Financial Ratios Part 13 of 21: Capital Debt Repayment Margin

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 Margin 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 Margin simply measures the dollars that  remain after all of the operating expenses, taxes, family living costs, and debt payments have been paid. This is the true cash amount that is left after paying all of the bills that a business/farm and the owner has. This left over amount of money is what is available to purchase new/additional assets. 

The following equation(s) will determine your Capital Debt Repayment Margin:

Capital Debt Repayment Margin = Capital Debt Repayment Capacity – Scheduled Principal & Interest on term loans and leases.

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

If you have any further question 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 12: Operating profit 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  

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