Intrinsic value of Alcoa - AA

Previous Close

$42.03

  Intrinsic Value

$849.30

stock screener

  Rating & Target

str. buy

+999%

Previous close

$42.03

 
Intrinsic value

$849.30

 
Up/down potential

+999%

 
Rating

str. buy

We calculate the intrinsic value of AA stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2017), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 7.8

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  25.10
  23.09
  21.28
  19.65
  18.19
  16.87
  15.68
  14.61
  13.65
  12.79
  12.01
  11.31
  10.68
  10.11
  9.60
  9.14
  8.72
  8.35
  8.02
  7.72
  7.44
  7.20
  6.98
  6.78
  6.60
  6.44
  6.30
  6.17
  6.05
  5.95
Revenue, $m
  14,577
  17,942
  21,761
  26,037
  30,773
  35,964
  41,604
  47,684
  54,194
  61,123
  68,463
  76,205
  84,341
  92,867
  101,781
  111,082
  120,774
  130,861
  141,352
  152,257
  163,591
  175,368
  187,608
  200,331
  213,559
  227,319
  241,637
  256,543
  272,069
  288,248
Variable operating expenses, $m
  7,201
  8,864
  10,750
  12,862
  15,202
  17,766
  20,552
  23,556
  26,772
  30,195
  33,821
  37,645
  41,665
  45,877
  50,280
  54,875
  59,662
  64,645
  69,828
  75,215
  80,814
  86,632
  92,678
  98,963
  105,498
  112,295
  119,369
  126,732
  134,402
  142,394
Fixed operating expenses, $m
  4,844
  4,951
  5,060
  5,171
  5,285
  5,401
  5,520
  5,641
  5,765
  5,892
  6,022
  6,154
  6,290
  6,428
  6,570
  6,714
  6,862
  7,013
  7,167
  7,325
  7,486
  7,651
  7,819
  7,991
  8,167
  8,346
  8,530
  8,718
  8,910
  9,106
Total operating expenses, $m
  12,045
  13,815
  15,810
  18,033
  20,487
  23,167
  26,072
  29,197
  32,537
  36,087
  39,843
  43,799
  47,955
  52,305
  56,850
  61,589
  66,524
  71,658
  76,995
  82,540
  88,300
  94,283
  100,497
  106,954
  113,665
  120,641
  127,899
  135,450
  143,312
  151,500
Operating income, $m
  2,532
  4,128
  5,951
  8,004
  10,286
  12,797
  15,532
  18,487
  21,656
  25,036
  28,621
  32,405
  36,387
  40,563
  44,932
  49,493
  54,250
  59,203
  64,357
  69,717
  75,291
  81,086
  87,111
  93,376
  99,894
  106,677
  113,738
  121,093
  128,757
  136,748
EBITDA, $m
  3,686
  5,549
  7,675
  10,066
  12,723
  15,645
  18,827
  22,263
  25,949
  29,877
  34,043
  38,441
  43,067
  47,918
  52,993
  58,291
  63,815
  69,567
  75,552
  81,776
  88,248
  94,975
  101,969
  109,243
  116,808
  124,680
  132,876
  141,411
  150,305
  159,577
Interest expense (income), $m
  226
  102
  339
  612
  921
  1,267
  1,651
  2,071
  2,528
  3,020
  3,548
  4,109
  4,703
  5,330
  5,989
  6,679
  7,401
  8,154
  8,939
  9,756
  10,605
  11,488
  12,406
  13,360
  14,351
  15,381
  16,453
  17,567
  18,726
  19,933
  21,190
Earnings before tax, $m
  2,429
  3,789
  5,339
  7,083
  9,019
  11,146
  13,460
  15,959
  18,636
  21,489
  24,512
  27,702
  31,057
  34,574
  38,252
  42,092
  46,095
  50,264
  54,601
  59,112
  63,803
  68,680
  73,751
  79,025
  84,513
  90,224
  96,171
  102,367
  108,824
  115,557
Tax expense, $m
  656
  1,023
  1,442
  1,912
  2,435
  3,009
  3,634
  4,309
  5,032
  5,802
  6,618
  7,480
  8,385
  9,335
  10,328
  11,365
  12,446
  13,571
  14,742
  15,960
  17,227
  18,543
  19,913
  21,337
  22,818
  24,361
  25,966
  27,639
  29,382
  31,201
Net income, $m
  1,773
  2,766
  3,898
  5,170
  6,584
  8,136
  9,826
  11,650
  13,604
  15,687
  17,894
  20,223
  22,672
  25,239
  27,924
  30,727
  33,650
  36,693
  39,859
  43,152
  46,576
  50,136
  53,838
  57,688
  61,694
  65,864
  70,205
  74,728
  79,442
  84,357

