Does American Electric Power Company (AEP) Make Enough Profit?

American Electric Power Company dropped -2.4% during today's afternoon session, underperforming the S&P 500 by -0.2%. The lackluster performance from the large-cap Utilities—Regulated Electric company may seem like an opportunity to buy shares at a discount, but it's a good idea to take a closer look at the company's financials first.

At first glance, American Electric Power Company is profitable because its operating margins have recently averaged 19.5%. This represents the percentage of profit after all operating costs have been accounted for, and if you're thinking that these profits neatly translate into cash, and therefore, equity growth, you'd be mistaken. This is because profits are not cash.

American Electric Power Company's Operating Margins

Date Reported Total Revenue ($) Operating Expenses ($) Operating Margins (%) YoY Growth (%)
2021-12-31 16,792,000,000 13,250,500,000 21.09 1.3
2020-12-31 14,918,500,000 11,811,800,000 20.82 12.97
2019-12-31 15,561,400,000 12,692,700,000 18.43 3.71
2018-12-31 16,195,700,000 13,317,900,000 17.77 n/a

When a company makes a sale, its accountants record it as revenue -- even if the company hasn't gotten paid yet. Corporate accountants use the accrual method (as opposed to the cash method) to paint a representative picture of how much money the company is collecting and spending on average in each reporting period. So these income and expense numbers for a given period never match the incoming and outgoing cash flows during the same period.

This means that a company can be profitable in a given year, yet post a negative cash flow from operations. Some profitable companies may struggle to reliably convert their profits into the cash needed to run the daily business, to service its debt, and to pay its equity investors. That's why its essential to review the company's cash flows in tandem with its profit margins. Below is an overview of American Electric Power Company's recent cash flows:

Date Reported Cash Flow from Operations ($) Capital expenditures ($) Free Cash Flow ($) YoY Growth (%)
2021-12-31 3,839,900,000 -6,531,300,000 -2,691,400,000 -8.39
2020-12-31 3,832,900,000 -6,316,000,000 -2,483,100,000 -32.53
2019-12-31 4,270,100,000 -6,143,700,000 -1,873,600,000 -65.25
2018-12-31 5,223,200,000 -6,357,000,000 -1,133,800,000 n/a

American Electric Power Company could be more effective in converting profits into cash, since its cash flows are averaging $-2,045,475,000.00, with a rate of change of -35.4% and a variability of 34.2%. For this reason, investors with a long term horizon will may want to look elsewhere if cash flow stability is an important factor of their stock screening.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.