To really understand a stock, you just have to get down and dirty, break out your pencil, and really weigh the risk-versus-reward potential of the company you're following. I propose we take a closer look at the good and the bad at AOL (NYSE: AOL), to see whether the stock is a good value or a potential money pit.

The good
AOL created quite a stir this week, for one of the first times since its separation from media giant Time Warner (NYSE: TWX), by announcing its purchase of online news website The Huffington Post. This marks the first of possibly many moves by AOL to reinvent its image as a premier online content provider. Huffington Post brings an immediately identifiable name to AOL, and could add a significant margin boost to AOL's bottom line, along with millions of untapped Internet users.

Perhaps the real value behind AOL is its balance sheet, which is still ripe with cash, even after the Huffington Post deal. Prior to the deal, which will be funded predominantly with cash, AOL had just more than $800 million in cash, and traded a hair above its book value. This cash should allow AOL the flexibility to continue its pursuit of new content sites to add to its brand name.

The bad
AOL bought Huffington Post largely because its own brand name is stale. The company has struggled to draw new users to its websites, and it often finds itself playing second fiddle to industry stalwarts. Its social-coupon website, Wow.com, pales in comparison to Groupon, while its Internet subscription service suffers from considerably lower gross margins than competitors Earthlink (Nasdaq: ELNK) and United Online (Nasdaq: UNTD). It's predominantly been an industry afterthought for years.

Likewise, AOL's advertising business, which accounts for more than one-quarter of its revenue, has recently been on a steep decline. Advertisers have been considerably more selective in their content choices since the economy nosedived, and this could be an indication that the industry considers AOL's content subpar.

The takeaway
The real question at hand is whether AOL has fallen too far behind its competitors to ever catch up. As I see it, the company has no choice but to take significant risks by purchasing eye-popping content if it hopes to attract new users and advertisers. Unfortunately, it's probably too far behind the curve to regain any market share in this hypercompetitive sector. Unless AOL shareholders are planning a million-person march in front of Yahoo! headquarters in Sunnyvale, Calif., demanding that it purchase their company, I see a very dim light at the end of AOL's tunnel.

What's your take on AOL? Does it still have what it takes, or will the company roll over and die? Sound off in the comments section below with your thoughts.

Related Foolishness:

Fool contributor Sean Williams does not own shares in any companies mentioned in this article. He would personally be lost if AOL Instant Messenger didn't exist. You can follow him on CAPS under the screen name TMFUltraLong. Yahoo! is a Motley Fool Global Gains pick. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy which is always cutting-edge.