Research Articles Base: Financial Analysis

identify and discuss about similarities and differences of the structure of financial regulatory system between Australia and Hong Kong

Letter of Transmittal   Mr. Tutor University Campus     Please accept the accompanying Money and Capital Market Assignment discussing about the differences and similarities between the structure of financial regulatory system between Australian and Singapore. This assignment is being done through the past few weeks. After doing a sufficient research, obtaining adequate information on this topic and listening to your advices, this assignment has finally being completed. In this opportunity, the writer would like to thank Mr. for his time and patience in guiding her along doing this assignment.             After completing this assignment, the writer believed that she has gained deeper knowledge regarding Australian and Singapore financial regulatory system. This is believed to be useful in the writer’s future study.                     Introduction Overview of Financial System The financial system is defined as set of financial markets and financial institutions that enable the flow of funds from the lender (surplus unit) to the borrower (deficit units) (, 1991; , 2003). Generally, the financial institutions and markets that exist today in most countries are similar in functions while it may be differ in terms of structure or level of regulation by the authorities ( & , 2000).  In financial system, mainly there are two main markets namely the capital market and money market. The capital market are set up for investments and borrowings in a long term usually over one year or known as a  long term market, whereas the money market deals with all short term funds, usually less than a year or short term markets (, 2003;  & , 2000; , 2000). Within those markets, there are primary and secondary market as well as the foreign exchange market and the derivative market, which deals with both short and long term funds. The financial institutions play role as intermediaries between the lender and the borrower in the system (, 2000). The institutions also offer financial products and services to the public. The financial system in most countries plays an important role for the economy of the countries. It promotes and allocates savings mainly from lender to borrower, which means it enable, the efficient uses of funds by the users. Which indirectly affects investment level by allocating those funds to the investors and ultimately it also helps in assisting the implementation of government or regulatory policy that eventually effect economic growth ( & , 2000). Australia Financial System             The Australian financial system consists of financial markets and financial institutions. Currently, the financial system involves regulatory framework that is use to maintain the stability of the system through imposing certain regulations on the institutions.             In Australia, the financial institutions are distinguished into several groups. Firstly, Bank institutions that are supervise by the central bank (Reserved Bank of Australia). Secondly, the Non Bank Financial Institutions like permanent building societies, credit unions, authorized money market dealers, finance companies and merchant banks. Banks and non bank financial institutions are the forms of intermediaries whereby the funds can be transferred between ultimate savers and ultimate borrowers. Thirdly are managed funds which are life insurances, superannuation funds, approved deposit funds, and public unit trusts ( & , 1997). Since 1998, credit unions are come under APRA which have role of taking deposit form into personal loans and lend to the users in market.  However, in building societies which come under AFICs before transferring the power to APRA in 1998, have a role to provide a housing loan and mortgage finance to home buyers. Lastly, finance companies borrow funds from the professional and institutional market and lend it out in areas such as commercial property through leasing (, 1998).             Regulated financial system After experiencing the failure of many institutions especially banks back in 1940s, the RBA applied various controls, which on banks interest rate and assets portfolio and the financial system responsibilities. In fact, the RBA cannot control the operation of financial systems. Its control were reducing the economic efficiency of the system as the impact of banks which can not compete their fund on the basis of the price and lent only to the most creditworthy customers and thus, they can not compete actively with others or with NBFIs (, 1997). At the beginning of 1980s, Campbell Committee reviewed the Australian financial system that is about the operating restriction by bank. Campbell Committee suggested deregulating to improve the efficiency through greater competition so that the domestic banks would attempt to strengthen their market position. The principal effect of deregulation on regularly bodies (particularly the RBA) was to shift the focus from controlling the business of intermediaries to one of the prudential supervision (, 1997, ). There are some objectives in carry out the deregulation such as to remove the restriction that impeded competition in the finance sector, to ensure that intermediaries take responsibility for their business decisions and to protect the integrity of the payment system as well as depositors’ funds through a regime of prudential supervision (. , 1997)               The Australian financial regulatory system   With a view in need of regulation to the financial institutions, the financial regulators are set up in response to the needs. Each of these