While small-cap stocks, such as AgroFresh Solutions Inc (NASDAQ:AGFS) with its market cap of USD $298.50M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. Check out our latest analysis for AgroFresh Solutions
How does AGFS’s operating cash flow stack up against its debt?
While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. These adverse events bring devastation and yet does not absolve the company from its debt. Can AGFS pay off what it owes to its debtholder by using only cash from its operational activities? Last year, AGFS’s operating cash flow was 0.1x its current debt. This is concerning as its incoming cash can pay off less than a tenth of what the company must return in the near term.
Does AGFS’s liquid assets cover its short-term commitments?
What about its commitments to other stakeholders such as payments to suppliers and employees? During times of unfavourable events, AGFS could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We test for AGFS’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that AGFS is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Is AGFS’s level of debt at an acceptable level?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. In the case of AGFS, the debt-to-equity ratio is over 100%, which indicates that the company is holding a high level of debt relative to its net worth. In the event of financial turmoil, the company may experience difficulty meeting interest and other debt obligations. While debt-to-equity ratio has several factors at play, an easier way to check whether AGFS’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings at least three times its interest payments is considered financially sound. In AGFS’s case, its interest is not sufficiently covered by its profits as the ratio is 0.51x. Lenders may be more reluctant to lend out more funding as AGFS’s low interest coverage already puts the company at higher risk of default.
Are you a shareholder? AGFS’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that its financial position may be different. I suggest keeping abreast of market expectations for AGFS’s future growth on our free analysis platform.
Are you a potential investor? With a high level of debt on its balance sheet, AGFS could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for AGFS to increase its operational efficiency. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. As a following step, you should take a look at AGFS’s past performance analysis on our free platform to conclude on AGFS’s financial health.
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.