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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, AO World plc (LON:AO.) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for AO World
What Is AO World's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 AO World had UK£30.3m of debt, an increase on UK£17.7m, over one year. However, because it has a cash reserve of UK£28.9m, its net debt is less, at about UK£1.40m.
How Healthy Is AO World's Balance Sheet?
According to the last reported balance sheet, AO World had liabilities of UK£251.2m due within 12 months, and liabilities of UK£41.0m due beyond 12 months. Offsetting this, it had UK£28.9m in cash and UK£103.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£160.0m.
While this might seem like a lot, it is not so bad since AO World has a market capitalization of UK£367.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Carrying virtually no net debt, AO World has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if AO World can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year AO World wasn't profitable at an EBIT level, but managed to grow its revenue by13%, to UK£903m. We usually like to see faster growth from unprofitable companies, but each to their own.