financial institutions (, NBFIs, and managed funds) has financial regulator respectively. There are four main financial regulators framework in Australia which are Reserve Bank of Australia (RBA), Australian Prudential Regulation Authority (APRA), Australian Securities and Investments Commission (ASIC) and Australian Competition and Consumer Commission (ACCC) (, 2003). The Reserve Bank of Australia (RBA) is the central bank of Australia. It is part of Commonwealth bank that was established in 1911(, 1991). In 1924 the first central banking were acquired their authority, when the Commonwealth Bank have power over the issue of notes (, 1991). The role of Australia’s central bank was first identified in the 1936-1937 Royal Commission into Money and Banking (, 1991). Generally the RBA play the important role in the regulatory framework of the financial system.  The objective of the RBA is to ensure the stability the currency of Australia or to keep inflation low, maintenance of full employment (anti inflationary level), and to smooth the economic growth and keep welfare of the people of Australia (, 2003). In July 1998,  established the APRA (Australia Prudential Regulation Authority). APRA is the statutory authority which took over prudential supervision utility from the insurance and superannuation commission (ISC) and as well as from RBA in supervising the institutions (, 1998). In this case APRA supervises all of the deposit taking institution, credit unions, building societies, friendly societies, general insurances, life insurances, and superannuation funds. Instead, APRA plays essential role in the success of financial sector such as prudential supervision in the financial industry which is to provide the disclose information for the consumers that related to the financial products and ensure that the products are secure for the consumers (, 2003). ASIC was established in 1991 as the part of the Australian Investment Commission (ASC) and the ISC (, 1991). ASIC has the responsible in supervising the insurance, superannuation funds, and public unit trusts. It also has a consumer protection, observe the market integrity and ensure that the public disclosure of information needed by investors and creditors (, 2003). In the financial institution it is important component to organize their authorized in order to build the confidence of depositors or consumers. The Australian Competition and Consumer Commission was established on 6 November 1995 by the merger of Trade Practices Commission and the Prices Surveillance Authority. In this case the objective of ACCC is to view the consumers’ protections and market integrity (). The responsibility of ACCC is to ensure that the individuals and businesses comply with the commonwealth competition, fair trading and consumer protection laws. The ACCC is the only national agency which is dealing with competition matters and also has a plan to promote consumer education in local areas and communities. ()               Comparison in regulatory framework                                                                                                                                                                                                                     Australian Model of Regulatory Framework In Australia, each regulator is responsible for each of the market. The main role is played by RBA responsible to maintain the systemic stability of the financial system through its functions. As for the competition area will be handle by ACCC, mainly to promote a healthy competition on the market. In terms of how financial institutions should behave by taking into account consumers protection will be administer by ASIC. The APRA role is as a prudential supervisor to make sure the financial institutions behave in the most correct manner in the industry. The framework has a strength point where it enables each of the regulatory body to be more focusing their roles and tasks on the regulated institutions. In other words, it will mean increase in efficiency and there should be no overlapping in supervising the financial institutions. On the other hand, the framework has a shortcoming where financial institutions will have to answer to multiple regulators (, 2003).       The HKMA and the Securities and Futures Commission (SFC) are the two major regulatory bodies for the capital market, with the SFC being the principal regulator of the securities and futures markets. The HKMA was founded on 1 April 1993 by merging the Office of Exchange Fund with the Office of the Commissioner of Banking. As the government’s monetary authority, the HKMA is responsible for maintaining monetary and banking stability to keep the Hong Kong dollar stable, managing the Exchange Fund (Hong Kong’s official reserves) effectively, promoting the safety of Hong Kong’s banking system, and developing sound financial infrastructure for Hong Kong.   The SFC was established on 1 May 1989 under the Securities and Futures Commission Ordinance. It is an independent non-governmental statutory body that is responsible not only for the regulation of the securities and futures markets, takeovers, merger activity, and offers of investment products in Hong Kong, but also for the enforcement of laws regarding market malpractice. To avoid potential conflict of interest, HKEx and its subsidiaries (the SEHK, HKFE, and HKSCC) are also directly regulated by the SFC as listed issuers.     Credit:ivythesis.typepad.com

identify and discuss about similarities and differences of the structure of financial regulatory system between Australia and Hong Kong

Letter of Transmittal Mr. Tutor University Campus Please accept the accompanying Money and Capital Market Assignment d...

