Return on Farm Assets and Equity

• profitability
• ratios
• financial management

What is return on farm assets?

Return on assets, often shortened to ROA, measures how much the whole operation earns compared with the total value of what it uses. It starts with farm income, adjusts for the value of unpaid family labor and for interest paid, and then divides by average total assets.

Because it looks at all assets regardless of who financed them, ROA shows how well the business itself performs before you consider the debt behind it.

Many extension worksheets are free to download, and some farm business associations offer one-on-one help with the calculation.

What is return on farm equity?

Return on equity, or ROE, looks only at your owned share. It takes net farm income after interest, adjusts for unpaid family labor, and divides by average owner equity. If ROE is higher than ROA, borrowed money is helping. If it is lower, debt costs are eating into what the assets earn.

This is why a falling ROA combined with rising borrowing deserves attention. Borrowing amplifies results in both directions.

Remember that a single year of ROE can be distorted by a big change in equity, such as an inheritance, a land revaluation or a large withdrawal for family living. Note these events beside the number so the ratio is not misread.

How do you calculate them from your records?

You need two things: an income statement for the year and balance sheets from the start and end of the year. Averaging the two balance sheets smooths out big swings. Accrual-adjusted income gives a truer picture than a cash tax return alone, since cash timing can hide how a year really went.

Extension tools, including free spreadsheets from university farm management programs, walk through each line. Check the Center for Farm Financial Management and your state extension site for current templates.

• Gather the income statement and both balance sheets
• Adjust income for inventory changes and prepaid or accrued items
• Charge a fair amount for unpaid family labor and management
• Divide by average assets for ROA or average equity for ROE

Why does land value complicate the numbers?

Owned land can make the asset base very large, so ROA looks low even in a good year. That is normal for land-heavy operations. Some analysts show the return before and after land value changes so that paper gains or losses do not hide how the operation performed.

When comparing yourself with neighbors or published averages, make sure everyone values land the same way.

If most of your assets are owned land, expect lower percentages than a rented-land operation, and read your return alongside cash flow and appreciation.

What do lenders and advisors look for?

Lenders read these ratios as a check on management and efficiency. A consistent, positive trend suggests the farm can service debt and replace equipment. A thin return may lead to questions about costs, marketing or asset use.

No target applies to every farm. Look to current extension benchmarks for your enterprise, and treat them as a guide, not a pass or fail.

If your lender uses a different method than your spreadsheet, ask for their formula. Matching definitions avoids confusing mismatches in the meeting.

How can you raise returns without taking on more risk?

Start with the denominator. Idle machinery, unused buildings and acres that never pay their way all add to assets without adding income. Selling or renting out what you do not need can lift ROA quickly.

Then look at the numerator: yields, unit costs, marketing and timing. Small gains in several places often beat one bold move. Review each change with your advisor so you understand the risk.

What does a worked example look like?

Suppose a farm reports farm income, subtracts a fair charge for the family's unpaid labor and management, and adds back interest paid. The result is divided by the average of beginning and ending total assets. That is ROA. For ROE, interest is not added back, and the divisor is average owner equity instead. The exact lines come from the farm financial standards guidelines, so follow a current extension worksheet.

Run the numbers for three or four years if you can. One year can mislead because weather and price swings move income a lot. A multi-year view shows whether the farm is earning a steady return or riding good luck.

• Use the same method each year
• Note one-time gains such as asset sales
• Record when land values changed the asset base

Last reviewed: November 12, 2026. Written by the Farm Money & Grants Editorial Team. Educational only, not tax, legal or financial advice. See our editorial policy.