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Australian Agricultural Company Ltd sees profits soar: Is it time to buy?

Shares of Australia’s leading beef and cattle producer, Australian Agricultural Company Ltd (ASX: AAC), or AACo, have traded higher on a better-than-expected profit result for financial year 2015 (FY15).

Shareholders in the $820 million AACo have endured a number of years of heightened volatility since the Global Financial Crisis, with its share price plunging from a high of $3.50 in 2008 to a low of $1.05 in September 2013.

However, after a number of years of big swings in profits, AACo was today able to deliver its first full year of results following its transformation from a pastoral company to a fully integrated branded beef producer and marketer.

The company said boxed beef sales for the year ended 31 March 2015 accounted for 77% group revenues, which were up 9.5% to $346.8 million. Statutory net profit was $9.6 million, up from a net loss of $49.5 million a year earlier.

AACo said its new Livingstone Beef processing facility in Darwin is fully operational with delivery to key markets from the Port of Darwin underway.

Whilst the report was undoubtedly a strong one, one area of concern was falling operational cash flow. Net operating cash flow (the actual cash which comes in or out of the core business of a company) fell to negative $75 million, from a positive $18 million a year earlier.

At reporting date, the company had just $12.2 million of cash, down from $69 million year-over-year. Meanwhile total debt stood at $369 million.

However, a net operating cash out flow isn’t always a bad thing and can be quite common when a company is investing heavily in its working capital (the money used for day-to-day activities). Indeed, AACo said it has made a “significant investment” in working capital.

Commenting on the result AACo Managing Director Jason Strong said, “We are implementing the strategy we announced in July last year.”

“Sales of boxed beef now account for 77% of revenue, up from 59% in the previous corresponding period,” Mr Strong said. “These sales are into global markets..(and)…sustainable practices and unique Australian heritage can command premium prices.”

AACo has established what it calls “customer-focused supply chains”, which are aimed at improving production levels and profit margins.

Mr Strong added, “Building our brands is the next stage of transforming and growing our business.”

Should you buy AACo shares?

AACo may like its ASX-listed peers Graincorp Ltd (ASX: GNC) and Ridley Corporation Ltd (ASX: RIC) be uniquely placed to benefit from the ‘Asian Dining Boom’, which’ll see enormous amounts of soft commodities (think: grains, meats, wool, fish etc) being demanded by Asia’s middle-class population. However, agriculture isn’t an easy business and is often characterised by high labour costs, natural weather events and intense competition.

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Motley Fool contributor Owen Raskiewicz has no position in any stocks mentioned. Owen welcomes your feedback on Google plus (see below) or you can follow him on Twitter @ASXinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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