The Andersons, Inc. (NASDAQ:ANDE) is a small-cap stock with a market capitalization of US$1.1b. 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? Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into ANDE here.
Does ANDE Produce Much Cash Relative To Its Debt?
Over the past year, ANDE has ramped up its debt from US$521m to US$748m , which includes long-term debt. With this growth in debt, ANDE's cash and short-term investments stands at US$23m to keep the business going. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. For this article’s sake, I won’t be looking at this today, but you can examine some of ANDE’s operating efficiency ratios such as ROA here.
Does ANDE’s liquid assets cover its short-term commitments?
Looking at ANDE’s US$833m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$1.0b, leading to a 1.23x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Consumer Retailing companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Is ANDE’s debt level acceptable?
With debt reaching 85% of equity, ANDE may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if ANDE’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 ANDE, the ratio of 1.82x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as ANDE’s low interest coverage already puts the company at higher risk of default.
Although ANDE’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. Since there is also no concerns around ANDE's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure ANDE has company-specific issues impacting its capital structure decisions. I recommend you continue to research Andersons to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ANDE’s future growth? Take a look at our free research report of analyst consensus for ANDE’s outlook.
- Historical Performance: What has ANDE'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.
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