Investors are always looking for growth in small-cap stocks like Australian Dairy Farms Group (ASX:AHF), with a market cap of AU$29.14M. However, an important fact which most ignore is: how financially healthy is the business? Given that AHF is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into AHF here.

Does AHF generate an acceptable amount of cash through operations?

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 reduction in debt, AHF’s cash and short-term investments stands at AU$1.66M , ready to deploy into the business. Additionally, AHF has produced AU$306.36K in operating cash flow over the same time period, resulting in 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 a sign of operational efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In AHF’s case, it is able to generate 0.029x cash from its debt capital.

Can AHF pay its short-term liabilities?

Looking at AHF’s most recent AU$3.86M liabilities, the company has been able to meet these obligations given the level of current assets of AU$5.00M, with a current ratio of 1.3x. Usually, for Food companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Is AHF’s debt level acceptable?

With debt at 36.99% of equity, AHF may be thought of as appropriately levered. This range is considered safe as AHF is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. AHF’s risk around capital structure is low, and the company has the 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 exhibits proper management of current assets and upcoming liabilities. 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: