Two important questions to ask before you buy American Electric Power Company, Inc. (NYSE:AEP) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the industry, AEP is currently valued at US$40b. I’ve analysed below, the health and outlook of AEP’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
What is American Electric Power Company’s cash yield?
American Electric Power Company’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for American Electric Power Company to continue to grow, or at least, maintain its current operations.
I will be analysing American Electric Power Company’s FCF by looking at its FCF yield and its operating cash flow growth. The yield will tell us whether the stock is generating enough cash to compensate for the risk investors take on by holding a single stock, which I will compare to the market index. The growth will proxy for sustainability levels of this cash generation.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
After accounting for capital expenses required to run the business, American Electric Power Company is not able to generate positive FCF, leading to a negative FCF yield – not very useful for interpretation!
What’s the cash flow outlook for American Electric Power Company?
Can American Electric Power Company improve its operating cash production in the future? Let’s take a quick look at the cash flow trend American Electric Power Company is expected to deliver over time. In the next few years, AEP is expected to deliver a decline in operating cash flow compared to the most recent level of US$5.2b, which is not an encouraging sign. However, breaking down growth into a year on year basis, AEP ‘s negative growth rate improves each year, from -13% in the upcoming year, to 3.5% by the end of the third year.
Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research American Electric Power Company to get a better picture of the company by looking at:
- Historical Performance: What has AEP’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on American Electric Power Company’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
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