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Treatment of Breeding Livestock in FINPACK’s Earned Net Worth Analysis

by | Jul 26, 2021

The purpose of Earned Net Worth Analysis is to back out Change in Market Valuation from total market value net worth change to arrive at the amount of net worth change resulting from earnings. The FINPACK approach is to estimate economic depreciation on each asset category. Any change greater or less than the amount explained by depreciation is Change in Market Valuation. Once Earned Net Worth Change is calculated, it is used to evaluate repayment capacity based on the Term Debt Coverage Ratio.

Below is the detail input form FINPACK uses to estimate Change in Market Valuation. For example, after depreciation, the ending value of Machinery and Equipment should be $677,920. However, machinery was valued at $709,966 on the ending balance sheet. The difference of $32,046 is Change in Market Valuation and will be backed out to arrive at Earned Net Worth Change.

Change in Market Valuation

Breeding Livestock Issues

This approach works well for depreciable assets like machinery and buildings. Breeding livestock, however, are another animal (pun intended). Often breeding livestock are raised and are therefore not depreciable. More importantly, a change in the value of breeding livestock may be due to a change in the number of head rather than a valuation change. For this reason, FINPACK treats any change in breeding livestock value (as well as other intermediate and other long term assets) as Inventory Change rather than Change in Market Valuation. Even though this example shows Change in Market Valuation for breeding livestock on the detail input form, that amount is not included in the amount backed out to calculate Earned Net Worth Change (see main input form below). In other words, any change in the value of these assets is treated as Earned Net Worth Change rather than Change in Market Valuation.

Inventory change

Summary

Breeding livestock pose specific challenges when analyzing agricultural credits. FINPACK’s Earned Net Worth Analysis treats changes in breeding livestock value as Inventory Change, which is included in the earned net worth change for the farm. See the FINPACK Knowledge Base for more helpful guides related to FINPACK Credit Analysis tools.

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