The Financial Performance of the Bank of East Asia

The Financial Performance of the Bank of East Asia Short Background to the Bank             The bank of East Asia (BEA) in Hong Kong is typically engaged in the financial services related, in the corporate, in the investor, and in the business. The company also offers its services as the personal banking, the corporate banking, the wealth management, the investment banking, and the international division. The bank has currently 100 branches in the whole Hong Kong which signifies that the bank is competitive.             To have knowledge on the performance of this company it is necessary to make a financial analysis on the bank to determine it trend as well as to forecast the future. The methods include the comparative analysis, the ratio analysis, the cash flow analysis and the historical analysis. Comparative Analysis             Annual Income Statement Millions of HKD (except for per share items) 2006 2005 12/31/2006 12/31/2005       Interest Income, Bank 12,866 7,807 Total Interest Expense 8,000 4,046 Net Interest Income 4,866 3,760 Loan Loss Provision – 0 NetInterIn after Loan Loss Provision 4,866 3,760   Fees & Commish from Operation 1,611 1,368 Insur Commish Fees& Premium 52 89 Dealer Trading Acct Profit -40 176 Invest Securities Gains 507 140 Foreign Currency Gains 146 294 Other Revenue 400 575 Non-Interest Income, Bank 2,676 2,642 Labor & Related Expenses -1,868 -1,604 Depreciation Expense -299 -259 Amortization of Intangibles -2 0 Amortization of Acq Costs – – Investment Securities Losses 0 -1 Other Unusual Expense -65 -158 Other Expense -1,047 -1,168 Non-Interest Expense, Bank -3,282 -3,189 Net Income Before Taxes 4,260 3,213   Provision for Income Taxes 775 427 Net Income After Taxes 3,486 2,786   Minority Interest -51 -37 Net Income Before Extra. Items 3,435 2,749   Net Income 3,435 2,749   Income Available to Common Excl. Extra. Items 3,435 2,749 Income Available to Common Incl. Extra. Items 3,435 2,749   Basic/Primary Weighted Average Shares 1,534 1,502 Basic/Primary EPS Excl. Extra. Items 2.239 1.83 Basic/Primary EPS Incl. Extra. Items 2.239 1.83 Dilution Adjustment 0 0 Diluted Weighted Average Shares 1,544 1,506 Diluted EPS Excl. Extra. Items 2.225 1.825 Diluted EPS Incl. Extra. Items 2.225 1.825   DPS – Common Stock Primary Issue 1.46 1.26 Gross Dividend – Common Stock 2,258 1,902   Pro Forma Net Income – –   Depreciation, Supplemental 299 259   Total Special Items 65 158 Normalized Income Before Tax 4,325 3,371 Effect of Special Items on Income Taxes 12 21 Inc Tax Ex Impact of Sp Items 786 448 Normalized Income After Tax 3,538 2,923 Normalized Inc Avail to Common 3,487 2,886 Basic Normalized EPS 2.274 1.921 Diluted Normalized EPS 2.259 1.916                         As we can see in the income statement, it has been stated that the income for the in the year 2006 had been increase compare for the past year. This income shows that the trend of the company is going up and shows a very good income flow. If we compare the performance of the bank when it comes to the income to the Industrial and Commercial Bank of China (ICBC) we can distinguish that the value of the income of ICBC for 2005 is 41, 390 and the income of the value in the 2006 is 22, 684. We can see that the income of the ICBC gets lower but when we compare it to the Bank of East Asia then we can simply determine that ICBC has much income than the Bank of East Asia. The company also met its benchmark and now continues growing.     Annual Balance Sheet Millions of HKD (except for per share items)     2006 12/31/2006     2005 12/31/2005       Cash & Due from Banks 8,318 4,526 Interest-Earning Deposits – – Trading Account Assets 3,558 3,858 Securities Held 10,249 13,017 Securities for Sale 12,002 8,399 Total Invest. Securities 22,252 21,416 Other Earning Assets 66,864 45,347 Other Erng. Assets, Total 92,674 70,622 Total Gross Loans 175,829 145,650 Loan Loss Allowances -732 -813 Net Loans 175,097 144,837 Buildings 4,231 4,304 Machinery/Equipment 2,255 1,999 Other Property/Plant/Equipment 1,289 951 Property/Plant/Equipment – Gross 7,774 7,254 Accumulated Depreciation -2,025 -1,898 Property/Plant/Equipment – Net 5,750 5,356 Goodwill, Gross 2,605 2,495 Accum. Goodwill Amort. 