How Financially Strong Is Australian Dairy Farms Group (ASX:AHF)?

Investors are always looking for growth in small-cap stocks like Australian Dairy Farms Group (ASX:AHF), with a market cap of AU$36.42m. However, an important fact which most ignore is: how financially healthy is the business? Since AHF is loss-making right now, it’s vital to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into AHF here.

Does AHF produce enough cash relative to debt?

AHF's debt levels have fallen from AU$13.11m to AU$10.60m over the last 12 months – this includes both the current and long-term debt. With this debt payback, the current cash and short-term investment levels stands at AU$1.66m , ready to deploy into the business. On top of this, AHF has generated cash from operations of AU$306.36k over the same time period, leading to an operating cash to total debt ratio of 2.89%, meaning that AHF’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In AHF’s case, it is able to generate 0.029x cash from its debt capital.

Can AHF pay its short-term liabilities?

With current liabilities at AU$3.86m, it seems that the business has been able to meet these commitments with a current assets level of AU$5.00m, leading to a 1.3x current account ratio. For Food companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too capital in low return investments.

Does AHF face the risk of succumbing to its debt-load?

With debt at 32.42% of equity, AHF may be thought of as appropriately levered. AHF is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Investors' risk associated with debt is very low with AHF, and the company has plenty of headroom and ability to raise debt should it need to in the future.

Next Steps:

Although AHF’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for AHF's financial health. Other important fundamentals need to be considered alongside. You should continue to research Australian Dairy Farms Group to get a more holistic view of the stock by looking at:

1. Historical Performance: What has AHF'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.
2. 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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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.