While small-cap stocks, such as Atlas Air Worldwide Holdings Inc (NASDAQ:AAWW) with its market cap of US$1.53B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into AAWW here.
Does AAWW generate an acceptable amount of cash through operations?
Over the past year, AAWW has ramped up its debt from US$1.85B to US$2.23B – this includes both the current and long-term debt. With this increase in debt, AAWW’s cash and short-term investments stands at US$294.41M for investing into the business. Additionally, AAWW has produced cash from operations of US$331.72M in the last twelve months, leading to an operating cash to total debt ratio of 14.90%, meaning that AAWW’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AAWW’s case, it is able to generate 0.15x cash from its debt capital.
Does AAWW’s liquid assets cover its short-term commitments?
With current liabilities at US$738.60M, the company is not able to meet these obligations given the level of current assets of US$587.59M, with a current ratio of 0.8x below the prudent level of 3x.
Is AAWW’s debt level acceptable?Since total debt levels have outpaced equities, AAWW is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether AAWW is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In AAWW’s, case, the ratio of 2.86x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
With a high level of debt on its balance sheet, AAWW could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for AAWW to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure AAWW has company-specific issues impacting its capital structure decisions. You should continue to research Atlas Air Worldwide Holdings to get a better picture of the stock by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for AAWW’s future growth? Take a look at our free research report of analyst consensus for AAWW’s outlook.
- 2. Valuation: What is AAWW 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 AAWW 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.