Agromep S.A. (WSE:AGP) is a small-cap stock with a market capitalization of zł13m. 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 essential, as mismanagement of capital can lead to 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 recommend you dig deeper yourself into AGP here.
Does AGP Produce Much Cash Relative To Its Debt?
AGP’s debt levels surged from zł1.6m to zł4.5m over the last 12 months , which accounts for long term debt. With this increase in debt, AGP’s cash and short-term investments stands at zł1.6m , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of AGP’s operating efficiency ratios such as ROA here.
Can AGP pay its short-term liabilities?
Looking at AGP’s zł9.2m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of zł17m, leading to a 1.82x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Trade Distributors 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 AGP’s debt level acceptable?
With a debt-to-equity ratio of 42%, AGP can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In AGP’s case, the ratio of 4.77x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as AGP’s high interest coverage is seen as responsible and safe practice.
AGP’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. This is only a rough assessment of financial health, and I’m sure AGP has company-specific issues impacting its capital structure decisions. I recommend you continue to research Agromep to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AGP’s future growth? Take a look at our free research report of analyst consensus for AGP’s outlook.
- Historical Performance: What has AGP’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.
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 firstname.lastname@example.org. 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.