This tool lets you benchmark the profitability of your farm against similar farms in the industry.

There are three profitability measures within this tool. In order of their completeness, these are:

  1. Earnings before interest, tax, and rent (EBITR) per hectare
  2. Earnings before interest and tax (EBIT) per hectare
  3. Profit (before tax) per hectare

Profit per hectare

Profit per hectare is a simple concept to understand, and is the easiest measure to derive. However, the ranking of farms on this measure is heavily influenced by the capital structure of each farm. Take two farms which are identical in all respects except that one has no debt while the other spends 15 per cent of its gross revenue on debt servicing. The farm with no debt will report a higher profit than the farm with the moderate debt loading - even though the earning rate of each farm was identical. The difference in reported profit was solely due to each farm's capital structure.

EBIT per hectare

To more accurately benchmark farms with differing capital structures, we use the EBIT (Earnings before interest and tax) per hectare measure. This includes the interest paid in the "earnings" of the farm, and would rate the two farms referred to above equally. So this measure gives a better view of the underlying earnings of farms.

EBITR per hectare

However, the industry doesn't solely consist of farms where the land is owned by the farm business. Many farms lease some or all of their land area from a third-party.

For example, consider a third farm that is functionally identical to the above two farms - except that it is wholly leased from a third-party. This farm's profit will be less than the freehold farm, while its relativity to the indebted farm will depend on the relative amounts of rental paid versus interest paid. On an EBIT per hectare basis, our third farm will lag well behind the other two - because its interest bill will be minimal and therefore gets little adjustment on an EBIT basis.

To fully compare all three farms, we need to use the EBITR (Earnings before Interest, Tax, and Rent) measure. This will "add back" the rent paid in the case of the third farm to take it to a similar basis to the other two farms.

Which is best?

Overall, EBITR is a better measure of the "earning power" of farms than EBIT; and in turn, EBIT is a better measure than profit. However, all three measures are closely related, and for some farms, all three measures will be identical.

These measures are not perfect - but they serve as a good starting point in analysing your farm performance. There are two particular areas where you could adjust your figures to get a "better" comparison figure:

  • If your farm is run by an employed manager rather than by an owner-operator, then the salary paid to the manager would normally be part of the "profit" in an owner-operator situation. Therefore, these "wages of management" could be added back.
  • Sometimes, profit (and therefore EBIT and EBITR) may be depressed in a given year through unusually high maintenance expenditure. This typically occurs when maintenance has been deferred in earlier years owing to a lack of revenue to fund it. Therefore, in those years when there is a catchup on deferred maintenance, some portion of that maintenance could be added back as "abnormal". (The corollary of this is that in years of depressed maintenance expenditure, profit should be reduced to reflect the maintenance liability for future years).

Look at the "Definitions" tab for more information on the individual inputs into these profitability comparisons.