Financial Ratios Part 19 of 21: Depreciation-Expense ratio

How quickly does a business or farm go through its capital assets?

Financial ratios & 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.

Depreciation-Expense Ratio is a measurement of Financial Efficiency and is determined based on information derived from a business’ or farm operations financial statements specifically using the financials that determine gross farm income. The term Financial Efficiency refers to how effectively a business or farm is able to generate income. Looking at the Financial Efficiency of a business or farm assists the owner(s) in determining how the various aspects of the business such as production, financing, marketing, etc. effects the gross income of the business.

Depreciation-Expense Ratio is measured as a percentage, the lower the percentage the stronger the ratio. The Depreciation-Expense Ratio intimates the amount of income that is required to maintain the capital being used by the business or farm. The lower the percentages the better, a business or farm should be no higher than 5% to be considered strong. Any percentage higher than 15% means that the business or farm may be wearing out its capital to quickly.

When you take the following financial ratios and add them up they should total 100%:

  • Operating-Expense Ratio
  • Depreciation-Expense Ratio
  • Interest-Expense Ratio
  • Net Income Ratio

The following equation(s) will determine your Depreciation-Expense Ratio:

Depreciation-Expense Ratio = Depreciation / Gross Income

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 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 20: Interest-expense ratio
Part 21: Net income ratio

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