Alcoa or Century Aluminum: Analyzing Leverage Ratios



Leverage ratios

Previously, we looked at aluminum producers’ (XLB) 4Q16 cash flows. In this part, we’ll compare their leverage ratios.

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Alcoa’s leverage ratios

A major concern for investors involves Alcoa’s (AA) split. The concern is related to splitting liabilities—specifically debt and pension liabilities. Alcoa addressed the 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. Net debt is 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.

Due to Alcoa’s strong cash flow generation in November and December 2016, its net debt fell below $600 million. Based on Alcoa’s trailing 12-month EBITDA (earnings before interest, tax, depreciation, and amortization), the company has a net debt-to-EBITDA multiple of ~0.6x.

Century Aluminum

Century Aluminum (CENX) has a net debt-to-EBITDA multiple of 4.3x. Century Aluminum’s leverage ratios are higher compared to Alcoa based on the net debt-to-EBITDA metric. Having said that, both of these companies have significant deleveraging opportunities in 2017. Century Aluminum already sold its stake in the Ravenswood plant. It will help the company bring down its debt levels this year.

Both of these companies could end up posting positive free cash flows this year if the current commodity pricing environment sustains for the remaining part of the year.

In the next part of this series, we’ll see what top aluminum executives (RIO) (NHYDY) had to say about the aluminum industry’s outlook during their 4Q16 earnings calls.


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