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  21,821
  26,860
  32,576
  38,978
  46,067
  53,838
  62,281
  71,383
  81,128
  91,502
  102,490
  114,079
  126,259
  139,023
  152,367
  166,291
  180,799
  195,900
  211,605
  227,930
  244,897
  262,528
  280,851
  299,896
  319,699
  340,297
  361,732
  384,046
  407,288
  431,509
Adjusted assets (=assets-cash), $m
  21,821
  26,860
  32,576
  38,978
  46,067
  53,838
  62,281
  71,383
  81,128
  91,502
  102,490
  114,079
  126,259
  139,023
  152,367
  166,291
  180,799
  195,900
  211,605
  227,930
  244,897
  262,528
  280,851
  299,896
  319,699
  340,297
  361,732
  384,046
  407,288
  431,509
Revenue / Adjusted assets
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
Average production assets, $m
  11,545
  14,210
  17,234
  20,622
  24,372
  28,483
  32,950
  37,765
  42,921
  48,410
  54,223
  60,354
  66,798
  73,551
  80,611
  87,977
  95,653
  103,642
  111,951
  120,588
  129,564
  138,892
  148,586
  158,662
  169,139
  180,036
  191,376
  203,182
  215,478
  228,292
Working capital, $m
  -554
  -682
  -827
  -989
  -1,169
  -1,367
  -1,581
  -1,812
  -2,059
  -2,323
  -2,602
  -2,896
  -3,205
  -3,529
  -3,868
  -4,221
  -4,589
  -4,973
  -5,371
  -5,786
  -6,216
  -6,664
  -7,129
  -7,613
  -8,115
  -8,638
  -9,182
  -9,749
  -10,339
  -10,953
Total debt, $m
  4,650
  8,383
  12,619
  17,363
  22,616
  28,374
  34,630
  41,375
  48,596
  56,283
  64,425
  73,013
  82,038
  91,496
  101,384
  111,702
  122,452
  133,642
  145,279
  157,376
  169,949
  183,013
  196,590
  210,703
  225,377
  240,640
  256,523
  273,058
  290,281
  308,228
Total liabilities, $m
  16,170
  19,903
  24,139
  28,883
  34,136
  39,894
  46,150
  52,895
  60,116
  67,803
  75,945
  84,533
  93,558
  103,016
  112,904
  123,222
  133,972
  145,162
  156,799
  168,896
  181,469
  194,533
  208,110
  222,223
  236,897
  252,160
  268,043
  284,578
  301,801
  319,748
Total equity, $m
  5,652
  6,957
  8,437
  10,095
  11,931
  13,944
  16,131
  18,488
  21,012
  23,699
  26,545
  29,547
  32,701
  36,007
  39,463
  43,069
  46,827
  50,738
  54,806
  59,034
  63,428
  67,995
  72,740
  77,673
  82,802
  88,137
  93,689
  99,468
  105,488
  111,761
Total liabilities and equity, $m
  21,822
  26,860
  32,576
  38,978
  46,067
  53,838
  62,281
  71,383
  81,128
  91,502
  102,490
  114,080
  126,259
  139,023
  152,367
  166,291
  180,799
  195,900
  211,605
  227,930
  244,897
  262,528
  280,850
  299,896
  319,699
  340,297
  361,732
  384,046
  407,289
  431,509
Debt-to-equity ratio
  0.820
  1.210
  1.500
  1.720
  1.900
  2.030
  2.150
  2.240
  2.310
  2.370
  2.430
  2.470
  2.510
  2.540
  2.570
  2.590
  2.610
  2.630
  2.650
  2.670
  2.680
  2.690
  2.700
  2.710
  2.720
  2.730
  2.740
  2.750
  2.750
  2.760
Adjusted equity ratio
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259
  0.259

