Applied Optoelectronics Inc (NASDAQ:AAOI) is a small-cap stock with a market capitalization of $658.99M. 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 Communications industry, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into AAOI here.
How does AAOI’s operating cash flow stack up against its debt?
AAOI has shrunken its total debt levels in the last twelve months, from $67.9M to $43.1M , which comprises of short- and long-term debt. With this debt payback, the current cash and short-term investment levels stands at $50.3M for investing into the business. On top of this, AAOI has generated cash from operations of $57.1M during the same period of time, resulting in an operating cash to total debt ratio of 132.39%, indicating that AAOI’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In AAOI’s case, it is able to generate 1.32x cash from its debt capital.
Can AAOI pay its short-term liabilities?
Looking at AAOI’s most recent $60.0M liabilities, the company has been able to meet these obligations given the level of current assets of $157.6M, with a current ratio of 2.63x. For Communications companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does AAOI face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 12.64%, AAOI’s debt level may be seen as prudent. This range is considered safe as AAOI is not taking on too much debt obligation, which may be constraining for future growth. We can test if AAOI’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For AAOI, the ratio of 93.5x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving AAOI ample headroom to grow its debt facilities.
AAOI has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure AAOI has company-specific issues impacting its capital structure decisions. You should continue to research Applied Optoelectronics to get a better picture of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for AAOI’s future growth? Take a look at our free research report of analyst consensus for AAOI’s outlook.
2. Valuation: What is AAOI 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 AAOI 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.
To help readers see pass 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.