Adecoagro SA (NYSE:AGRO) is a small-cap stock with a market capitalization of US$1.00b. 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? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into AGRO here.
How much cash does AGRO generate through its operations?
AGRO’s debt levels surged from US$635.40m to US$817.96m over the last 12 months – this includes both the current and long-term debt. With this growth in debt, AGRO’s cash and short-term investments stands at US$269.20m , ready to deploy into the business. On top of this, AGRO has generated US$237.11m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 28.99%, signalling that AGRO’s operating cash is sufficient to cover its 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 0.29x cash from its debt capital.
Does AGRO’s liquid assets cover its short-term commitments?
At the current liabilities level of US$282.41m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$689.45m, with a current ratio of 2.44x. For Food companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does AGRO face the risk of succumbing to its debt-load?
With total debt exceeding equities, AGRO is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if AGRO’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For AGRO, the ratio of 3.07x 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.
Although AGRO’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure AGRO has company-specific issues impacting its capital structure decisions. You should 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 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.