# Financial Performance: Measurement and Analysis

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4 PURDUE AGRICULTURAL ECONOMICS REPORT 17 beginning and ending dates, respectively, for a farmer s taxable year. For example, March 1 balance sheets would produce unreliable measures when combined with a calendar year Schedule F. Worksheet 1 identifies where specifically to look for the necessary information in the federal income tax return and what type of information to input from beginning and ending year balance sheets. Worksheet 2 guides you through a series of specific computations using the data from Worksheet 1. The computations required by Worksheet 2 produce values for the key financial measures outlined in Table 1. Once these measures have been computed, you can transfer the high-profit benchmarks from Table 1 to the benchmark column on Worksheet 2. Finally, you should compare the values for each of the financial measures to the corresponding benchmark in order to assess the financial performance and financial position of your farm. How do you measure up? Indications of financial strength will depend on the measure being considered. In some cases, a measure with a value greater than the benchmark will indicate financial strength. In other cases, a value smaller than the benchmark will indicate financial strength. Table 2 indicates which measures fall into which categories. At a very minimum, your farm needs to perform better than the average of farms that are similar to your own. The average benchmark provides a reference point for recognizing better-than-average performance. More likely than not, that level of performance will not be good enough long term, and so producers should benchmark against the top Worksheet 2. Financial Performance Measures Measure Your Farm Bench mark Strong(+)/Weak(-) 3 Profitability (Circle one) 1. Return on Assets % % + - [(z+x-v) q] x Return on Equity % % + - [(z-v) s] x Operating Profit Margin % % + - [(z+x-v) w] x 100 Liquidity 4. Current Ratio + - [m n] Solvency 5. Debt-to-Asset Ratio % % + - [r q] x 100 Financial Efficiency 6. Asset Turnover Ratio % % + - [w q] x Revenue per Full-Time Laborer + - [w u] 8. Operating Expense Ratio % % + - [(y-c) w] x Depreciation Expense Ratio % % + - [c w] x Interest Expense Ratio % % + - [x w] x Net Farm Income Ratio % % + - [z w] x A strong indicator for items 1, 2, 3, 4, 6, 7, and 11 would be a value for your farm that is greater than the benchmark. A strong indicator for items 5, 8, 9, and 10 would be a value for your farm that is less than the benchmark.

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