With respect to short-term solvency, Caterpillar is in no danger. While the firm's inventory and receivables turn have been reduced as a result of the downturn, the current ratio has actually improved. In 2007, Cat's current ratio was 1.14, while at the end of 2008 it was 1.22, both of these being healthy figures. As further evidence of Caterpillar's financial strength, its accounts payable turnover improved during the period. Accounts payable increased just 2.2% while sales increased 14.1%. Caterpillar maintained its payments to suppliers even when its customers were delaying payments and its inventories were building up.
With respect to long-term solvency, long-term debt increased 28.07% and total liabilities increased 30.5%, both rates much faster than the growth in sales. Neither the 2007 nor 2008 income statement highlighted the firm's interest expense. However, it is worth noting that the company is highly levered. Total liabilities to total assets increased from 84% to 91%, both figures being high. The largest increases in liabilities were in long-term debt and in "other liabilities," the latter category increasing 142% in the year. These figures are not cause for immediate alarm, but clearly Caterpillar has...
This is indicative of a steadily growing firm in a large, mature but still growing industry. Thus, the ROE fits Caterpillar's position in the market and its business strategy. What does not fit the company's strategy is its degree of leverage. Caterpillar's leverage is more indicative of a rapidly growing firm. With flat profits and a cyclical business, Caterpillar is not in that position. Cat's leverage does not support its strategy.
Works Cited:
Caterpillar 2008 Annual Report. Retrieved October 22, 2009 from http://www.cat.com/cda/files/1401923/7/Caterpillar%202008%20Annual%20Report%20-%20electronic%20only.pdf
Caterpillar 2007 Annual Report. Retrieved October 22. 2009 from http://www.cat.com/cda/files/815749/7/AR_2007_final.pdf?m=294196&x=7
MSN Moneycentral: Caterpillar. Various pages. (2009). Retrieved October 22, 2009 from http://moneycentral.msn.com/detail/stock_quote?Symbol=cat&getquote=Get+Quote
Hsu, Tiffany. (2008). Housing slowdown spurs auction of construction equipment. LA Times. Retrieved October…
