American States Water Corporate Bonds and Leverage Analysis
| FDK Stock | EUR 80.25 0.80 0.99% |
American States Water has over 586.68 Million in debt which may indicate that it relies heavily on debt financing. . American States' financial risk is the risk to American States stockholders that is caused by an increase in debt.
Asset vs Debt
Equity vs Debt
American States' 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 States' 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 States' stakeholders.
For most companies, including American States, marketable securities, inventories, and receivables are the most common assets that could be converted to cash. However, for American States Water, the most critical issue when managing liquidity is ensuring that current assets are properly aligned with current liabilities. If they are not, American States' management will need to obtain alternative financing to ensure there are always enough cash equivalents on the balance sheet to meet obligations.
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Given the importance of American States' capital structure, the first step in the capital decision process is for the management of American States 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 States Water to issue bonds at a reasonable cost.
American States Water Debt to Cash Allocation
Many companies such as American States, eventually find out that there is only so much market out there to be conquered, and adding the next product or service is only half as profitable per unit as their current endeavors. Eventually, the company will reach a point where cash flows are strong, and extra cash is available but not fully utilized. In this case, the company may start buying back its stock from the public or issue more dividends.
American States Water has accumulated 586.68 M in total debt with debt to equity ratio (D/E) of 78.2, indicating the company may have difficulties to generate enough cash to satisfy its financial obligations. American States Water has a current ratio of 1.07, suggesting that it is not liquid enough and may have problems paying out its financial obligations in time and when they become due. Debt can assist American States until it has trouble settling it off, either with new capital or with free cash flow. So, American States' shareholders could walk away with nothing if the company can't fulfill its legal obligations to repay debt. However, a more frequent occurrence is when companies like American States Water sell additional shares at bargain prices, diluting existing shareholders. Debt, in this case, can be an excellent and much better tool for American to invest in growth at high rates of return. When we think about American States' use of debt, we should always consider it together with cash and equity.American States 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 States' operation. In addition, a high debt-to-assets ratio may indicate a low borrowing capacity of American States, which in turn will lower the firm's financial flexibility.American States Corporate Bonds Issued
Most American bonds can be classified according to their maturity, which is the date when American States Water has to pay back the principal to investors. Maturities can be short-term, medium-term, or long-term (more than ten years). Longer-term bonds usually offer higher interest rates but may entail additional risks.
Understaning American States Use of Financial Leverage
American States' financial leverage ratio helps determine the effect of debt on the overall profitability of the company. It measures American States' total debt position, including all outstanding debt obligations, and compares it with American States' equity. Financial leverage can amplify the potential profits to American States' owners, but it also increases the potential losses and risk of financial distress, including bankruptcy, if American States is unable to cover its debt costs.
American States Water Company, through its subsidiaries, provides water and electric services to residential, industrial, and other customers in the United States. American States Water Company was founded in 1929 and is based in San Dimas, California. AMERICAN STAT operates under Utilities - Regulated Water classification in Germany and is traded on Frankfurt Stock Exchange. It employs 817 people. Please read more on our technical analysis page.
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Additional Information and Resources on Investing in American Stock
When determining whether American States Water is a strong investment it is important to analyze American States' competitive position within its industry, examining market share, product or service uniqueness, and competitive advantages. Beyond financials and market position, potential investors should also consider broader economic conditions, industry trends, and any regulatory or geopolitical factors that may impact American States' future performance. For an informed investment choice regarding American Stock, refer to the following important reports:Check out the analysis of American States Fundamentals Over Time. You can also try the Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.
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.