Order Financial Analysis Assessment

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Based on the above factual data collected and complied, we now proceed to analysis the financial position of Caterpillar Inc. with respect to its competitors and the industry. The analysis is based on various parameters calculated above and measured based on yardsticks such as Liquidity, Activity, Leverage, Profitability, Market Value and Market-to-book ratio.
The first and foremost parameter to study liquidity is Net working capital. It can be observed that the net working capital has dropped by USD 2.87b when compared to 2014. The operating cash flows have dropped by USD 4.51b. This, prima facie appears to be alarming. However, on a careful evaluation of the other factors and the competitors, the following can be observedFinancial Analysis 11 | P a g e The main competitor as well has witnessed a drop of USD 3.08b in their net working capital numbers. Current ratio is
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stable and has not fluctuated. (from 1.39 to 1.31) The revenues have dipped by 85% (from USD 55b to USD 47b) It may be noted from the above that the current ratio is stable. It can therefore be concluded that there has not be any inefficiency as far as working capital management is concerned. However, there is an indication that there has been a slump in the industry as a whole in which the company is operating i.e. Manufacture of earth moving and other heavy equipment’s. The revenues have dipped by 15% where the competitor’s revenues have dipped by 20%. One of the broad causes for this can be attributed to an overall fall in the commodity and metal prices worldwide. The competitor has however, maintained very good liquidity position at 2.05 and is one of the best in the industry which is averaging at 1.7. On the whole, the working capital and liquidity levels are not the best in the industry. However, considering the capital intensive nature of business and heavy reliance on metal coupled with a slump in the metal industry, it can be concluded that the company has well managed and maintained its working capital and liquidity position.
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In order to evaluate the Activity and Efficiency of operation, we have computed the Inventory and Receivable number of days. Inventory days have only marginally increased from 112 days to 116 days and receivable days from 123 to 139 days. On a careful analysis of these two parameters, it can be observed that in-spite of the pressure on the revenues, the Inventory days and receivable days have not drastically fluctuated. This is an indicator that the management has been quite sensitive to the developments in the industry and had taken adequate precautions regularly in order to keep the working capital under control. It can also be seen that the competitor could not control the receivable days and have increased by 82 days. With a dip in revenue, there is a high likelihood that the inventories pile up and customer payments get delayed resulting in higher inventory days and receivable days. However, in case of Caterpillar Inc., they have done a commendable job of keeping both these parameters under control.
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Debt to equity ratio is the best measure to assess how the capital is leveraged. The D/E ratio of Caterpillar Inc. for the current year and previous year has been 2.57 and 2.35 respectively. This simply means that the company relies on debt capital 2.5 times that of the shareholders equity. In short, the company is heavily debt leveraged. This is the reason why the interest costs are very high (almost 2-3% of the revenues). The interest coverage ratio indicates that the EBIT covers the interest expense only by 6 times in 2015 whereas it used to be 11.5 times in the previous year and industry average is 14.12. It however needs to be remembered that this is a heavily capital intensive process industry and requires huge amount of capital investment for its process. On a comparison of the
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competitor’s numbers, it can be seen that their D/E ratio is enormous. It is clear that the competitor is not safely placed in the industry on capital leverage terms. On the contrary, the industry is maintaining a D/E ratio of only 0.69. This is certainly a matter of concern for both Caterpillar Inc. as well as the competitor. Both the companies are nowhere in competition when it comes to the capital leverage of the industry as a whole. Caterpillar Inc. has to take urgent measures to improve its capital structure either through public offerings or institutional investment and try and reduce its debts and in-turn reduce the interest burden which is almost 50% of its Net Income.

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