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Atlas Air Worldwide Holdings, Inc. (NASDAQ:AAWW) is a small-cap stock with a market capitalization of US$1.1b. 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? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into AAWW here.
AAWW’s Debt (And Cash Flows)
AAWW's debt levels surged from US$2.3b to US$3.0b over the last 12 months , which accounts for long term debt. With this increase in debt, AAWW currently has US$166m remaining in cash and short-term investments , ready to be used for running the business. Additionally, AAWW has produced US$410m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 14%, signalling that AAWW’s debt is not covered by operating cash.
Can AAWW pay its short-term liabilities?
At the current liabilities level of US$937m, it seems that the business may not have an easy time meeting these commitments with a current assets level of US$553m, leading to a current ratio of 0.59x. The current ratio is the number you get when you divide current assets by current liabilities.
Does AAWW face the risk of succumbing to its debt-load?
Since total debt levels exceed equity, AAWW is a highly leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. 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 2.71x 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.
Although AAWW’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. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for AAWW's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Atlas Air Worldwide Holdings to get a better picture of the stock by looking at:
- 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.
- 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.
- 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 firstname.lastname@example.org. 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.