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  1,773
  2,766
  3,898
  5,170
  6,584
  8,136
  9,826
  11,650
  13,604
  15,687
  17,894
  20,223
  22,672
  25,239
  27,924
  30,727
  33,650
  36,693
  39,859
  43,152
  46,576
  50,136
  53,838
  57,688
  61,694
  65,864
  70,205
  74,728
  79,442
  84,357
Depreciation, amort., depletion, $m
  1,154
  1,421
  1,723
  2,062
  2,437
  2,848
  3,295
  3,777
  4,292
  4,841
  5,422
  6,035
  6,680
  7,355
  8,061
  8,798
  9,565
  10,364
  11,195
  12,059
  12,956
  13,889
  14,859
  15,866
  16,914
  18,004
  19,138
  20,318
  21,548
  22,829
Funds from operations, $m
  2,928
  4,187
  5,621
  7,232
  9,021
  10,985
  13,121
  15,426
  17,897
  20,528
  23,316
  26,258
  29,351
  32,594
  35,985
  39,525
  43,215
  47,057
  51,054
  55,211
  59,532
  64,025
  68,697
  73,555
  78,608
  83,867
  89,343
  95,046
  100,989
  107,186
Change in working capital, $m
  -111
  -128
  -145
  -163
  -180
  -197
  -214
  -231
  -247
  -263
  -279
  -294
  -309
  -324
  -339
  -353
  -368
  -383
  -399
  -414
  -431
  -448
  -465
  -483
  -503
  -523
  -544
  -566
  -590
  -615
Cash from operations, $m
  3,039
  4,315
  5,766
  7,395
  9,201
  11,182
  13,335
  15,657
  18,144
  20,791
  23,595
  26,552
  29,661
  32,918
  36,324
  39,879
  43,583
  47,440
  51,453
  55,625
  59,963
  64,473
  69,162
  74,038
  79,111
  84,390
  89,887
  95,612
  101,579
  107,801
Maintenance CAPEX, $m
  -923
  -1,154
  -1,421
  -1,723
  -2,062
  -2,437
  -2,848
  -3,295
  -3,777
  -4,292
  -4,841
  -5,422
  -6,035
  -6,680
  -7,355
  -8,061
  -8,798
  -9,565
  -10,364
  -11,195
  -12,059
  -12,956
  -13,889
  -14,859
  -15,866
  -16,914
  -18,004
  -19,138
  -20,318
  -21,548
New CAPEX, $m
  -2,313
  -2,666
  -3,024
  -3,387
  -3,751
  -4,111
  -4,467
  -4,815
  -5,156
  -5,488
  -5,813
  -6,131
  -6,444
  -6,753
  -7,060
  -7,367
  -7,676
  -7,989
  -8,309
  -8,637
  -8,976
  -9,328
  -9,694
  -10,076
  -10,477
  -10,898
  -11,340
  -11,806
  -12,296
  -12,814
Cash from investing activities, $m
  -3,236
  -3,820
  -4,445
  -5,110
  -5,813
  -6,548
  -7,315
  -8,110
  -8,933
  -9,780
  -10,654
  -11,553
  -12,479
  -13,433
  -14,415
  -15,428
  -16,474
  -17,554
  -18,673
  -19,832
  -21,035
  -22,284
  -23,583
  -24,935
  -26,343
  -27,812
  -29,344
  -30,944
  -32,614
  -34,362
Free cash flow, $m
  -198
  494
  1,321
  2,284
  3,388
  4,633
  6,020
  7,547
  9,211
  11,010
  12,941
  14,999
  17,181
  19,485
  21,909
  24,451
  27,110
  29,886
  32,779
  35,793
  38,928
  42,189
  45,579
  49,103
  52,768
  56,579
  60,543
  64,669
  68,965
  73,439
Issuance/(repayment) of debt, $m
  3,246
  3,734
  4,236
  4,744
  5,253
  5,758
  6,256
  6,744
  7,221
  7,687
  8,142
  8,588
  9,025
  9,458
  9,888
  10,318
  10,751
  11,189
  11,637
  12,097
  12,572
  13,065
  13,577
  14,113
  14,674
  15,263
  15,883
  16,535
  17,222
  17,947
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  3,246
  3,734
  4,236
  4,744
  5,253
  5,758
  6,256
  6,744
  7,221
  7,687
  8,142
  8,588
  9,025
  9,458
  9,888
  10,318
  10,751
  11,189
  11,637
  12,097
  12,572
  13,065
  13,577
  14,113
  14,674
  15,263
  15,883
  16,535
  17,222
  17,947
Total cash flow (excl. dividends), $m
  3,048
  4,228
  5,557
  7,028
  8,641
  10,392
  12,276
  14,291
  16,433
  18,698
  21,083
  23,586
  26,207
  28,943
  31,797
  34,769
  37,860
  41,075
  44,417
  47,890
  51,500
  55,253
  59,156
  63,216
  67,442
  71,842
  76,426
  81,204
  86,187
  91,386
Retained Cash Flow (-), $m
  -1,129
  -1,305
  -1,480
  -1,658
  -1,836
  -2,013
  -2,187
  -2,357
  -2,524
  -2,687
  -2,846
  -3,002
  -3,155
  -3,306
  -3,456
  -3,606
  -3,758
  -3,911
  -4,068
  -4,228
  -4,394
  -4,566
  -4,746
  -4,933
  -5,129
  -5,335
  -5,551
  -5,779
  -6,020
  -6,273
Prev. year cash balance distribution, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
  23
  29
  36
  44
  52
  62
  72
  83
  95
  108
  122
  137
  152
  169
  186
  204
  222
  242
  262
  283
  305
  327
  351
  375
  401
  427
  455
  483
  513
  544
Cash available for distribution, $m
  1,919
  2,923
  4,076
  5,370
  6,805
  8,379
  10,090
  11,934
  13,909
  16,011
  18,237
  20,585
  23,052
  25,638
  28,341
  31,162
  34,103
  37,164
  40,349
  43,662
  47,106
  50,687
  54,410
  58,283
  62,313
  66,507
  70,875
  75,425
  80,167
  85,113
Discount rate, %
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
  1,840
  2,676
  3,547
  4,422
  5,275
  6,081
  6,816
  7,459
  7,990
  8,394
  8,660
  8,784
  8,765
  8,607
  8,320
  7,919
  7,420
  6,844
  6,213
  5,548
  4,872
  4,206
  3,566
  2,968
  2,424
  1,940
  1,521
  1,167
  875
  641
Current shareholders' claim on cash, %
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Alcoa Corporation, formerly Alcoa Upstream Corporation, is engaged in the production of bauxite, alumina and aluminum of various cast and rolled products. The Company is engaged in the production and management of aluminum and alumina combined through its participation in various aspects of the industry, such as technology, mining, refining, smelting, and recycling. The Company's segments include Bauxite, Alumina, Aluminum, Cast Products, Energy and Rolled Products. The Company's Bauxite segment represents its global portfolio of bauxite mining assets. The Company's Alumina segment represents its refining system across the world, and processes bauxite into alumina and sells it directly to internal and external smelter customers across the world. The Company's Aluminum segment represents its smelter system across the world. Its Energy segment represents its portfolio of energy assets, with power production capacity of approximately 1,685 megawatts.

