American Electric Power Corporate Bonds and Leverage Analysis
| AEPPZDelisted Stock | USD 50.28 0.01 0.02% |
American Electric Power holds a debt-to-equity ratio of 1.573. With a high degree of financial leverage come high-interest payments, which usually reduce American Electric's Earnings Per Share (EPS).
Asset vs Debt
Equity vs Debt
American Electric's liquidity is one of the most fundamental aspects of both its future profitability and its ability to meet different types of ongoing financial obligations. American Electric's cash, liquid assets, total liabilities, and shareholder equity can be utilized to evaluate how much leverage the Company is using to sustain its current operations. For traders, higher-leverage indicators usually imply a higher risk to shareholders. In addition, it helps American Stock's retail investors understand whether an upcoming fall or rise in the market will negatively affect American Electric's stakeholders.
For most companies, including American Electric, marketable securities, inventories, and receivables are the most common assets that could be converted to cash. However, for American Electric Power, the most critical issue when managing liquidity is ensuring that current assets are properly aligned with current liabilities. If they are not, American Electric's management will need to obtain alternative financing to ensure there are always enough cash equivalents on the balance sheet to meet obligations.
American |
Given the importance of American Electric's capital structure, the first step in the capital decision process is for the management of American Electric to decide how much external capital it will need to raise to operate in a sustainable way. Once the amount of financing is determined, management needs to examine the financial markets to determine the terms in which the company can boost capital. This move is crucial to the process because the market environment may reduce the ability of American Electric Power to issue bonds at a reasonable cost.
American Electric Power Debt to Cash Allocation
As American Electric Power follows its natural business cycle, the capital allocation decisions will not magically go away. American Electric's decision-makers have to determine if most of the cash flows will be poured back into or reinvested in the business, reserved for other projects beyond operational needs, or paid back to stakeholders and investors.
American Electric Power has accumulated 40.4 B in total debt with debt to equity ratio (D/E) of 1.57, which is about average as compared to similar companies. American Electric Power has a current ratio of 0.74, indicating that it has a negative working capital and may not be able to pay financial obligations in time and when they become due. Note, when we think about American Electric's use of debt, we should always consider it together with its cash and equity.American Electric Assets Financed by Debt
Typically, companies with high debt-to-asset ratios are said to be highly leveraged. The higher the ratio, the greater risk will be associated with the American Electric's operation. In addition, a high debt-to-assets ratio may indicate a low borrowing capacity of American Electric, which in turn will lower the firm's financial flexibility.American Electric Corporate Bonds Issued
Understaning American Electric Use of Financial Leverage
Understanding the structure of American Electric's debt obligations provides insight if it is worth investing in it. Financial leverage can amplify the potential profits to American Electric's owners, but it also increases the potential losses and risk of financial distress, including bankruptcy, if the firm cannot cover its cost of debt.
American Electric Power Company, Inc., an electric public utility holding company, engages in the generation, transmission, and distribution of electricity for sale to retail and wholesale customers in the United States. American Electric Power Company, Inc. was incorporated in 1906 and is headquartered in Columbus, Ohio. American Electric operates under UtilitiesRegulated Electric classification in the United States and is traded on NASDAQ Exchange. It employs 16688 people. Please read more on our technical analysis page.
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Other Consideration for investing in American Stock
If you are still planning to invest in American Electric Power check if it may still be traded through OTC markets such as Pink Sheets or OTC Bulletin Board. You may also purchase it directly from the company, but this is not always possible and may require contacting the company directly. Please note that delisted stocks are often considered to be more risky investments, as they are no longer subject to the same regulatory and reporting requirements as listed stocks. Therefore, it is essential to carefully research the American Electric's history and understand the potential risks before investing.
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What is Financial Leverage?
Financial leverage is the use of borrowed money (debt) to finance the purchase of assets with the expectation that the income or capital gain from the new asset will exceed the cost of borrowing. In most cases, the debt provider will limit how much risk it is ready to take and indicate a limit on the extent of the leverage it will allow. In the case of asset-backed lending, the financial provider uses the assets as collateral until the borrower repays the loan. In the case of a cash flow loan, the general creditworthiness of the company is used to back the loan. The concept of leverage is common in the business world. It is mostly used to boost the returns on equity capital of a company, especially when the business is unable to increase its operating efficiency and returns on total investment. Because earnings on borrowing are higher than the interest payable on debt, the company's total earnings will increase, ultimately boosting stockholders' profits.Leverage and Capital Costs
The debt to equity ratio plays a role in the working average cost of capital (WACC). The overall interest on debt represents the break-even point that must be obtained to profitability in a given venture. Thus, WACC is essentially the average interest an organization owes on the capital it has borrowed for leverage. Let's say equity represents 60% of borrowed capital, and debt is 40%. This results in a financial leverage calculation of 40/60, or 0.6667. The organization owes 10% on all equity and 5% on all debt. That means that the weighted average cost of capital is (.4)(5) + (.6)(10) - or 8%. For every $10,000 borrowed, this organization will owe $800 in interest. Profit must be higher than 8% on the project to offset the cost of interest and justify this leverage.Benefits of Financial Leverage
Leverage provides the following benefits for companies:- Leverage is an essential tool a company's management can use to make the best financing and investment decisions.
- It provides a variety of financing sources by which the firm can achieve its target earnings.
- Leverage is also an essential technique in investing as it helps companies set a threshold for the expansion of business operations. For example, it can be used to recommend restrictions on business expansion once the projected return on additional investment is lower than the cost of debt.