Liquidity Ratios
Liquidity refers to the firm's capacity to generate sufficient
cash to meet its financial commitments as they become due. Whenever
a firm cannot satisfy these financial claims, it is bankrupt even
though the firm might be profitable and have a favorable net worth.
The part of net worth comprised of claims on fixed assets is inaccessible
without partially or wholly liquidating the firm.
Farm business debt service coverage: (Net cash farm income
+ interest)/(Interest + principal payments)—Measures the
farm business's ability to repay both interest (excluding operator
dwellings) and principal.
Debt servicing: (Interest + principal payments)/(Gross
cash farm income)—Measures the share of the farm business's
gross income needed to service debt.
Times interest: (Net farm income before interest and
taxes)/(Interest payments)—Measures the farm business' ability
to service debt (includes operator dwellings) out of net income
earned.
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