What You Must Know About AO World plc’s (LON:AO.) Financial Strength

Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!

AO World plc (LON:AO.) is a small-cap stock with a market capitalization of UK£476m. 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, in particular ones that run negative earnings, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into AO. here.

How much cash does AO. generate through its operations?

AO.’s debt levels surged from UK£16m to UK£17m over the last 12 months , which accounts for long term debt. With this rise in debt, AO.’s cash and short-term investments stands at UK£41m for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 assess some of AO.’s operating efficiency ratios such as ROA here.

Does AO.’s liquid assets cover its short-term commitments?

Looking at AO.’s UK£172m in current liabilities, the company may not be able to easily meet these obligations given the level of current assets of UK£158m, with a current ratio of 0.92x.

LSE:AO. Historical Debt, February 22nd 2019
LSE:AO. Historical Debt, February 22nd 2019

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

With a debt-to-equity ratio of 25%, AO.’s debt level may be seen as prudent. AO. is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. AO.’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:

AO. has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Though 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. I recommend you 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.