Must-know: Lowest EBITDA margin in 10 years for AES

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Fall in EBITDA

AES Corporation (AES) reported EBITDA, or earnings before income taxes depreciation and amortization margins of 24.3% in the third quarter of 2014. Year-over-year EBITDA margins had dropped from 28.1% in 3Q13.

EBITDA

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Rising fuel costs

Like most power companies, AES Corporation incurs high fuel costs for power generation. The company’s fall in profit margins can be attributed to the rise in the price of fuel. During the third quarter, fuel costs for AES rose by 20.7% across all geographies compared to the same quarter last year.

Increasing revenues and falling margins

EBITDA margins reflect the profitability of a company. Higher EBITDA margins imply higher profit margins, while lower EBITDA margins indicate lower profit margins.

The EBITDA margins for AES have been falling consistently over the last four quarters. The third-quarter EBITDA margins are the lowest quarterly margins that AES has seen in ten years.

The slump in EBITDA margins shows the decline in AES Corporation’s profitability. Revenues have risen by 11%, while operating income has fallen by 17.4% in 3Q14 on a year-over-year basis. As noted in the chart above, the company’s revenue growth and EBITDA margins have been moving in opposite directions all year long.

Within the power utility industry, Southern Company (SO), PPL Corporation (PPL), and Ameren Corporation (AEE) enjoyed high EBITDA margins for the third quarter of 2014. These companies are part of the Utilities Select Sector SPDR (XLU), a key ETF, or exchange-traded fund in the power utility industry.

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