Capital Turnover Ratio

[tweety]

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

Specifically the indicator for Capital Turnover Ratio - yes. Your ability as a business to produce x dollars with x dollars of assets goes up and looks better.

Spend some time on the web looking exactly what the ratio means on the web - not only for Ag but other businesses. The ratio too high isn't good either. As well as the other indicators. Here is a really good site explaining more of them - we all hate doing this stuff but it is important. Used together, they paint an accurate picture. Turnover is just one of the useful tools.

https://www.extension.iastate.edu/agdm/wholefarm/html/c3-55.html

[Bowerpower]

Good topic. Well established farms will have a terrible turnover rat. would it not be better use the land value that you bought the land for to benchmark the ratio?

[DaneG]

http://aei.ag/2020/02/16/farm-debt-and-working-capital-continue-to-deteriorate/?utm_source=Agricultural+Economic+Insights&utm_cam paign=0f9a60ed63-EMAIL_CAMPAIGN_2018_10_15_02_36_COPY_01&utm_medium =email&utm_term=0_6f5fb3d56c-0f9a60ed63-451362589 http://aei.ag/2020/02/16/farm-debt-and-working-capital-continue-to-deteriorate/?utm_source=Agricultural+Economic+Insights&utm_cam paign=0f9a60ed63-EMAIL_CAMPAIGN_2018_10_15_02_36_COPY_01&utm_medium =email&utm_term=0_6f5fb3d56c-0f9a60ed63-451362589

[tweety]

Good topic. Well established farms will have a terrible turnover rat. would it not be better use the land value that you bought the land for to benchmark the ratio?

Good question, but when evaluating a business, you would have to use today's. But your working capital assuming you owned everything would look great. Also working capital to Gross.

If you rent all your land, the ratio looks great, but then working capital is substantially less.

[LEP]

Good question, but when evaluating a business, you would have to use today's. But your working capital assuming you owned everything would look great. Also working capital to Gross.

If you rent all your land, the ratio looks great, but then working capital is substantially less.

Land values dont even come into play when calculating working capital.

Working Capital is current assets minus current liabilities.

[Bowerpower]

Land values dont even come into play when calculating working capital.

Working Capital is current assets minus current liabilities.

True but if you don’t rent anything and own land free and clear more cash flow available.
I’m also thinking the ratio of debt capital turnover would be the one that would be the best indicator. It’s how an established farm can justify overspending on some land. The land itself won’t pay for itself but spread across the whole operation it can handle it. Might not make financial sense to do it but it does happen.

[bobofthenorth]

I've looked at a lot of farm financial statements over the years. Working capital is the only reliable predictor of future success. All the other fancy ratios that bankers and consultants like to trot out may work in other industries but aren't real useful in ag. That capital turnover ratio is a great example - maybe its useful in industries with stable capital values but most (perhaps all) of the change showing on that graph was driven by rapidly rising land values. In that sense its an excellent trailing indicator. IOW it predicts what happened 10 years ago just fine.

Preserve your working capital at all costs. You only need it when you need it and then you'll really need it.

[LEP]

I've looked at a lot of farm financial statements over the years. Working capital is the only reliable predictor of future success. All the other fancy ratios that bankers and consultants like to trot out may work in other industries but aren't real useful in ag. That capital turnover ratio is a great example - maybe its useful in industries with stable capital values but most (perhaps all) of the change showing on that graph was driven by rapidly rising land values. In that sense its an excellent trailing indicator. IOW it predicts what happened 10 years ago just fine.

Preserve your working capital at all costs. You only need it when you need it and then you'll really need it.

You are right working capital is huge. Bowerpower don’t assume if you rent land that your wc is weaker. How many people that own their entire farm are mortgage debt free? Current liabilities in the calculation includes one year’s payments on debt. Also generally those that have less debt and/or less shiny equipment generally have stronger wc.

[tweety]

Land values dont even come into play when calculating working capital.

Working Capital is current assets minus current liabilities.

Never said it did.

[farming101]

Good question, but when evaluating a business, you would have to use today's. But your working capital assuming you owned everything would look great. Also working capital to Gross.

If you rent all your land, the ratio looks great, but then working capital is substantially less.

So, if you don't rent your land your working capital is higher? Is that what is meant by your last statement?

[LEP]

Good question, but when evaluating a business, you would have to use today's. But your working capital assuming you owned everything would look great. Also working capital to Gross.

If you rent all your land, the ratio looks great, but then working capital is substantially less.

You talk owned vs rented land and made an assumption about working capital which in my experience doesn't necessarily follow through. Profitability has everything to do with wc.

[tweety]

You talk owned vs rented land and made an assumption about working capital which in my experience doesn't necessarily follow through. Profitability has everything to do with wc.

The ratio does look better if you rent land. Your asset value is low and the gross is the same as if you owned everything. So with the renter, the ratio looks impressive (the denominator is smaller). It's not an assumption, it's math.

[LEP]

The ratio does look better if you rent land. Your asset value is low and the gross is the same as if you owned everything. So with the renter, the ratio looks impressive (the denominator is smaller). It's not an assumption, it's math.

You are referring to the Capital turnover ratio and I was talking about wc (working capital). Two different things.

[tweety]

You are referring to the Capital turnover ratio and I was talking about wc (working capital). Two different things.

Yes of course, trying to stay on topic.

[LEP]

Good question, but when evaluating a business, you would have to use today's. But your working capital assuming you owned everything would look great. Also working capital to Gross.

If you rent all your land, the ratio looks great, but then working capital is substantially less.

Your post was the first mention of wc in this thread.

You made some wild assumptions that if you rent land your wc is substantially less.

I know farmers with paid for farms that are struggling to make a living because of marginal profitability. As I stated before wc is the best indication of profitability.

Just pointing that out.