Agriterra Limited (LON:AGTA) is a small-cap stock with a market capitalization of UK£1.5m. 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? Since AGTA is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into AGTA here.
AGTA’s Debt (And Cash Flows)
AGTA's debt levels surged from US$4.2m to US$5.4m over the last 12 months , which accounts for long term debt. With this increase in debt, AGTA's cash and short-term investments stands at US$2.8m , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of AGTA’s operating efficiency ratios such as ROA here.
Does AGTA’s liquid assets cover its short-term commitments?
With current liabilities at US$2.7m, the company has been able to meet these commitments with a current assets level of US$6.6m, leading to a 2.4x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Food companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can AGTA service its debt comfortably?
With a debt-to-equity ratio of 75%, AGTA can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since AGTA is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
AGTA’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. I admit this is a fairly basic analysis for AGTA's financial health. Other important fundamentals need to be considered alongside. You should continue to research Agriterra to get a more holistic view of the small-cap by looking at:
- Historical Performance: What has AGTA's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.