For example, a coverage ratio of 200 shows that the firm generated twice the amount of cash needed to make debt payments. The capital replacement margin shows how much cash is available above the amount needed to pay operating expenses, taxes, family living costs, and scheduled debt payments. The high profit farms were in a strong position to service debt commitments and finance growth from cash flows during 1996. It appears many of the 37 farms in the low income group were unable to make the all the short term debt payments they committed themselves to at the start of 1996. They also had negative capital replacement margins.
Efficiency ratios measure the degree of effectiveness in the use of land, labor and capital.
The asset turnover ratio measures how efficiently assets are being used to generate revenue. A high number says that less capital is needed to generate a dollar of sales, while a low number indicates farms require more capital to raise a dollar of revenue. In most cases, a business is more profitable if it can generate more revenue from fewer dollars invested in machinery, inventory, land and other assets. The other efficiency ratios are a comparison of expenses, depreciation or interest expense to revenue. Lower expense ratios should result in more residual income to the business.