0 0 Goodwill, Net 2,605 2,495 Long Term Investments 1,077 769 Def. Inc. Tax – LT Asset 39 38 Other Assets 8,643 10,158 Other Assets, Total 8,643 10,158 Total Assets 294,202 238,799   Interest Bearing Deposits 216,523 182,326 Other Deposits 31,959 13,785 Total Deposits 248,482 196,112 Other Current Liabilities, Total 334 262 Total Long Term Debt 8,154 8,549 Total Debt 8,154 8,549 Deferred Income Tax 598 627 Minority Interest 382 207 Other Liabilities, Total 8,989 8,845 Total Liabilities 266,939 214,602   Common Stock 3,875 3,776 Additional Paid-In Capital 1,099 743 Retained Earnings (Accumulated Deficit) 22,289 19,679 Total Equity 27,263 24,197 Total Liabilities & Shareholders’ Equity 294,202 238,799 Total Common Shares Outstanding 1,550 1,510               When we talk of the liquidity ratio we have been distinguish that the value of the current ratio of the bank for the 2005 is 1.11275 and for the 2006 is 1.102131. This means that the company still cannot support its short term debt which came from its current assets.                   Credit:ivythesis.typepad.com

The Financial Performance of the Bank of East Asia

The Financial Performance of the Bank of East Asia Short Background to the Bank The bank of East Asia (BEA) in Hong Kong is...

Finance (analysis of investment activities)

INVESTMENT DECISION IN BASIC MATERIALS/ ALUMINUM INDUSTRY: ALCOA VERSUS ALCAN   Introduction             Alcoa and Alcan are the selected NYSE-listed companies to be analyzed.  They are the top-two companies in terms of market capitalization and total revenues.  They are also among the leaders in short-term and long-term growth.  For these reasons, comparative analysis of financial position and performance is on relative equal-footing and the findings will allow potential investors to pursue a more lucrative portfolio.  Simply put, when Alcoa and Alcan are the sample companies, investors are assured that they are the benchmark within the market leader’s criteria.  It is also useful to note that the business experience of the two firms is also comparable as they are working and polishing the business and the industry as a whole as far as the mid-1880s.  Financial data are based on the recent Yahoo! Finance listings and 3-year financial statements of the two firms.             I. Profitability             Alcan exceeded Alcoa with 1.79 points in terms of return on stockholders equity (i.e. in general).  The former is more effective in allocating and using the funds of its shareholders.  This happened despite Alcoa’s big face value amount in its earnings in 2006.  One reason is the multiple growths in earnings of Alcan where Alcoa has only doubled the account.  This is concretized by the stable growth of their total equity.  It is also observable that financing activities of Alcoa is in continuous decline during the last three years while Alcan is on the reverse direction.  On the contrary, Alcoa is pouring its funds on investing activities.  In this view, Alcoa may be investing in underperforming or possible growth assets while Alcan is focusing on debt management.  As their performances are within the industry average, their difference on this specific ratio has insufficient investment basis.               In terms of net profit margin, Alcan exceeded Alcoa by 0.16 of points.  The former has a larger margin that makes its total revenues more relevant to the bottom-line or the amount those investors especially shareholders can receive.  Although 2005 provided margin difficulties for both companies due to higher cost of business, they have managed to substantially improve their profit after income taxes (PAIT).  However, Alcan obtained the upper-hand because it succeeded to reduce its 2006 cost of sales with increasing sales.  Alcoa incurred rise in cost sales.  Even so, both companies exceeded the performance of the industry.  In terms of the profitability of regular operations, Alcoa overtook 1.39 points from Alcan because of the latter’s move to reduce interest payments for some uncertain motivation.                Investing wise, Alcoa is more profitable in its portfolio that Alcan garnering 0.51 points upper hand in return on total assets.  This is a useful finding because both companies have exhibited growth in PAIT, total assets and cash investments and proved that one company has more sound investment decision than the other.  Return on common equity, however, is higher for Alcan exceeding Alcoa with 0.80 points.  In conjunction with return on stockholder’s equity above, this upper hand of Alcan showed that even if its net return on assets is smaller, it assures that common shareholders (i.e. and preferred stock holders) will receive higher returns insensitive to underperforming investments.  This also indicated that Alcan can provide more returns to common stockholders even if preferred shareholders are prioritized.               