Anemic returns on capital and fixed assets - the financial ratio analysis later in this paper makes this point very clear; the company is struggling to gain higher levels of asset utilization and therefore increase gross margins and profitability.
Aerospace growth will significantly grow Alcoa's business - Despite the many problems in the areas of asset utilization and profitability, the company is well positioned to take advantage of the growing demand for their core products, services, and programs oriented to the aerospace industry.
Growth of the global construction industry - This is also a significant opportunity for Alcoa to continue to grow all its core businesses through demand for construction products in the most rapidly growing industrialized economies globally. This includes the growth in construction throughout China, India and throughout the Pacific Rim 4Q06 Analyst Presentation (2006).
Automotive and truck growth continues to stall - This is impacting each business unit of Alcoa today, specifically the rolled steel products and the engineering services divisions. It is anticipated that Alcoa will continue to move away from this sector and concentrate more on aerospace demand and projects according to Investor Analyst Day (2006).
Tightening of environmental regulations globally - This is also forcing a higher level of costs on all phases of the Alcoa value chain and also increasing the costs of mining bauxite and obtaining other raw materials.
Increasing energy prices globally - the rising cost of electricity has a direct impact on above-the-line business profitability, and is 25% of the cost of aluminum products, in general, for the last three years. Energy costs will be a significant factor the company will have to compensate for going into the future.
As one of the most pervasively used metals in global production, aluminums' influence on many industries is central to their abilities to compete. As a result, aluminum is a staple for the many of the most advanced industries including aerospace, automotive manufacturing, and many other segments. Figure 2 defines the use segments for aluminum products per the International Aluminum Institute.
Figure 2: End Uses of Aluminum
Aluminum is considered a premium metal due to its weight, corrosion resistance, conductive capabilities, and strength. These factors have made aerospace applications of high interest for the end use of this metal.
Global Aluminum Demand
While the overall growth of aluminum continues to be sluggish at 2.7% per year for the past ten years, many analysts including the International Aluminum Institute expect above-trend global aluminum consumption growth rates of 7% or higher in the 2007-2010 timeframe. This is primarily due to two factors:
The first is due to a lower level of consumption during the early 2000-2002 timeframe and the second is the expectation of higher consumption rates in emerging regions of the world including China.
Aerospace, transportation, packaging, construction, power lines, and consumer durables are all factors that are significantly driving the demand for aluminum both domestically and globally. The aluminum sector is cyclical; one of its key bellwethers is the trend in industrial production. The correlation between western world aluminum consumption and industrial production growth has been 65-70% over the past 40 years.
Alcoa Financial Analysis
Despite the slow-down in key segments including consumer plastics and automotive, top-line revenue growth continues strong for Alcoa, as is shown in the Annual Income Statement Analysis, shown below SEC Filing (2006).
Alcoa Annual Income Statement Analysis
The growth of Australian sales has been a significant driver of overall revenue growth, accentuated by the exchange rate fluctuations favoring the American dollar of the Australian currencies.
The following analysis of Alcoa Business Segments shows the distribution of income by business sector:
Alcoa Business Segment Analysis
Packaging & Consumer
Extruded & End Products
Alumina & Chemicals
Finally, a comparison of financial ratios shows the strength of the company in the core areas of Return on Equity and corresponding rise in Return on Investment. What is troubling however the lack of strength is in Return on Assets which despite a significant rise in revenues is still at 5.81%, well under industry average. In addition, gross margins are relatively flat compared to overall revenue growth and the operating margin, while spiking in the latest year, has for the most part been relatively flat. The company has also stayed focus on the financing through organic revenue growth, and as a result their debt is staying constant relative to other factors. Sourcing for this information is from SEC documents SEC Filing (2004), SEC Filing (2005) and SEC Filing (2006).
Alcoa Financial Ratio Analysis
Return on Equity (%)
Return on Assets (%)
Return on Investment
EBITDA of Revenue (%)
Operating Margin (%)
Net Profit Margin (%)
Effective Tax Rate (%)
Working Capital/Total Assets
Total Debt to Equity
Long-Term Debt to Assets
Investor Analyst Day (2006) - Introductory remarks to Investment Analysts during June 15, 2006 Alcoa Investor Day.
Accessed from the Internet on February 20, 2007 from location:
http://www.alcoa.com/global/en/investment/pdfs/06_investor_day/1_Muscari_Welcome.pdffrom the location:
4Q06 Analyst Presentation (2006) - Presentation by Alcoa Company officials to the investment analyst community. Accessed from the Internet on February 20, 2007 from location:
Desjardins Materials Conference (2006) - Presented by Alain Belda, Alcoa Chairman and Chief Executive Officer. Accessed from the Internet on February 20, 2007 from location:
SEC Filing (2006) - Form 10K Filed with the SEC by Alcoa in 2006: Accessed from the Internet on February 20, 2007 from location:
SEC Filing (2005) - Form 10K Filed with the SEC by Alcoa in 2005: Accessed from the Internet on February 20, 2007 from location:
SEC Filing (2004) - Form 10K Filed with the SEC by Alcoa in 2004: Accessed from the Internet on February 20, 2007 from location:
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