Is Alcoa Corporation (NYSE:AA) As Strong As Its Balance Sheet Indicates?
Stocks with market capitalization between $2B and $10B, such as Alcoa Corporation (NYSE:AA) with a size of US$9.67B, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. AA’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into AA here. View our latest analysis for Alcoa
Does AA generate enough cash through operations?
Over the past year, AA has maintained its debt levels at around US$1.40B – this includes both the current and long-term debt. At this current level of debt, AA currently has US$1.36B remaining in cash and short-term investments for investing into the business. On top of this, AA has produced cash from operations of US$1.22B during the same period of time, leading to an operating cash to total debt ratio of 87.18%, signalling that AA’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AA’s case, it is able to generate 0.87x cash from its debt capital.
Can AA pay its short-term liabilities?
Looking at AA’s most recent US$3.25B liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$4.24B, leading to a 1.3x current account ratio. Generally, for Metals and Mining companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does AA face the risk of succumbing to its debt-load?
AA’s level of debt is appropriate relative to its total equity, at 19.42%. This range is considered safe as AA is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether AA is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In AA’s, case, the ratio of 15.08x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as AA’s high interest coverage is seen as responsible and safe practice.
Next Steps:
AA has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for AA’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Alcoa to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for AA’s future growth? Take a look at our free research report of analyst consensus for AA’s outlook.
Valuation: What is AA worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AA is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
