Yahoo Finance How Financially Strong Is Anglo African Agriculture Plc (LON:AAAP)?
Anglo African Agriculture Plc (LON:AAAP), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is AAAP will have to follow strict debt obligations which will reduce its financial flexibility. While zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
View our latest analysis for Anglo African Agriculture
Is financial flexibility worth the lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. Either AAAP does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. AAAP delivered a negative revenue growth of -16%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.
Does AAAP’s liquid assets cover its short-term commitments?
Since Anglo African Agriculture doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. With current liabilities at UK£827k, it seems that the business may not have an easy time meeting these commitments with a current assets level of UK£530k, leading to a current ratio of 0.64x.
Next Steps:
Having no debt on the books means AAAP has more financial freedom to keep growing at its current fast rate. However, the company’s low liquidity reduces our conviction around meeting short-term commitments. Some level of low-cost debt funding could help meet these needs. Moving forward, its financial position may be different. This is only a rough assessment of financial health, and I’m sure AAAP has company-specific issues impacting its capital structure decisions. I recommend you continue to research Anglo African Agriculture to get a more holistic view of the stock by looking at:
Historical Performance: What has AAAP’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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
