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Running head: CATERPILLAR INCORPORATION 1

CATERPILLAR INCORPORATION 2

Caterpillar Incorporation:

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Business

· American Fortune 100 Company

· Designs, develops, engineers, manufactures, markets and sells machinery, engines, financial products and insurance

· Deals to customers via a worldwide dealer network

· Caterpillar is the World’s largest construction equipment manufacturer; One of the most valuable brands in the world.

· Its world-class distribution network and supply chain provide competitive advantage and increased production levels while catering to various customer needs.

· Caterpillar is a 93 year old company that has excelled and reached the top of its industry, till this day its stock value is still increasing and shows no signs of being held back despite..

· Caterpillar has a good amount of worldwide competitors, the biggest being John deere, Hitachi, JCB, and Komatsu (Jones, 1988).

Moat

· Caterpillar’s wide moat rests heavily on its intangible assets, which include the strength of its brand and extensive dealer network across the globe.

· Interbrand ranked Cat as the world’s 89th most valuable brand, worth $4.9 billion.

· With 172 dealers across the globe, it employs 157,000 employees at 2,163 branches. In order to replicate its dealer network it would cost more than $20 billion.

· Which coverage over every continent in the world it’s an ever increasing brand.

· Its book value per share is $23.79, a 3.80% increase per year.

· Its dividend value per share is $3.28, a 5.80% increase.

· Cat’s EPS growth rate was 2.7% since last year

· Cash flow per share growth rate of Cat was 8.20% per year

· Caterpillar’s Sales per Share growth rate was 1.12% since last quarter (Miller, 2002).

Risk

· From 2013 to 2017 Caterpillar revenue was declining 4.2% which led to the net income increasing massively, due to general decline in the industries market.

· Revenue has been declining for the past five years, and a massive obligations has been taken by the company.

· From 2013 to this moment the long-term debt has grown to 8.4%. Moreover, 70% of Caterpillar total long-term obligations are due from now to 2022. Which might affect the company financial strength (O'Leary, 2002).

Management

· Caterpillar’s CEO is Jim Umpleby, he has been CEO since January 1, 2017. He became chairman of the board of directors in 2018.

· He became a vice president for caterpillar in 2010, he also became president of Solar Turbines.

· Umpleby presented a new Corporate strategy to investors at a conference, describing it as a strategy focused on profitable growth through product expansion, and increased focus on operational excellence s. Barron’s, a U.S.-based financial magazine, described the new corporate strategy stating, “…investors can expect a more return-focused company

· Strategy has made fantastic progress on implementing priorities to profitably increase the company. Also guide the company to reach constant financial achievement, including record quarterly earnings per share in each quarter of 2018 to date.” (Leung, 2014).

The commonly financial ratio for December 2018: ROE 44%

ROA: 8.69%

LT Debt Earning ratio: 1.78

Part 2

· Gross profit ratio shows relationship between the gross profit and the total net sales revenue

· It evaluates operational performance of the business

· Gross profit ratio = (gross profit/ net sales)X 100

Billion	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Gross profit	8.51	12.22	16.56	18.82	14.93	14.47	13.47	10.49	14.20	17.73
Net Sales	0.895	0.2700	0.4928	0.5681	0.3789	0.2452	0.2512	-0.67	0.754	0.6147
Gross profit Ratio	9.50	4.52	3.36	3.31	3.94	5.90	5.36	-156.56	18.83	2.88

· Free cash flow is the efficiency and the liquidity ratio which calculates how much cash a firm may generates than it uses to run and expand the business.

· Free cash flow ratio = Operating Cash Flow – Capital Expenditure

Millions	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Net Sales	32,396	42,588	60,138	65,875	55,656	55,184	47,011	- 38,537	45,462	54,722
Net Income	895	2,700	4,928	5,681	3,78	2,452	2,512	-67	754	6,147

Millions	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Operating income	577	3963	7153	8573	5628	3314	3785	1162	4460	8293
Net Sales	895	2700	4928	5681	3789	2452	2512	-67	754	6147
Operating Margin	0.64	1.47	1.45	1.51	1.49	1.35	1.51	-17.34	5.92	1.35

Millions	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Cash flow from operations activity	6499	5009	6957	5184	10191	8057	6699	5639	5706	6558
CAPEX	-2472	-2586	-3924	-5076	-4446	-3379	-3261	-2928	-2336	-2916
Free Cash Flow	8971	7595	10881	20260	14367	11436	9960	8567	8042	9474

Millions	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Free Cash Flow	8971	7595	10881	20260	14367	11436	9960	8567	8042	9474
Income from continue operations	6499	5009	6957	5184	10191	8057	6699	5636	5702	6558

Price per earnings ratio:

	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Price Per Earning Ratio:	31.39	18.03	9.95	8.80	13.44	13.62	17.89	0	121.54	12.36

The Company Financial Position: 1-Liquidity

· Current ratio is liquidity ratio which measures a firm’s ability to pay the short term obligations or the ones that are paid within a period of one year.

· Current ratio= current assets/ current liabilities

· Quick ratio indicates a firm’s short term liability position and it also measures the firm’s ability in meeting its short term obligations.

· Quick ratio compares total amount of cash + marketable securities + accounts receivables to amount of current liabilities.

