Capital Turnover Ratio

[tweety]

Don't read the left side as direct. It takes what it was in 2008 and makes that 100%. As time moves right, what is happening to the ratio? Going up (good) or down (bad)?

Kinda like a yield chart, the check is 100 - doesn't mean it yielded 100 bu/acre. Typical turnover is 25%. so if you have 2 million in assets, it should generate at least 500k.

So if you choose to buy a 500,000 combine and a 350,000 seeder, instead of a 100,000 dollar combine and 50,000 seeder that could of done the job, your ratio is now 18.5%. 500k/2.7m*100.

Rented farms have higher asset ratios, but also higher operating expense ratios.

[farming101]

Don't read the left side as direct. It takes what it was in 2008 and makes that 100%. As time moves right, what is happening to the ratio? Going up (good) or down (bad)?

Kinda like a yield chart, the check is 100 - doesn't mean it yielded 100 bu/acre. Typical turnover is 25%. so if you have 2 million in assets, it should generate at least 500k.

Thanks. That makes a lot more sense to me now.

[rumrocks]

Don't read the left side as direct. It takes what it was in 2008 and makes that 100%. As time moves right, what is happening to the ratio? Going up (good) or down (bad)?

Kinda like a yield chart, the check is 100 - doesn't mean it yielded 100 bu/acre. Typical turnover is 25%. so if you have 2 million in assets, it should generate at least 500k.

I think your too high on the 25% unless you also have oil revenue.

[tweety]

I think your too high on the 25% unless you also have oil revenue.

Well it wasn't 5 years ago

And if it isn't today, time to look closer at what you're doing.

[AlbertaFarmer5]

This is likely a reasonable measure for most operations.
But, if an established farmer who doesn't buy any new land, or even possibly machinery, Could have constant income and be in great financial shape, but because the valuation of his ( or hers) land has gone up, the ratio goes down, even though, on paper, he has made even more than the beginning of the period due to the land appreciation.

Just not sure why this measure is the most relevant. It would be interesting to see the chart extended back another cycle or two.

[tweety]

....Could have constant income and be in great financial shape, but because the valuation of his ( or hers) land has gone up, the ratio goes down, even though, on paper, he has made even more than the beginning of the period due to the land appreciation.

...

Perfect for the farmer talking to Ritchie Bros. Not so much for one wanting build a business. Big difference. And that is exactly what the ratio means. How many $ in assets does it take to make a buck. Once that number gets below .15 or so, you risk losing it all especially since farming has considerable risk from all sides.

The chart is basically saying - watch that spending right now because the turnover ratio is low and trending lower. Some times you just have to look past the myriad of meaningless details you try to over analyze and look at the big picture.

[Hamloc]

Well it wasn't 5 years ago

And if it isn't today, time to look closer at what you're doing.

Tweety where I live 3 quarters of land puts you over $2 million in assets and 3 quarters of land are not going to produce $500000 in gross returns no matter what I grow. Does this mean I have to move to where land is cheaper? And where in western Canada would that be? According to my math land would have to be worth just over $1000 an acre for this to work and that is farming it with my equipment that the majority of is 10 years old and older.

[tweety]

Tweety where I live 3 quarters of land puts you over $2 million in assets and 3 quarters of land are not going to produce $500000 in gross returns no matter what I grow. Does this mean I have to move to where land is cheaper? And where in western Canada would that be? According to my math land would have to be worth just over $1000 an acre for this to work and that is farming it with my equipment that the majority of is 10 years old and older.

All it means is land is overpriced for the revenue it can generate. Eventually you may not be able to afford the taxes because the value is so high. How will the next generation pay you for it while farming it? Remember the ratio is about the ability of the assets to produce cash - that's it!!!!! What it is saying is you should sell that land and buy something with a much higher ratio.

The ratio doesn't try to define the philosophy of why you farm or should farm, or sell or..., only the ability to generate revenue based on capital asset value. And is an indicator of overall finances. It's a tool. Not the whole toolbox.

[bucket]

These things confuse me....so if I can still produce a good crop at reasonable prices and my land value goes down. ...the indicators are better?

Some have said I should be spending more on inputs but when I say the net return isn't there ...I get a blank look

[Hay Farmer]

GARS always says that spending more on the crop, on average, nets the farmer more according to their clients. I just don’t see how blanket spraying every acre, multiple times a year nets better in the end.