farmcfo.com.au/tools/bank-ratio-check · 0412 759 847Bank review ratio check
Enter figures from last year's financial statements and loan statements. The check works out interest cover, debt service cover, debt to assets, equity, the current ratio and debt per DSE or per sow, and explains how a credit team reads each one. It doesn't give a pass or fail, because every lender sets its own limits.
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| Measure | Your figure | How a credit team reads it |
|---|---|---|
| EBITDA | $420,000 | Earnings before interest, tax, depreciation and drawings. The cash the farm makes from running stock, before the bank and the family are paid. |
| EBIT | $360,000 | EBITDA less depreciation. Depreciation is the cost of wearing out plant and improvements, and a credit team takes it off to see the farm's true earnings. |
| Interest cover | 3.79 times | How many times EBIT covers the interest bill. Lenders look at the level and the trend over three years, and some set a minimum as a covenant in the facility letter. |
| Debt service cover | 1.44 times | Cash left after drawings and tax, divided by interest and principal together. Below 1 means the year's earnings didn't meet the repayments, and the gap came from savings, the overdraft or new debt. |
| Debt to assets | 23.1% | Total debt as a share of assets at market value. Close to the loan to value ratio the bank works out on its security, though the bank uses its own valuations. |
| Equity | 76.9% | The share of the assets you own outright. It is the cushion if land values fall, and lenders watch how it moves year to year. |
| Current ratio | 1.50 to 1 | Current assets (cash, stock for sale, grain, debtors) against debts due within a year. Below 1 suggests the business relies on the overdraft for working capital. |
| Debt per DSE | $167 | Total debt spread over the stock run. Handy for comparing with similar farms and with what each DSE earns in a year. |
| EBIT margin | 30.0% | EBIT as a share of farm income. Shows how much of every dollar of sales is left after running costs. |
| Return on assets | 5.5% | EBIT as a share of total assets. Farms with a lot of land often show a low return here even when they run well, so read it with the cash ratios above. |
There is no pass mark here. Each lender sets its own limits, and any that apply to you are in your facility letter.
The example is an invented mixed beef and sheep business running 9,000 DSE, with made-up figures.
The working
- EBITDA = farm income - operating costs (before interest, depreciation and drawings).
- EBIT = EBITDA - depreciation.
- Interest cover = EBIT / interest paid.
- Debt service cover = (EBITDA - drawings - tax paid) / (interest + principal repayments).
- Debt to assets = total debt / total assets at market value. Equity = (total assets - total debt) / total assets.
- Current ratio = current assets / current liabilities.
- Debt per DSE or per sow = total debt / DSE run or sows.
General information only. This calculator doesn't take account of your circumstances and isn't tax, credit or financial product advice. Check figures with your accountant before relying on them.
Want the numbers done for you?
Farm CFO builds the budget, the monthly cashflow and the tests your lender will run, at a fixed price.
Read next: What the bank looks at in a farm review
Questions
What interest cover does a bank want?
Each lender sets its own limits in its credit policy and in your facility letter, and they vary with the type of farm and the security. Check your facility letter for any financial covenants. The check shows the number and how it moved, so you can talk to your lender with the figure in hand.
Which year's figures should I use?
Use the last full financial year from your accountant's statements. Lenders often look at a three-year average as well, so it's worth running the check for each of the last three years.
Should drawings come out before the debt service cover?
Yes. Lenders want to know the business can pay its loans after the family has been paid, so drawings and any tax paid come out before the cover is worked out.