FINANCIAL ANALYSIS

Alcoa Inc

Alcoa Inc

Introduction

Alcoa and other aluminum companies have run into obstacles in expanding raw aluminum production because it is energy intensive and often attract protest from environmentalist. The good news is that Alcoa Inc. and United Shipbuilding Corporation signed a memorandum of understanding to further develop the Russian shipbuilding market and expand the use of aluminum in domestic shipbuilding.

In August 2010, Alcoa acquired Trace (a maker of windows and doors for the commercial building and construction market) in its bid to leverage the construction markets to its favor. Alcoa also resumed operations in three of its factories in the United States

Company Background

The history of Alcoa Incorporated can be traced back to Charles Martin Hall's discovery of finding a feasible way of commercially extracting aluminum. He received a patent for the discovery in 1889. Since this period, the corporation improved and has undergone various structural and organizational changes.

In 1888, Alcoa was incorporated as 'The Pittsburgh Reduction Company' and in 1908; the name was changed to Aluminum Company of America, which it remained till it was officially shortened to 'Alcoa' in 1999. Moreover, in 1928, Alcoa moved most of the activities it had been conducting outside the United States into Aalen, a Canadian company, making Aalen legally independent. In 2008, Alcoa sold its packaging business which had accounted for more than 10% of its sales to Rank Group, and in 2009, it sold its wire harness and electrical distribution business to Platinum Equity.

Time Series Analysis

Liquidity Ratios

The liquidity ratios of the corporation increased over the periods analyzed. Receivables reduced considerably as well as total current liabilities. The increase in these ratios is good for Alcoa as it would be able to meet its short term obligations.

The inventory turnover reduced in these periods as sales dropped by 37% between 2007 and 2009. Sales between these periods declined primarily due to a drop in realized prices of aluminum, closure of some operating segments, unfavorable currency movement caused by a decline in the value of Euro and Australian Dollars. Between 2007 and 2008, inventory level increased as sales decreased which is not good sign. The average collection period for 2009 fell from 2008 and 2007 figures because accounts receivable reduced significantly. This reduction is good for Alcoa because a reduction in the level of accounts receivable reduces the potential risk of bad debt (BERNSTEIN 1978 Pp. 153-160).

The debt ratio increases in 2010 because of the short term borrowings from the commercial paper market. In 2011, the debt ratio reduced as the commercial paper was paid off through the issuance of stock. The debt to equity ratio increased in 2010 because of the increase in total debt (borrowing from commercial paper) and reduced in 2009 as a result of stock issuance. However, the times-interest-earned ratio fell considerably from 2010 to 2011.

Profitability Ratio

Alcoa's profitability ratios fell significantly since 2010 which is not a good situation for the company. The decrease in the income from continuing operations was due to charges for the 2009 and 2010 restructuring program, ...