage at 1.05, and stable on the current ratio at 1.20 until the crop in store is taken out.
When the banker asks how much you owe, or the input dealer asks before carrying you another season, the usual answer is the loan balance. Alone, that figure means little: $500,000 of debt is light on a farm worth three million and heavy on one worth six hundred thousand. In each ratio the debt is set against something else. The example farm used throughout is worth $1,000,000 and owes $500,000.
How do you work out the three ratios?
Six figures from the balance sheet and last year’s accounts feed the three ratios, and three choices along the way are yours. Value the machinery at what it would sell for used, not what it cost new, because the higher figure makes the assets look bigger and the debt ratio look better than it is.
For coverage, start from the year’s profit, add back depreciation, because it lowered profit on paper while no cash left the farm, and subtract what the family took out, because that money is no longer there to pay the bank. And the loan payments due this year count twice: in coverage, as what the year has to pay, and in current liabilities, as debt due within twelve months.
The bands used here come from a 2024 guide by Griffith and three colleagues at Mississippi State University Extension, the farm advisory service of that US university, built on the measures of the Farm Financial Standards Council.
On the example farm the land is worth 650,000, the machinery 120,000, the livestock 50,000, and 180,000 is cash, crop to sell and money owed to the farm, which is 1,000,000 of assets. It owes 350,000 on loans due in later years and 150,000 due within the year, which is 500,000. Debt over assets is total farm liabilities divided by total farm assets: 500,000 over 1,000,000 is 0.50, so half of what the farm owns is owed. The guide puts below thirty percent as a strong position and above sixty percent as weak, with the middle stable, so fifty percent is stable.
Cash available for debt payments is 90,000 of profit plus 40,000 of depreciation less the 25,000 the family took out, which is 105,000. This year’s loan payments are 80,000 of principal plus 20,000 of interest, which is 100,000. Coverage is 105,000 over 100,000, or 1.05: the farm earned 1.05 for every 1 it had to pay. The guide puts below 1.10 as weak and above 1.50 as strong, so the farm covers its payments with almost nothing to spare. A value under one does not necessarily mean the business cannot repay the debt, only that the operation’s cash did not cover it and the rest came from somewhere else.
Current assets are 20,000 of cash, 100,000 of crop to sell and 60,000 owed to the farm, which is 180,000, already counted inside the 1,000,000. Current liabilities are the 80,000 of principal and 20,000 of interest due this year, 30,000 of operating credit and 20,000 owed to suppliers, which is 150,000. The current ratio is 180,000 over 150,000, or 1.20, and the guide puts below 1.0 as weak and above 2.0 as strong, so 1.20 is stable.
How much can a shorter coverage formula change the result?
The coverage worked out for the example farm uses three terms, short enough to work out from the figures many farms keep. The full formula in the Mississippi guide has seven: income from operations, plus or minus miscellaneous items, plus off-farm income, plus depreciation, less income tax, less total owner withdrawals, less the interest on short-term operating credit, all over the principal and interest on term debt. The guide runs its own example farm through all seven and gets 1.063, which its table marks weak.
Run that same farm through the three-term version, using the guide’s figures: 175,314 of profit plus 80,710 of depreciation less 68,420 of withdrawals, over the same 153,741 of payments, gives 1.22, stable. The shorter formula moved the farm up a band without a single figure on the farm changing.
Rurivia calculation from the example farm figures in the Mississippi State guide, using the three-term coverage formula (Rurivia publishes this library).
That is why the guide warns that when you compare against a benchmark you should ensure the farm value is calculated the same way as the benchmark value, otherwise you may be incorrectly convinced that your farm is struggling or succeeding. The three-term version is still worth using, because the seven-term one needs a full income statement and a cash flow statement that many farms do not prepare.
What is not worth doing is comparing the result with the 1.10 line without writing down which version you used. Income tax and the interest on operating credit, both missing from the short version, pull the number down. Off-farm income pushes it up, and where someone in the family draws a paycheck in town, that term alone can move the farm from one band to another.
Why does a farm with plenty of assets still run short of cash?
Solvency is owning enough to back what you owe, even when what you own is not cash. Liquidity is having the cash on the day a payment falls due. A review of business financial analysis in the Revista Venezolana de Gerencia, written about firms in general rather than farms, puts it in one line: a business with liquidity is considered solvent, but a solvent business does not always have liquidity.
On a farm, most of what backs the debt is land and machinery. The Mississippi guide defines liquidity as meeting short-term bills without making long-term changes, such as unexpectedly selling land or equipment or getting a new loan, and that is the trap: a farm short of cash and rich in assets makes the payment by selling what it needs to produce. A tractor sold in March to make a payment settles this year and costs next year, and you will not see that cost in any ratio until next year’s figures come in.
