Yahoo Finance What Investors Should Know About AO World plc’s (LON:AO.) Financial Strength
AO World plc (LON:AO.) is a small-cap stock with a market capitalization of UK£634m. 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? Companies operating in the Online Retail industry facing headwinds from current disruption, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into AO. here.
Does AO. produce enough cash relative to debt?
Over the past year, AO. has maintained its debt levels at around UK£18m – this includes both the current and long-term debt. At this current level of debt, AO.’s cash and short-term investments stands at UK£56m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of AO.’s operating efficiency ratios such as ROA here.
Can AO. pay its short-term liabilities?
With current liabilities at UK£164m, the company has been able to meet these obligations given the level of current assets of UK£164m, with a current ratio of 1x. Generally, for Online Retail companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does AO. face the risk of succumbing to its debt-load?
AO.’s level of debt is appropriate relative to its total equity, at 22%. This range is considered safe as AO. is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Risk around debt is very low for AO., and the company also has the ability and headroom to increase debt if needed going forward.
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AO.’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for AO.’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research AO World to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for AO.’s future growth? Take a look at our free research report of analyst consensus for AO.’s outlook.
Valuation: What is AO. 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 AO. is currently mispriced by the market.
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.
