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Is AO World plc (LON:AO.) A Financially Sound Company?

Simply Wall St

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Investors are always looking for growth in small-cap stocks like AO World plc (LON:AO.), with a market cap of UK£440m. However, an important fact which most ignore is: how financially healthy is the business? Since AO. is loss-making right now, it’s crucial to understand the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into AO. here.

AO.’s Debt (And Cash Flows)

AO.'s debt levels surged from UK£18m to UK£38m over the last 12 months , which accounts for long term debt. With this increase in debt, AO.'s cash and short-term investments stands at UK£29m to keep the business going. Moving on, operating cash flow was negative over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can take a look at some of AO.’s operating efficiency ratios such as ROA here.

Can AO. pay its short-term liabilities?

With current liabilities at UK£251m, the company may not be able to easily meet these obligations given the level of current assets of UK£224m, with a current ratio of 0.89x. The current ratio is the number you get when you divide current assets by current liabilities.

LSE:AO. Historical Debt, June 6th 2019

Does AO. face the risk of succumbing to its debt-load?

AO. is a relatively highly levered company with a debt-to-equity of 44%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since AO. is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

Although AO.’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven't considered other factors such as how AO. has been performing in the past. You should continue to research AO World to get a better picture of the stock by looking at:

  1. 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.
  2. 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.
  3. 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 editorial-team@simplywallst.com. 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.