What does debt over assets leave out?
In debt over assets every dollar of debt weighs the same, but two things decide how hard a debt presses: when it falls due, and who is owed. On the example farm, 150,000 of the 500,000 falls due within twelve months, which is thirty percent of the debt in one year. A farm at fifty percent debt over assets with a tenth of it due this year and one with half of it due this year read the same on that ratio and are in different positions. When the short-term share is heavy, the first question for the lender is whether part of it can move to a longer term at a cost worth paying.
Who is owed matters too. In a peer-reviewed study of fruit growers in northeast Brazil, farmers were 8.03 times more likely to default on public-sector debt than on private-sector debt, because private-sector debts are usually short-term, which makes the farmer more committed to paying them, at the risk of stopping the farm’s production. Credit is organized differently from one country to the next, but on many farms some creditors can wait and others can stop the next crop.
What can a current ratio of 1.20 hide?
A ratio has no size in it. Two farms at 1.20, one with 180,000 against 150,000 and one with 18,000 against 15,000, read the same, but the second has 3,000 of room and one late payment uses it up. The Mississippi guide also lists working capital, current farm assets less current farm liabilities, which on the example farm is 30,000. Write it beside the ratio, because it is money you can actually spend.
The ratio also hides what the current assets are made of. On the example farm, 100,000 of the 180,000 is crop in the bin. Take it out and the current ratio is 80,000 over 150,000, or 0.53: the farm that reads stable at 1.20 covers only about half of what falls due this year unless the crop sells, and at the price it was counted at.
Where does the sixty percent cut-off come from, and what does owning the land do to it?
The guide says in the same sentence that a debt-to-asset ratio above sixty percent signals a weak condition, though experts disagree on this threshold. What counts as weak often depends on the type of enterprise, the stage of the business, and the level of land ownership. Land ownership moves the number more than anything a manager does in a year, because operating on rented land tends to lead to high debt-to-asset ratios, since the operation does not have land as an asset.
Put two farms side by side. Both work the same 650,000 of land, both hold the same 350,000 in machinery, livestock, crop in store and cash, and both owe the same 250,000 on machinery and operating credit. The one that owns its land has 1,000,000 of assets and comes out at twenty-five percent, strong. The one that rents the same ground has 350,000 of assets and comes out at seventy-one percent, weak. Same debt, same machinery, same crop, opposite ends of the scale, and the only difference is whose name is on the deed. Crossing that line tells you nothing about how either farm is run.
| Ratio | Strong | Stable | Weak |
|---|---|---|---|
| Debt over assets | < 30% | 30% to 60% | > 60% |
| Term-debt coverage | > 1.50 | 1.10 to 1.50 | < 1.10 |
| Current ratio | > 2.0 | 1.0 to 2.0 | < 1.0 |
One year’s ratios are a snapshot. The guide asks you to pay special attention to trends in the financial ratio analysis; these can indicate future financial stress to plan for, and to see a trend you need last year’s sheet beside this one.
What do you do about the weakest of the three?
The weakest ratio, the one in the weak band or closest to it, is where the pressure sits, and each of the three calls for a different response. If debt over assets is the weakest, the debt is too big for what the farm owns, and the responses are slow ones: sell what is not producing, stop adding debt, and give it years.
If coverage is the weakest, the debt may be a fine size and the year is not earning enough to pay it. The guide lists the levers: coverage can be improved by decreasing owner withdrawals or increasing off-farm income, and by increasing sales volume and selling price. None of them touches the debt. Another article in this library, on how much each activity must sell to break even, helps you find which part of the farm is falling short.
If the current ratio is the weakest, the debt and the year’s earnings may both be fine and too much falls due at once. The response is to move part of this year’s payments into later years, where the cost of doing so pays. The mistake to avoid is treating every tight year as a debt problem and paying down term loans with cash the season needed, which improves a ratio that was not the problem and worsens the one that was.
Where to start
An hour with the last balance sheet, the loan statements and a figure for what the family took out, before the next financing decision is on the table.
The three ratios on a dated sheet are not a grade. They are three questions about the same debt, and the one that answers worst is where you act. The line no calculator gives you is the one you write yourself: which ratio is weakest, why, and what you decided not to do this year because of it. With that line, next year you, a partner or an adviser can check whether the pressure really was the size of the debt, the year’s earnings or the timing.
The debt and coverage calculator on this site does the three divisions from your own figures. Reading the debt is one part of running the farm as a business, and the guide to farm management covers the rest.