These 4 metrics indicate that AAON (NASDAQ:AAON) is using debt reasonably well


Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies AAON, Inc. (NASDAQ:AAON) resorts to debt. But the real question is whether this debt makes the business risky.

What risk does debt carry?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.

Our analysis indicates that AAON is potentially overvalued!

How much debt does AAON carry?

You can click on the graph below for historical numbers, but it shows that in June 2022, AAON had debt of $106.2 million, an increase from zero, year-over-year. However, since he has a cash reserve of $17.6 million, his net debt is less, at around $88.6 million.

NasdaqGS: AAON Debt to Equity October 29, 2022

How strong is AAON’s balance sheet?

The latest balance sheet data shows that AAON had liabilities of $136.2 million due within the year, and liabilities of $150.0 million due thereafter. On the other hand, it had $17.6 million in cash and $140.5 million in receivables within one year. It therefore has liabilities totaling $128.0 million more than its cash and short-term receivables, combined.

Of course, AAON has a market capitalization of US$3.46 billion, so those liabilities are probably manageable. That said, it is clear that we must continue to monitor its record, lest it deteriorate.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.

AAON has a low net debt to EBITDA ratio of just 0.87. And its EBIT easily covers its interest charges, which is 80.1 times the size. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Its low leverage could become crucial for AAON if management cannot prevent a repeat of the 22% decline in EBIT over the past year. When it comes to paying off debt, lower income is no more helpful than sugary sodas for your health. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether AAON can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecasts.

Finally, while the taxman may love accounting profits, lenders only accept cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, AAON’s free cash flow has been 23% of its EBIT, less than expected. It’s not great when it comes to paying off debt.

Our point of view

AAON’s EBIT growth rate was definitely negative in this analysis, even though the other factors we considered were significantly better. There is no doubt that its ability to cover its interest costs with its EBIT is quite flashy. When we consider all the factors mentioned above, we feel a bit cautious about AAON’s use of debt. While we understand that debt can improve return on equity, we suggest shareholders keep a close eye on their level of debt, lest it increase. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example, AAON has 2 warning signs (and 1 which is a little worrying) we think you should know.

If after all this you are more interested in a fast growing company with a strong balance sheet, then check out our list of net cash growth stocks without delay.

Valuation is complex, but we help make it simple.

Find out if AON is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

See the free analysis

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.


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