Financial Ratios Part 12 of 21: Capital Debt Repayment Capacity

How much has been generated to cover business or farm debt and capital replacement costs?

Financial Ratios and indicators can assist in determining the health of a business. There is a minimum of 21 different ratios and indicators that can be looked at by many financial institutions. You cannot look at a single ratio and determine the overall health of a business or farming operation. Multiple ratios and indicators must be used along with other information to determine the total and overall health of a farming operation and business. This series of articles will look at 21 commonly used ratios and indicators.

Capital Debt Repayment Capacity is a measurement of Repayment Capacity and is determined based on information derived from a business’ or farm operations Cash-Flow Statement. The term Repayment Capacity refers to the borrowers ability to repay term debt on time. Typically Repayment capacity is not considered a measurement of a farm or business’ performance because Repayment Capacity also uses a borrowers non-business and/or non-farm sources of income. The Capital Debt Repayment Capacity simply measures the amount of funds generated from the business/Farm and non-farm/business sources that can be used to pay debt on time and to cover the expenses to replace capital items.

The following equation will determine your Capital Debt Repayment Capacity:

Capital Debt Repayment Capacity = Net Income + Depreciation Expense + Non-Farm/Business Income – Family Living Expenses & Income Taxes + Interest Expense on Term Loans

Capital Debt Repayment Capacity is measured in a dollar value. This value represents the amount that can be used to repay debt on time and to replace capital items.

If you have any further questions please feel free to contact your local Farm Management Educator or the author.

Information for this article has been modified and gathered using material created by the University of Minnesota Center for Farm Financial Management (CFFM).   

You can read the other articles in this series:
Part 1: The current ratio
Part 2: Working capital.
Part 3: Working capital to gross revenues
Part 4: Debt-to-asset ratio
Part 5: Equity-to-asset ratio
Part 6: Debt-to-equity ratio
Part 7: Net farm income
Part 8: Rate of return on assets
Part 9: Rate of return
Part 10: Operating profit margin
Part 11: The EBITDA measurement of profitability
Part 13: Capital debt repayment margin
Part 14: Replacement margin
Part 15: Term debt coverage
Part 16: Replacement margin coverage ratio
Part 17: Asset turnover rate
Part 18: Operating-expense ratio
Part 19: Depreciation-expense ratio
Part 20: Interest-expense ratio
Part 21: Net income ratio