FINANCIAL RATIOS  of  Alcoa (AA)

Valuation Ratios
P/E Ratio -19.2
Price to Sales 0.8
Price to Book 1.4
Price to Tangible Book
Price to Cash Flow -24.7
Price to Free Cash Flow -10.8
Growth Rates
Sales Growth Rate -16.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 3.3%
Cap. Spend. - 3 Yr. Gr. Rate -6.6%
Financial Strength
Quick Ratio 41
Current Ratio 0
LT Debt to Equity 25.2%
Total Debt to Equity 25.6%
Interest Coverage 0
Management Effectiveness
Return On Assets 0.5%
Ret/ On Assets - 3 Yr. Avg. 4.8%
Return On Total Capital -4.8%
Ret/ On T. Cap. - 3 Yr. Avg. -5.9%
Return On Equity -5.3%
Return On Equity - 3 Yr. Avg. -6.2%
Asset Turnover 0.6
Profitability Ratios
Gross Margin 15.2%
Gross Margin - 3 Yr. Avg. 18.1%
EBITDA Margin 8.4%
EBITDA Margin - 3 Yr. Avg. 8%
Operating Margin -0.1%
Oper. Margin - 3 Yr. Avg. 0.7%
Pre-Tax Margin -1.7%
Pre-Tax Margin - 3 Yr. Avg. -1.7%
Net Profit Margin -4.3%
Net Profit Margin - 3 Yr. Avg. -4.6%
Effective Tax Rate -113.6%
Eff/ Tax Rate - 3 Yr. Avg. -227.9%
Payout Ratio 0%

AA stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the AA stock intrinsic value calculation we used $11652 million for the last fiscal year's total revenue generated by Alcoa. The default revenue input number comes from 2017 income statement of Alcoa. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our AA stock valuation model: a) initial revenue growth rate of 25.1% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for AA is calculated based on our internal credit rating of Alcoa, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Alcoa.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of AA stock the variable cost ratio is equal to 49.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $4740 million in the base year in the intrinsic value calculation for AA stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 7.3% for Alcoa.

Corporate tax rate of 27% is the nominal tax rate for Alcoa. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the AA stock is equal to 0.2%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for AA are equal to 79.2%.

Life of production assets of 10 years is the average useful life of capital assets used in Alcoa operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for AA is equal to -3.8%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $4523 million for Alcoa - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 185 million for Alcoa is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Alcoa at the current share price and the inputted number of shares is $7.8 billion.

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COMPANY NEWS

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