American Outdoor Brands has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed 13.8% to $9.01 per share while the index has gained 10.5%.

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We're cautious about American Outdoor Brands. Here are three reasons why AOUT doesn't excite us and one stock we'd rather own today.

Why Do We Think American Outdoor Brands Will Underperform?

Spun off from Smith and Wesson in 2020, American Outdoor Brands (NASDAQ:AOUT) is an outdoor and recreational products company that offers firearms and firearm accessories.

1. Long-Term Revenue Growth Disappoints

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one sustains growth for years. Over the last four years, American Outdoor Brands grew its sales at a weak 1.9% compounded annual growth rate. This was below our standards.

2. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it raised (debt and equity).

We typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. Unfortunately, American Outdoor Brands’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

3. Restricted Access to Capital Increases Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

American Outdoor Brands, which has $23.46 million of cash and $34.31 million of debt on its balance sheet, was unprofitable over the last 12 months. It posted negative $4.05 million of EBITDA, and as investors in high-quality companies, we seek to avoid indebted loss-making companies.

We implore our readers to do the same because credit agencies could downgrade American Outdoor Brands if its unprofitable ways continue, making incremental borrowing more expensive and restricting growth prospects. The company could also be backed into a corner if the market turns unexpectedly. We hope American Outdoor Brands can improve its profitability and remain cautious until then.