What does American Electric Power Company, Inc.’s (NYSE:AEP) Balance Sheet Tell Us About Its Future?

American Electric Power Company, Inc. (NYSE:AEP), a large-cap worth US$41b, comes to mind for investors seeking a strong and reliable stock investment. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the key to their continued success lies in its financial health. Let’s take a look at American Electric Power Company’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into AEP here.

See our latest analysis for American Electric Power Company

AEP’s Debt (And Cash Flows)

AEP’s debt levels surged from US$23b to US$26b over the last 12 months – this includes long-term debt. With this rise in debt, AEP’s cash and short-term investments stands at US$393m to keep the business going. On top of this, AEP has generated US$5.2b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 20%, signalling that AEP’s current level of operating cash is high enough to cover debt.

Can AEP meet its short-term obligations with the cash in hand?

With current liabilities at US$8.6b, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.48x. The current ratio is the number you get when you divide current assets by current liabilities.

NYSE:AEP Historical Debt, April 24th 2019
NYSE:AEP Historical Debt, April 24th 2019

Can AEP service its debt comfortably?

American Electric Power Company is a highly levered company given that total debt exceeds equity. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can check to see whether AEP is able to meet its debt obligations by looking at the net interest coverage ratio. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For AEP, the ratio of 2.96x suggests that interest is not strongly covered. The sheer size of American Electric Power Company means it is unlikely to default or announce bankruptcy anytime soon. However, lenders may be more reluctant to lend out more funding as AEP’s low interest coverage already puts the company in a risky position.

Next Steps:

With a high level of debt on its balance sheet, AEP could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for AEP to increase its operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. This is only a rough assessment of financial health, and I’m sure AEP has company-specific issues impacting its capital structure decisions. I recommend you 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.