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You wake up in the morning, grab your phone and check three critical pieces of information: what's the weather, did my team win last night and how are my farm's key financial ratios today?
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According to Glenn Crook, Canada's top farm business managers know their financial ratios intimately.
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"Tracking a number of proven ratios, focusing on areas like cash flow, liquidity and leverage, can enable a farm business to achieve long-term sustainable growth," says Crook, RBC's Vice-President of Commercial Financial Services. He's based in western Manitoba, so agriculture is front and center.
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| Which ratio gives the best quick reading on financial health? Crook notes that different ratios have value for different operations. Twist his arm, however, and he'll point to the Debt Service Coverage Ratio as being especially revealing, particularly for crop producers. He summarizes the calculation.
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"Arriving at your Debt Service Coverage Ratio starts by taking your average EBITDA for the past three years," says Crook. "This is to account for variations in crop yields and commodity prices. You divide that adjusted EBITDA figure by all of the principal and interest payments due over the next year, both loans and leases, relating to land, buildings and equipment."
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- Glenn Crook,
Vice President, Commercial Financial Services, RBC.
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Crook explains that an average-performing Canadian crop producer would have $1.14 to $1.20 in earnings for every $1 in payments. In other words, they have a 14% to 20% buffer in addition to covering their payments. Top-performing farms could have $2 per $1 of payments, and the very top could have a 3-to-1 ratio.
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Crook recommends producers get a handle of their own Debt Service Coverage Ratio and track it regularly. Your RBC agriculture account manager can help you with this ratio and other financial insights.
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®/™Trademark(s) of Royal Bank of Canada. RBC and Royal Bank are registered trademarks of Royal Bank of Canada.
* NO PURCHASE NECESSARY. Contest is open to Agricultural Producers in Canada. Contest ends April 10, 2020 at 5:00 PM EDT. One prize available to be won (approx. value $50,000). Correct answer to skill-testing question required. Complete Contest Rules available at rbc.com/feastinthefield.
RBC Royal Bank | Royal Bank of Canada l RBC Waterpark Place, 88 Queens Quay West, 12th Floor, Toronto, ON, M5J 0B8, Canada | www.rbcroyalbank.com
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