Earnings per share (EPS) has different scenario between in the two firms.  As observed in three-year computation, Alcoa has a more stable and growth of EPS while Alcan substantially jumped to .47 EPS in 2006 compared to .33 and .69 in the last two years.  This latter situation is possible for Alcan because it had a drastic increase in earnings in 2006 while Alcoa merely doubled this account.  Further, the number of common stockholders of Alcan is reduced from 2005 level to 2006 level by at least 5,000,000 outstanding shares.  The net effect, therefore, was stronger that affected EPS.  However, even with such substantial increase in EPS, Alcan has the same dividend pay-out ratio compared to Alcoa at 23%.  Therefore, Alcan afforded to invest a lot in 2006 due to increase in available operating cash than Alcoa.  Even if the dividend payout ratio is the same the share of Alcan shareholders to earnings rise.      II. Liquidity             Alcan’s ability to meet its current financial liabilities is higher than Alcoa having the difference of 2.6 points.  Since 2004, the two companies exhibited similar movements wherein the increase/ decrease in current liabilities led to increase/ decrease of current assets.  This is an indication that they are financing some of their current assets with current liabilities.  Also since 2004, Alcoa and Alcan exhibited continuous decrease in financing activities while increasing its investing activities.  Such trade-off is reflected in the relationship of its current assets and current liabilities.  Both of the companies derived most of their current assets/ liabilities in trade receivables/ payables and inventories/ short-term borrowings which suggested the vitality of inventory turn-over and collection efficiency.  Such weight is concretized by low-levels of cash/ cash equivalents and short-term investments exemplified in the balance sheet of both companies.               The heightened sales performance of Alcan in 2006 is showed by 1.6 advantage over Alcoa in quick ratio.  The former inventories are relatively easily sold than the latter; therefore, it did not have to rely much on inventories to pay short-term obligations.  This finding assigns to Alcan the initial impression that it has relative strength in coping short-term liabilities.  However, in evaluating the aggregate three-year performance of both firms, the Alcoa has higher quick ratio in 2004 and 2005.  With this, it can be thought that Alcan’s 2006 performance derived the biggest “disturbance” in its high earnings growth relative to past two years.  Such also affected lower inventory levels and higher quick ratio.  Further, the increase in trade payables and trade receivable are seemingly related to each other.  If this suggests that the payment for trade is derived from receipt of receivable, collection and payment efficiencies should be managed properly.   III. Efficiency             In collection efficiency, Alcoa consistently exceeded Alcan with 2006 figures separating the two companies with 7.3 points.  The comparative figures mean that Alcoa receives the actual payment for its credit sales approximately 37 days from the day of invoice compared to Alcan who lagged at approximately 44 days.  As a result, the upper hand of Alcan’s in liquidity ratios is tarnished by faster conversion of Alcoa of its inventories to cash.  If any, Alcan benefits from having a higher trade receivable account but not on cash and cash equivalents.  On the contrary, Alcan has longer grace period in paying for its short-term obligations compared to Alcoa with average payment period upper hand of 51.63 points (i.e. days).  As a result, the former situation compensated its relative inefficiency in collection.  In this view, the preposition that payment for trade receivables are used to finance existing liabilities grain ground.    For Alcoa, low average payment period (i.e. even below the collection period) can mean two-things; namely, it can have substantial  free cash flows or it has risky short-term obligations due to shorter grace periods.  The former cannot be supported by liquidity ratios because Alcan took-over the advantage.  However, the 2006 reductions in receivables and increases in prepaid expenses and other current assets can reflect that Alcoa has enough cash to pay for its obligations (i.e. even in advance) despite low levels of receivables.  However, for the investors, the inability of the company to bargain payment extensions from capital suppliers can adversely affect their returns.  