5. Financial Strength (Assets and Liabilities)
5.1 Net worth (Table 10)
The net worth of farm businesses is an important factor in determining the value of the business. Farm businesses are capital intensive and typically have high asset values which are not included in income measures. The average appreciation of business assets in 2016-17 was £11,200 (ranging from a loss of £8,100 for tenanted farms to an appreciation of £16,500 for owner occupied farms). The average net worth of farm businesses in Scotland was £1.3m, an increase of less than one per cent in 2016-17.
Figure 10 shows the average change between opening and closing valuations in 2016-17 (in actual prices) for assets, liabilities and net worth of Scottish farm businesses by tenure type and the overall average for all tenures.
Figure 10: Change in assets, liabilities and net worth by tenure: 2016-17
Overall, asset values increased by around one per cent (£11,200) while liabilities increased by three per cent (£4,600), resulting in an overall increase of less than one per cent (£6,600) in net worth.
5.2 Debt ratio (Table 10)
Figure 11 shows the debt ratios (liabilities:assets) expressed as percentages for each farm type and tenure. The debt ratio provides an insight into how indebted the sector is and its ability to service those debts. On average, Scottish farm businesses have relatively low debt ratios (liabilities were ten per cent of assets in 2016-17), reflecting the fact that their assets heavily outweigh their liabilities.
Figure 11: Liabilities as a percentage of assets in 2016-17
Tenanted farm businesses, where relatively little capital is owned, have higher debt ratios than other tenure types. However, on average assets still outweigh liabilities by about five to one; that is, for every pound of debt, the tenanted business has at least five pounds of assets. For owner occupied farm businesses, assets are on average around 11 times greater than liabilities and for mixed tenure types, assets are on average eight times greater than liabilities.
Specialist sheep (LFA) farms had the lowest debt ratio on average for all tenures, at seven per cent. Dairy farms had the highest ratio at 14 per cent, while those of other farm types lay between nine per cent and 12 per cent for all tenures.