Is Ag Growth International Inc. (TSE:AFN) A Financially Sound Company?

Investors are always looking for growth in small-cap stocks like Ag Growth International Inc. (TSE:AFN), with a market cap of CA$1.2b. However, an important fact which most ignore is: how financially healthy is the business? 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. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into AFN here.

Does AFN Produce Much Cash Relative To Its Debt?

AFN's debt levels have fallen from CA$590m to CA$556m over the last 12 months – this includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at CA$34m , ready to be used for running the business. Additionally, AFN has generated CA$41m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 7.4%, signalling that AFN’s operating cash is less than its debt.

Can AFN pay its short-term liabilities?

Looking at AFN’s CA$230m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of CA$394m, with a current ratio of 1.71x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Machinery companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can AFN service its debt comfortably?

With total debt exceeding equity, AFN is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether AFN is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In AFN's, case, the ratio of 2.75x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.

Next Steps:

AFN’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for AFN's financial health. Other important fundamentals need to be considered alongside. You should continue to research Ag Growth International to get a better picture of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for AFN’s future growth? Take a look at our free research report of analyst consensus for AFN’s outlook.
2. Valuation: What is AFN 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 AFN is currently mispriced by the market.
3. 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.