This is evidenced by minimal financing activities of Alcoa in 2006 (i.e. from 4 Million to Million) where payments in dividends remained constant since 2004 while long-term debt repayments have a three-year all time low.  The funds could have been diverted to pay short-term obligations had diminished the chance of shareholders to receive higher dividends.         In inventory efficiency, Alcoa maintained the 14.4 points edge contrary to Alcan.  This means that the former sold more inventories as percentage of total sales.  This ratio showed that the substantial increase in sales of Alcan in 2006 did meet the growth expectation of the company leading to inventory surplus, thus, lower inventory turnover.  On the contrary, the modest and consistent sales of Alcoa aided the company to accurately forecast the demand for the coming year.  Due to this difference, Alcoa maintained higher inventory turnover even if it incurred considerable rise in COGS probably due to volatile price movements of raw materials and prices of its products.  The three-year performance of the two firms also showed that Alcoa is consistent on having efficient inventory turnover compared to the near competitor Alcan.   In terms of efficiency in utilizing their assets, the two firms are at par with one another as no difference is derived in asset turnover.  Due to this, the need for economies of scale and scope in the industry is evidenced as companies are using this benchmark to sustain substantial costs in heavy industries.  However, by digging deeper in asset efficiency, Alcoa exceeded 14.4 points in fixed asset turnover compared to Alcan.  This ratio is helpful in showing the manufacturing capabilities and value-adding resources of the firm that investors may view as precious in their decision-making.  Alcan may have significant wastage in product defects or its machines have relative shorter performance lives.  Labor productivity is also a crucial factor to consider in evaluating fixed assets because the low fixed asset turnover of Alcan can be supported by more skilled and motivated workforce.  However, since the industry is capital-intensive, such admonition is difficult to assume rather should be based on actual findings (e.g. fixed asset ratios).   IV. Financial Stability             As Alcan exceeded the debt-to-equity ratio of Alcoa by 0.56 points, it is more leveraged and has higher financial risk.  Due to this, the higher financing activities of Alcan can be presupposed to come from debts that it had afford to increased investments and financing activities at the same time.  Compared to the same situation of Alcoa also with increased operating cash flows, cash that are used in financing activities have substantially reduced from 2005 levels.  This mean that Alcan is using is debt on a rather strategic way while Alcoa can experience relative reduction in sales growth due to minimal financing and investing activities.  As both of their ratios are injected with almost the same levels of debt and equity, the financial risk being more attributable to Alcan is justified by effort to increase returns (i.e. bigger/ smaller risks will result to bigger/ smaller returns).  Alcoa may be on the brink of undercutting the debt edge.               Even though Alcoa has lower debt-to-equity ratio, its times interest earned or coverage ratio is higher by 3.13 points compared to Alcan.  This is a bad signal for the latter because as it is more leverage than the former it would require the ability to pay the interest in order to prevent demise of credit worthiness and even face litigation.  Such scenario is apparently avoided by Alcan as it posted a huge difference in financing activities compared to Alcoa.  The former used most of its cash from its operations for debt repayments while the latter hardly pay for such account.  This approach is consistent with the fact that Alcan undercut interest payments in 2006 compared to 2004 and 2005 while the less indebted Alcoa even intensified its interest payments.  The seemingly opposite debt payment strategies of the two companies are eminent.  With this, Alcan is on the risk of inability to borrow from creditors which can limit long-term growth of the firm. V. Horizontal and Vertical Analysis             The initial boost of Alcan’s stocks in the first quarter of 2007 is combined results of good earnings in 2006, increased in aluminum prices, plant expansions, more leveraged business model and European exposure.  Due to these factors, such trend is expected to remain over the year and that will offer potential investors above average returns.  