Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
American Outdoor Brands Corporation (NASDAQ:AOBC) is a small-cap stock with a market capitalization of US$494m. 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? Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into AOBC here.
AOBC’s Debt (And Cash Flows)
Over the past year, AOBC has maintained its debt levels at around US$202m which accounts for long term debt. At this stable level of debt, AOBC's cash and short-term investments stands at US$41m , ready to be used for running the business. On top of this, AOBC has generated cash from operations of US$57m in the last twelve months, leading to an operating cash to total debt ratio of 28%, meaning that AOBC’s current level of operating cash is high enough to cover debt.
Can AOBC meet its short-term obligations with the cash in hand?
At the current liabilities level of US$111m, it seems that the business has been able to meet these commitments with a current assets level of US$299m, leading to a 2.68x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Leisure companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is AOBC’s debt level acceptable?
With a debt-to-equity ratio of 45%, AOBC can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether AOBC 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 AOBC's, case, the ratio of 5.18x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving AOBC ample headroom to grow its debt facilities.
AOBC’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around AOBC's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure AOBC has company-specific issues impacting its capital structure decisions. I recommend you continue to research American Outdoor Brands to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AOBC’s future growth? Take a look at our free research report of analyst consensus for AOBC’s outlook.
- Valuation: What is AOBC 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 AOBC 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 email@example.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.