What does American Water Works Company Inc's (NYSE:AWK) Balance Sheet Tell Us About Its Future?

The size of American Water Works Company Inc (NYSE:AWK), a US$16.2b large-cap, often attracts investors seeking a reliable investment in the stock market. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. However, the key to extending previous success is in the health of the company’s financials. I will provide an overview of American Water Works Company’s financial liquidity and leverage to give you an idea of American Water Works Company’s position to take advantage of potential acquisitions or comfortably endure future downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into AWK here.

See our latest analysis for American Water Works Company

Does AWK produce enough cash relative to debt?

AWK's debt levels surged from US$7.5b to US$8.4b over the last 12 months , which comprises of short- and long-term debt. With this increase in debt, AWK currently has US$71m remaining in cash and short-term investments for investing into the business. Moreover, AWK has generated cash from operations of US$1.5b in the last twelve months, resulting in an operating cash to total debt ratio of 17%, signalling that AWK’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AWK’s case, it is able to generate 0.17x cash from its debt capital.

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

With current liabilities at US$3.0b, it appears that the company may not have an easy time meeting these commitments with a current assets level of US$833m, leading to a current ratio of 0.28x.

Can AWK service its debt comfortably?

With total debt exceeding equities, American Water Works Company is considered a highly levered company. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. In AWK's case, the ratio of 3.41x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes AWK and other large-cap investments thought to be safe.

Next Steps:

AWK’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. I admit this is a fairly basic analysis for AWK's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research American Water Works Company to get a more holistic view of the stock by looking at:

1. 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.
2. Valuation: What is AWK worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AWK is currently mispriced by the market.
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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.