Capital Turnover Ratio

[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.

[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.