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What You Must Know About American Electric Power Company, Inc.’s (NYSE:AEP) Financial Strength

Simply Wall St

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Investors pursuing a solid, dependable stock investment can often be led to American Electric Power Company, Inc. (NYSE:AEP), a large-cap worth US$42b. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. However, the key to their continued success lies in its financial health. Today we will look at American Electric Power Company’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into AEP here.

Check out our latest analysis for American Electric Power Company

Does AEP Produce Much Cash Relative To Its Debt?

AEP has built up its total debt levels in the last twelve months, from US$23b to US$26b , which includes long-term debt. With this increase in debt, AEP’s cash and short-term investments stands at US$393m , ready to be used for running the business. Additionally, AEP has produced US$5.2b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 20%, indicating that AEP’s current level of operating cash is high enough to cover debt.

Can AEP pay its short-term liabilities?

At the current liabilities level of US$8.6b, the company may not have an easy time meeting these commitments with a current assets level of US$4.1b, leading to a current ratio of 0.48x. The current ratio is the number you get when you divide current assets by current liabilities.

NYSE:AEP Historical Debt, March 26th 2019

Does AEP face the risk of succumbing to its debt-load?

Considering American Electric Power Company’s total debt outweighs its equity, the company is deemed highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can check to see whether AEP is able to meet its debt obligations by looking at the net interest coverage ratio. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For AEP, the ratio of 2.96x suggests that interest is not strongly covered. Although it is highly unlikely we’d see American Electric Power Company defaulting or announcing bankruptcy tomorrow, this situation may put the company in a tough position when borrowing more money in the future to fuel its growth.

Next Steps:

AEP’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. Keep in mind I haven’t considered other factors such as how AEP has been performing in the past. You should continue to research American Electric Power Company to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for AEP’s future growth? Take a look at our free research report of analyst consensus for AEP’s outlook.
  2. 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.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.