While small-cap stocks, such as Adecoagro SA (NYSE:AGRO) with its market cap of US$984.09m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into AGRO here.
How does AGRO’s operating cash flow stack up against its debt?
Over the past year, AGRO has maintained its debt levels at around US$828.53m made up of current and long term debt. At this current level of debt, AGRO currently has US$183.78m remaining in cash and short-term investments for investing into the business. On top of this, AGRO has generated cash from operations of US$240.81m during the same period of time, leading to an operating cash to total debt ratio of 29.06%, signalling that AGRO’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AGRO’s case, it is able to generate 0.29x cash from its debt capital.
Can AGRO meet its short-term obligations with the cash in hand?
Looking at AGRO’s most recent US$304.06m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$651.32m, with a current ratio of 2.14x. For Food companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is AGRO’s debt level acceptable?
With total debt exceeding equities, AGRO is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In AGRO’s case, the ratio of 3.07x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
AGRO’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how AGRO has been performing in the past. I suggest you continue to research Adecoagro to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AGRO’s future growth? Take a look at our free research report of analyst consensus for AGRO’s outlook.
- Valuation: What is AGRO worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AGRO is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.