Investors are always looking for growth in small-cap stocks like Australian Agricultural Company Limited (ASX:AAC), with a market cap of AU$744m. However, an important fact which most ignore is: how financially healthy is the business? Given that AAC is not presently profitable, it’s crucial to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into AAC here.
How much cash does AAC generate through its operations?
AAC’s debt level has been constant at around AU$357m over the previous year which accounts for long term debt. At this current level of debt, the current cash and short-term investment levels stands at AU$11m for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of AAC’s operating efficiency ratios such as ROA here.
Can AAC meet its short-term obligations with the cash in hand?
At the current liabilities level of AU$34m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 9.48x. Having said that, a ratio above 3x may be considered excessive by some investors.
Is AAC’s debt level acceptable?
With debt at 36% of equity, AAC may be thought of as appropriately levered. This range is considered safe as AAC is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with AAC, and the company has plenty of headroom and ability to raise debt should it need to in the future.
AAC’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure AAC has company-specific issues impacting its capital structure decisions. You should continue to research Australian Agricultural to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AAC’s future growth? Take a look at our free research report of analyst consensus for AAC’s outlook.
- Valuation: What is AAC 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 AAC 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 email@example.com.