Measuring Farm Profitability

Abstract

Farm profitability can be measuring using earnings before interest, taxes, and amortization (EBITA), net farm income, operating profit margin ratio, rate of return on farm assets, and rate of return on farm equity. EBITA, as the name implies, is used to cover interest, taxes, and amortization, which includes depreciation on machinery and buildings. Net farm income is used for family living, to repay debt, and to purchase new and used assets. Though these two measures are extremely important to monitor over time on a particular farm, due to the fact that these measures depend on farm size, it seldom makes sense to compare EBITA and net farm income with other farms. Because they take into account farm size, the profitability measures other than EBITA and net farm income are more useful when making comparisons among farms. The rates of return on assets and equity are extremely useful when comparing farm investments with other investments. However, these two measures are sensitive to how farms asset are valued on the balance sheet. For this reason, the operating profit margin is more conducive for benchmarking profitability among farms. In this article, a case farm in west central Indiana is used to examine operating profit margin benchmarks.