Billion	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Current assets	$27.22	$31.81	$37.90	$42.14	$38.34	$38.87	$33.51	$31.97	$36.24	$38.60
Current Liability	$18.98	$22.02	$28.36	$29.42	$27.30	$27.88	$26.24	$26.13	$26.93	$28.22
Current Ratio	1.43	1.45	1.34	1.43	1.40	1.39	1.28	1.22	1.35	1.37

Millions	2009	2010	2011	2012	2013	2014	1015	2016	2017	2018
Cash and Cash Equivalents	$4,867	$3,592	$3,057	$5,490	$6,081	$7,341	$6,460	$7,168	$8,261	$7,857
Accounting Receivable	10	-32	-25	15	-41	77	6	32	-3	-95
Short Term Investment	0	0	0	0	0	0	0	0	0	0
Current Liability	$18.98	$22.02	$28.36	$29.42	$27.30	$27.88	$26.24	$26.13	$26.93	$28.22
Quick Ratio	256.95	161.67	106.91	187.12	221.25	266.07	246.42	275.55	306.65	275.05

2-Solvency:

· Long term debt to asset ratio is a solvency that would help in calculating Caterpillar Company leverage as it compares the total debts to the assets of the company.

· It measures the percentage of the assets that a firm needs in liquidating and pay off its long term debt.

· Long-Term Debt Ratio = Long-Term Debt/Total Assets

Millions	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Long Term Debt	$5,441	$4,424	$8,369	$8,593	$7,902	$9,408	$8,883	$8,368	$7,929	$8,005
Total Assets	$60,038	$64,020	$81,218	$88,970	$84,896	$84,681	$78,342	$74,704	$76,962	$78,509
Long Term debt to Total Assets Ratio	9%	7%	10%	10%	9%	11%	11%	11%	10%	10%

Part 3: Operating cycle

· Operating cycle of Caterpillar Company shows the period of time that would be required for the business to make a partial outlay of cash in production of its goods.

· Its uses to estimate the amount of working capital that the business would need in its option or in expanding its business.

· The company used LIFO as a costing method.

· In 2017, the inventory quantities were reduced leading to a liquidation of LIFO inventory mostly from the closure of their facility.

· This forced carrying the liquidated inventories at a lower cost as compared to the prevailing years.

· This led to a decrease of the cost of goods sold by a margin of $66 million and profits increased by a margin of $49 million.

· Walmart Inc. also adopts LIFO as a costing method.

· The company uses this costing method since during inflation period, the costs of goods are higher and the inventor balance remains to be lower.

· Accounts receivables turnover = Net Sales/(beginning A/R+ Ending A/R)/2

· Inventory turnover = Cost of Goods Sold/ Beginning inventory+ Ending Inventory)2

· Operating cycle (in days) = {(365/ A/R turnover) + (365/ Inventory Turnover)} (Wu, 2014).

millions	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Net sales	895	2700	4928	5681	3781	2452	2552	-67	754	6147
Account receivables	10	-32	-25	15	-41	77	6	32	-3	-95
AR turnover	89.5	-84.375	-197.12	378.73	92.22	31.84	425.33	-2.092	251.33	-64.71
Cost of goods sold	26670	32964	46051	49470	43002	43188	35897	30667	33427	39819
inventories	2629	1826	1829	3306	4597	6317	5340	5257	7381	7857
Inventory turnover	10.14	18.05	25.17	14.96	9.35	6.83	6.72	5.83	4.53	5.07
Operation cycle	40.07	15.84	12.65	25.36	57.39	64.90	55.17	-11186	82.03	66.35

Part 4: Valuation

· This is the process that estimates the economic value of the owner’s interest in a business.

· The FGR of Caterpillar Company are being speculated to earn at an average annual rate of around 15%.

millions	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
EPS	-0.19	0.36	1.84	2.37	1.31	1.44	2.03	0.46	0.32	10.26
P/E ratio	25.96	17.28	10.61	10.82	16.38	13.58	20.02	30.52	20.40	39.10

· Analysts’ forecasts the company to be earning an increase of around 8.6%to the previous years as they anticipate an earnings of around 6.6%.

· Price Earnings Ratio = Market Value Price Per Share/ Earning per Share

· The future EPS is then calculated by = EPS TTS X (1+FGR) 10.

=$573.6

Fair price = Future value/4

= $143.4

MOS price = Fair price X 50%

= $71.7

Part 5: Conclusion and recommendation

Caterpillar Inc. being the among the world’s largest manufacturer has been successful due to its values and principles making the company ethical. The company is a best place for investment in spite of its market decreasing and leading to a decrease in the revenue. Its dividend shares has been increasing yearly with an average of 5 % and the EPS is growing since last year showing an improvement.

Caterpillar Company has a positive ratio over its year in the past 10 years indicating that the company has a good short term financial strength as it can pay off its short term debts as it has ability to pay the short term obligations or the ones that are paid within a period of one year. This shows that the company is a good investment plan for any investors.

References

https://www.koyfin.com/company/CAT/total_assets

Jones, L. (1988). Competitor cost analysis at Caterpillar. Strategic Finance, 70(4), 32.

Miller, P., & O'Leary, T. (2002). Rethinking the Factory: Caterpillar Inc. Cultural Values, 6(1-2), 91-117.

Wu, J. Y., Leung, H. P., Wang, W. Q., & Xu, C. (2014). Mycelial fermentation characteristics and anti-fatigue activities of a Chinese caterpillar fungus, Ophiocordyceps sinensis strain Cs-HK1 (Ascomycetes). International journal of medicinal mushrooms, 16(2).