Caterpillar Finance

Caterpillar Finance

Report on the Financial Health of Caterpillar, Inc.

This report will contain discussion of the financial condition and performance of Caterpillar Inc. In the fiscal year 2011. This discussion will include key ratios and will also include a comparison of our performance with industry norms.

In terms of liquidity, there are three key ratios that need to be taken into consideration -- the current ratio, the quick ratio and the cash ratio. The current ratio for Caterpillar is 1.33, the quick ratio is 0.82 and the cash ratio is 0.1. The industry averages for the current and quick ratios are known. They are 1.6 and 1.1 respectively. Thus, Caterpillar is underperforming its industry peers.

The profitability ratios are the gross margin, the operating margin and the net margin. For the fiscal year 2011, these were 27.5%, 11.8% and 8.2%. The industry averages for these measures are 32.7%, 13.3% and 9.85%. Again, Caterpillar lags the industry on these averages.

The important solvency ratios are the debt ratio and the long-term debt to equity ratio. The debt ratio is 83.5% and the ratio of long-term debt to equity is 1.92. The industry averages for these figures are 1.01 for debt/equity, which equate to 50.25% debt and 49.75% equity. Clearly, most firms in the industry have less debt than we do. All in all, our financial performance lags the industry in every key metric.

The company has been profitable for the past five years, so there is little excuse for this type of financial underperformance. The company's liquidity has actually improved, compared with where we were five years ago, when we had a current ratio of 1.14. The past year, however, saw a spike in accounts payable, which is something over which we have control. Our cash position is not great, and was better in each of the past two years. This partially explains the growth in the accounts payable. There has not been any substantial growth in receivables but our cash conversion cycle has been affected by excess inventory. Inventory as a percentage of total assets was 17.8% in 2011, compared with 12.8% five years ago. We are simply not selling our inventory as quickly as we need to, and this has led to a situation where we have to stretch our payables.

The company has also taken on more long-term debt last year, adding $4.5 billion in long-term debt. This takes the long-term debt to the highest level it has ever been. Part of this could be related to the cash conversion cycle, but it also hints at spending that is out of control. Yet, our margins are better than they have in the past few years and there has been no specific escalation in our operating costs. Our ratio of selling, general and administration expense to revenue has remained largely unchanged in the past five years.