How Does Alcoa’s Balance Sheet Look Heading into 2017?



Alcoa’s balance sheet

A major investor concern regarding Alcoa’s (AA) split is related to the splitting of liabilities, namely, debt and pension liabilities. Alcoa addressed this issue by retaining its entire debt with Arconic (ARNC). Alcoa has debt liability of ~$1.5 billion, which is composed mostly of notes that were issued in September 2016.

Along with its total debt levels, we should also look at the net debt. You can define net debt as total debt minus the cash and cash equivalents. Alcoa had a cash balance in excess of $600 million on November 1, 2016, leaving it with net debt of $831 million.

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Net debt

Thanks to Alcoa’s (AA) strong cash flow generation in November and December 2016, its net debt has fallen below $600 million. Based on Alcoa’s trailing 12-month EBITDA,[1. earnings before interest, tax, depreciation, and amortization] the company has a net-debt-to-EBITDA multiple of ~0.6x. This ratio looks comfortable when compared with some other mining companies (CENX) (NHYDY).

Comfortable leverage ratios

Alcoa’s debt levels also look comfortable on other parameters. Alcoa’s current market capitalization is almost ten times its current net debt. Credit rating agencies may recognize improved commodity markets and Alcoa’s lower leverage ratios, and we could see a credit rating upgrade.

However, rating agencies might want to wait to gauge the sustainability of higher commodity prices before they consider upgrading mining companies (RIO). Nonetheless, comfortable leverage ratios and improved earnings capacity can open up additional opportunities for Alcoa, which we’ll discuss in the next article.


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