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3 Key Metrics for American Water Works' Investors to Focus On

AWK Return on Invested Capital (Annual) Chart

With President Trump's call for improving American infrastructure echoing in their ears, investors are turning their focus to utility stocks. American Water Works (NYSE: AWK) , a leader among water utility stocks, for example, is one name that's been drawing much attention. Whether testing the waters or ready to dive in and pick up shares, investors should have a sense of what they need to monitor. So let's look at three ways to evaluate the company.

AWK Return on Invested Capital (Annual) Chart

AWK Return on Invested Capital (Annual) data by YCharts

Sporting a ROIC of 4.24%, American Water Works may not seem much better than its peers -- if at all -- at effectively investing in itself.

AWK Return on Invested Capital (Annual) data by YCharts

We're interested in the long term, though. And when we consider the company form that perspective, we find American Water Works has far exceeded its peers at improving its ROIC, showing that it has found a way to navigate some choppy waters, while others have not.

Keeping things in balance

Dealing in a capital-intensive industry, American Water Works is no stranger to taking on debt. For example, in terms of acquisitions, management acknowledges, in its more recent 10-K, that "acquisitions are funded initially with short-term debt and later refinanced with the proceeds from long-term debt."

Since its incumbent on us to pay attention to the company's debt, we'll make use of a tried and true metric: the debt-to-equity ratio. Over the past five years, the company's debt-to-equity ratio has hovered between 1.2 and 1.3 -- considerably higher than its peers.

AWK Debt to Equity Ratio (Annual) data by YCharts

Some investors may see this and start reaching for a red flag; however, when it comes to rating a company's balance sheet, it's worth hearing what Standard & Poor's and Moody's have to say. For them, American Water Works' is anything but drowning in debt. In the company's most recent 10-K, management notes that Standard & Poor's raised the company's corporate credit rating from A- to A and confirmed its stable rating outlook in May 2015. In addition, Moody's maintains a long-term rating of A3 and a stable outlook.

Lastly, when we return to the 10-K once more, we find insight into management's perspective on its debt:

Since we expect our capital investments over the next few years to be greater than or equal to our cash flows from operating activities, we have no plans to reduce debt significantly.

What does all of this mean in terms of the debt-to-equity ratio? Though it's high, neither is there anything to suggest that it's placing the company in a tenuous position nor is there an indication that the ratio will be dropping anytime soon. So we can consider the current 1.3 ratio as a guidepost. If the ratio creeps higher, it may certainly be a cause for concern and warrants further investigation.

The takeaway

Keeping more than 49,000 miles of distribution and transmission pipes, 1,400 pumping stations, 1,200 water storage facilities, and 81 dams (among other assets) in tip-top shape doesn't come cheaply. So it's imperative for investors to weigh heavily the effects that capex has on American Water Works' business. And with these three metrics, investors will have a good sense of how smoothly things are flowing.

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Scott Levine has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Moody's. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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