You Might Like AgroFresh Solutions, Inc. (NASDAQ:AGFS) But Do You Like Its Debt?
Investors are always looking for growth in small-cap stocks like AgroFresh Solutions, Inc. (NASDAQ:AGFS), with a market cap of US$85m. However, an important fact which most ignore is: how financially healthy is the business? Given that AGFS is not presently profitable, 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. However, this is not a comprehensive overview, so I recommend you dig deeper yourself into AGFS here.
Does AGFS Produce Much Cash Relative To Its Debt?
AGFS's debt level has been constant at around US$414m over the previous year – this includes long-term debt. At this stable level of debt, AGFS's cash and short-term investments stands at US$40m to keep the business going. Moreover, AGFS has generated cash from operations of US$8.6m in the last twelve months, leading to an operating cash to total debt ratio of 2.1%, indicating that AGFS’s operating cash is less than its debt.
Does AGFS’s liquid assets cover its short-term commitments?
Looking at AGFS’s US$71m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$140m, with a current ratio of 1.98x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Chemicals companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does AGFS face the risk of succumbing to its debt-load?
Since total debt levels exceed equity, AGFS is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since AGFS is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Although AGFS’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. Keep in mind I haven't considered other factors such as how AGFS has been performing in the past. You should continue to research AgroFresh Solutions to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for AGFS’s future growth? Take a look at our free research report of analyst consensus for AGFS’s outlook.
Valuation: What is AGFS 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 AGFS 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.
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 editorial-team@simplywallst.com. 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.
