Adecoagro SA. (NYSE:AGRO) is a small-cap stock with a market capitalization of US$1.01B. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into AGRO here.
Does AGRO generate an acceptable amount of cash through operations?
AGRO’s debt levels have fallen from US$723.34M to US$635.40M over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, AGRO currently has US$158.57M remaining in cash and short-term investments for investing into the business. On top of this, AGRO has generated cash from operations of US$255.40M during the same period of time, resulting in an operating cash to total debt ratio of 40.20%, signalling that AGRO’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In AGRO’s case, it is able to generate 0.4x cash from its debt capital.
Can AGRO pay its short-term liabilities?
With current liabilities at US$332.48M, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.71x. Generally, for Food companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
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 3.21x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving AGRO ample headroom to grow its debt facilities.
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. Since there is also no concerns around AGRO’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for AGRO’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Adecoagro to get a better picture of the small-cap by looking at:
1. 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.
2. 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.
3. 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 pass 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.