On the other hand, Alcoa only received a pinch of price increase as it announced divestment of one of its low- margin business area.  However, as showed in ratio analysis above, this will trim down the inefficiencies lurking in COGS particularly in 2006 that pulled its net profit margin behind Alcan even with higher sales in absolute amounts and year-on-year growth.  Further, most analysts suggested that Alcoa’s price outlook can be directed to a more positive scenario if its assets and investments are less diversified.  Due to this, the stake of the company in pharmaceutical and other consumer products are on the verge of re-assessment to assure business success in the future which could undermine its substantial capital expenditures implemented in 2006.               According to corporate leaders of aluminum companies, the industry will have a balance market in 2007.  However, the growth in demand will fall from 6.8% in 2006 to 6.7% in 2007 and overall supply will risk 7.8%.  As a consequence, even though the supportive status of market indicators, aluminum industry will post less growth in the current year except perhaps from industry-specific strategies and situations.  In the vertical industry like steel and iron, a growth company Steel Dynamics can trigger the consolidation trend for steel/ iron and metal industry.  Steel/ iron industry is regarded as efficient industry while most of the companies have lower debt-to-equity ratio.  As a result, most firms are acquiring diligently using minimal debt financing rather rely on growth revenues to finance them.  The implications to the aluminum industry is that it can have customers shifting to steel/ iron and metal industries due to substantial economies of scale and scope.  As a result, aluminum companies such as Alcoa and Alcan are expected to intensify the dependence of their customers on their products through continuous innovation and cost-efficient operations.   VI. Portfolio Decision             In profitability, Alcoa has more consistent performance than Alcan making the former more safe investment destination.  The substantial increase in sales of Alcan and subsequent increase in costs of Alcoa in 2006 have underpinned the positions of two companies.  However, as the industry merely receives positive impact of increase in aluminum price in the 2006 while Alcoa is improving its portfolio, Alcoa is more profitable in the long-term and less risky compared to the short-term and cyclical direction of Alcan.  Consistency is also implied in liquidity ratios exemplified by Alcoa where Alcan only took the upper hand in drastic sales success in 2006.  Efficiency in collection, inventory and bargaining is payment are also attributed to Alcoa, although as shareholder, it is more advantageous to haggle payment periods of creditors.  The plant efficiency of Alcoa also surpassed Alcan even if there are still inefficient areas to develop.  Lastly, financial stability is afforded in Alcoa relative to Alcan due to less leverage and higher coverage ratio.  As a result, Alcoa is also ready for consolidation threats of the steel/ ore and metal industry as the latter industries are also less indebted.   Appendices Appendix 1: Manual Computation of Unsearchable Financial Ratios FINANCIAL RATIOS   AA   AL     2006 2005 2004   2006 2005 2004   I. Profitability                 Return on Equity 0.154 0.092     0.162 0.013 0.024   Return on Total Assets 0.060 0.037     0.062 0.005 0.008   Net Profit Margin 0.074 0.048     0.076 0.006 0.010   Gross Profit Margin 0.126 0.090     0.112 0.033 0.037   Earnings Per Share 2.57 1.40 1.49   4.47 0.33 0.69   Dividend Pay-out 0.233 0.425     0.150 1.736 0.864                     II. Liquidity                 Current Ratio 1.258 1.163     1.284 1.101 1.017   Quick Ratio 0.735 0.711     0.751 0.625 0.580                     III. Efficiency                 Average Collection Period 37.571 37.345     44.928 41.458 47.505   Average Payment Period 32.200 34.547     83.835 82.772 85.486   Inventory Turnover 2.051 2.034     1.907 1.842 1.877   Asset Turnover 0.817 0.759     0.817 0.763 0.748   Fixed Assets Turnover 2.051 2.034     1.907 1.842                       IV. Financial Stability                 Total Debt to Total Assets 0.558 0.563     0.614 0.635 0.664   Times Interest Earned 7.938 4.811 6.945   7.356 -0.077 0.673     Credit:ivythesis.typepad.com

Finance (analysis of investment activities)

INVESTMENT DECISION IN BASIC MATERIALS/ ALUMINUM INDUSTRY: ALCOA VERSUS ALCAN Introduction Alcoa and Alcan are the selec...