While small-cap stocks, such as Applied Optoelectronics Inc (NASDAQ:AAOI) with its market cap of US$622.09M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Communications industry, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into AAOI here.
Does AAOI generate an acceptable amount of cash through operations?
Over the past year, AAOI has ramped up its debt from US$43.13M to US$49.56M , which comprises of short- and long-term debt. With this rise in debt, AAOI currently has US$82.97M remaining in cash and short-term investments for investing into the business. Additionally, AAOI has generated US$84.28M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 170.07%, signalling that AAOI’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AAOI’s case, it is able to generate 1.7x cash from its debt capital.
Does AAOI’s liquid assets cover its short-term commitments?
Looking at AAOI’s most recent US$70.71M liabilities, the company has been able to meet these obligations given the level of current assets of US$229.70M, with a current ratio of 3.25x. However, anything about 3x may be excessive, since AAOI may be leaving too much capital in low-earning investments.
Is AAOI’s debt level acceptable?
AAOI’s level of debt is appropriate relative to its total equity, at 14.87%. AAOI is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether AAOI 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 AAOI’s, case, the ratio of 137x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
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 exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how AAOI has been performing in the past. I suggest you continue to research Applied Optoelectronics to get a more holistic view of the stock by looking at:
- 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.
- 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.
- 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.