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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as American Water Works Company, Inc. (NYSE:AWK) a safer option. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the key to extending previous success is in the health of the company’s financials. Let’s take a look at American Water Works Company’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into AWK here.
AWK’s Debt (And Cash Flows)
AWK’s debt levels surged from US$7.7b to US$8.6b over the last 12 months , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at US$133m , ready to be used for running the business. On top of this, AWK has generated cash from operations of US$1.4b during the same period of time, leading to an operating cash to total debt ratio of 16%, signalling that AWK’s operating cash is less than its debt.
Does AWK’s liquid assets cover its short-term commitments?
At the current liabilities level of US$2.1b, it seems that the business may not be able to easily meet these obligations given the level of current assets of US$781m, with a current ratio of 0.37x. The current ratio is calculated by dividing current assets by current liabilities.
Does AWK face the risk of succumbing to its debt-load?
With total debt exceeding equities, American Water Works Company is considered a highly levered company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can test if AWK’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In AWK’s case, the ratio of 3.25x suggests that interest is well-covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like AWK are considered a risk-averse investment.
With a high level of debt on its balance sheet, AWK 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 AWK to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the large-cap. This is only a rough assessment of financial health, and I’m sure AWK has company-specific issues impacting its capital structure decisions. I suggest you continue to research American Water Works Company to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AWK’s future growth? Take a look at our free research report of analyst consensus for AWK’s outlook.
- Historical Performance: What has AWK’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.
- 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 firstname.lastname@example.org. 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.