Shares of American Electric Power Inc. (NASDAQ:AEP) moved lower by 3.82% in the past three months. Before having a look at the importance of debt, let’s look at how much debt American Electric Power has.
American Electric Power Debt
Based on American Electric Power’s financial statement as of February 23, 2023, long-term debt is at $33.63 billion and current debt is at $6.44 billion, amounting to $40.06 billion in total debt. Adjusted for $509.40 million in cash-equivalents, the company’s net debt is at $39.55 billion.
Let’s define some of the terms we used in the paragraph above. Current debt is the portion of a company’s debt which is due within 1 year, while long-term debt is the portion due in more than 1 year. Cash equivalents includes cash and any liquid securities with maturity periods of 90 days or less. Total debt equals current debt plus long-term debt minus cash equivalents.
To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering American Electric Power’s $93.47 billion in total assets, the debt-ratio is at 0.43. As a rule of thumb, a debt-ratio more than 1 indicates that a considerable portion of debt is funded by assets. A higher debt-ratio can also imply that the company might be putting itself at risk for default, if interest rates were to increase. However, debt-ratios vary widely across different industries. For example, a debt ratio of 40% might be higher for one industry, but normal for another.
Why Shareholders Look At Debt?
Debt is an important factor in the capital structure of a company, and can help it attain growth. Debt usually has a relatively lower financing cost than equity, which makes it an attractive option for executives.
Interest-payment obligations can impact the cash-flow of the company. Equity owners can keep excess profit, generated from the debt capital, when companies use the debt capital for its business operations.
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This article was generated by Benzinga’s automated content engine and reviewed by an editor.