Justification
Historically, analysts and policy-makers have relied heavily on a solvency measure,
often the debt-to-asset ratio or percentage, to report the financial condition of the
agricultural sector. That measure is often calculated using data reported on the sector
balance sheet, with assets valued using market values. Although solvency is one of the
criteria recommended by the Farm Financial Standards Council (FFSC) to evaluate
financial condition and performance, it is only one of five. The other four criteria
include liquidity, profitability, financial efficiency, and repayment capacity (FFSC,
2010). Solvency measures provide insight into the capacity of the sector to handle risk
and absorb future losses, but reveal nothing about the profitability and repayment
capacity of the sector. An indirect measure of both criteria would be the retained
AFR
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Downloaded by SRINAKHARINWIROT UNIVERSITY At 22:00 21 January 2016 (PT)earnings reported in a SOE. A 10 percent debt-to-asset percentage for the sector would
be an indication of realized financial strength if the owner equity reported on the sector
balance sheet was the result of retained earnings; whereas, it would be viewed with
more caution by those who experienced the 1970s and 1980s when it is the result of a
dramatic increase in valuation equity derived from double-digit percentage increases
in farm real estate prices