• Debt Coverage Ratio - (Annual Net Income + Amortization/Depreciation + Interest Expense + other non-cash and discretionary items) / (Principal Repayment + Interest payments + Lease payments)
This ratio indicates whether or not a business is generating enough cash to pay its debts. In family farming operations, some lenders will deduct family living from the total cash income with the assumption that the allocation is taken before debt payments are made. Put simply: you have to feed yourself. Any value over 1 for this ratio is good and indicates that the farm can cover its debt payments. Most lenders prefer a ratio of at least 1.
• Blended Capital Debt Term- Total Average Capital Debt (net of deferred tax and pension plan obligations) / (Annual Capital Debt Servicing Requirement - Total Interest Expense)
This ratio indicates how long it would take to pay off all debt based on the annual debt service amounts. This is important because it shows how long it would take a business to pay off all debts at their current rate of annual payments. A good value can vary based on the structure/type of business. Asset heavy businesses will usually have longer blended capital debt terms versus service businesses. It is ideal for farming operations to be between 7 and 12 depending on the current positions of the business.
• 10 yr Blended Excess- (EBITDA* - Total Interest Expense) - (Closing Capital Debt (net of deferred tax and pension plans obligations) / 10)
This shows how much trend cash excess a business will have if all of their debt was scheduled over 10 years. This can show increased profitability if a businesses Blended Capital Debt Term is under 10 years. This measurement can show a businesses profitability should their debt structure change.
*EBITDA- Earnings before interest, taxes, depreciation and appreciation