In the Farm Financial Standards Council’s Financial Guidelines for Agriculture, return on assets (ROA) and return on equity (ROE) are two ratios categorized as measures of profitability. Yet we rarely consider the balance sheet when looking to maximize an operations financial performance, but we should.

Simply put, both ROA and ROE are measures of how hard your balance sheet is working to produce revenue and profits. The higher the value for both ratios, the better the operation is performing. ROA is a measure of the return on all capital deployed from both debt and equity: the calculation’s numerator represents all income from operations after interest costs, while the denominator represents all assets. ROE differs in that its numerator excludes the interest expense as it only measures the return against the denominator, equity or net worth. Both are measuring the return, or profits, generated by the deployment of capital. (Full definitions can be found in the Financial Guidelines for Agriculture).

When looking at your balance sheet, one of the big questions to ask is: how hard is your debt working for you? That is, are you making money on what you have borrowed from others? We often look to the numerator first to see what is happening there. Revenue is a great place to start, but we also need to look at the debt schedule.

During times of tight margins, we build a bridge back to good times by deploying several strategies with debt. There’s the common practice of terming out operating losses or refinancing operating lines of credit into term debt. Another option with similar impact is to increase the line of credit to finance the losses, creating additional debt on the balance sheet as a result of the operating loss. Another practice is the re-amortization of debts to slow down repayment of current debts, which provides some cash flow relief. The concern here is that you could be paying for an asset that has long since been used up or is obsolete.

While these strategies are viable ways to help build the bridge, the challenge is the impact of this “deadweight debt” on future performance. Higher interest rate costs will reduce profits while equity growth slows, causing higher liabilities going forward. The result: lower ROA and ROE until they’re both gone.

Think about this in your cost of production math as well. Every extra dollar of deadweight debt along with the resulting increase in interest cost will increase your cash flow break-even cost of production. The result is a hangover impact that is compounded if not cleaned up before the next downturn. The key to managing this is making sure you only use bridging tactics when they’re truly needed to offset market conditions that are outside of your control. That is, make sure you’re controlling what you can control before deploying these tactics or you may end up digging yourself a deeper hole.

During good times, make sure you’re doing all you can to eliminate deadweight debt while rebuilding your working capital position to minimize the hangover effect. Consider paying more than required in the good times and leave the note language the same. That way, during the tough times you can revert back to the lower payment. All the while, you’ll be improving your position for the better times ahead.

When looking at your balance sheet, the second question to ask yourself is: “what assets are not working hard enough for me?” In other words, identify your welded hitch pins. It’s when you walk through a machinery shed in August and realize a tractor is still attached to the corn planter you used in May. That is, you have a tractor that hasn’t been used in three months, so the hitch pin may as well be welded to the planter. This is a sure sign that an asset is not working hard enough for you.

As you look at the balance sheet and machinery list, you should be looking for these kinds of assets. Are there expensive pieces not turning quickly enough? In the dairy world, this decision is made every time cows are culled. As profit-generating assets, underperforming cows are easily identified for culling, but it’s less easy to recognize machinery and land base that are not performing efficiently.

For example, over-investment in machinery can be a strategy to improve crop timing, but it should be done only when there is underlying strength in the operation’s financials to support it—and with the full understanding of the potential drag on profits. Be careful to make sure the math works and that the improved timing actually pays for the additional equipment. Otherwise, if you find a welded hitch pin, make sure you take action to turn it into capital that can be recycled into harder working assets.

Finally, when looking at the balance sheet, be sure you understand the impact of debt on nonworking assets on your operation’s balance sheet. We all have our hobbies, but you need to calculate the cost of those related assets may have on your operation. A lake home is a nice thing to have, but it’s difficult to call it a working asset without deadweight debt.

The balance sheet is often an overlooked tool for improving profitability, yet it can have a significant impact on the profitability measures. Regularly examining your balance sheet to ensure all your assets are truly working for your operation’s profitability should be a key step in your continuous improvement plans.

This article originally appeared in Progressive Dairy.