Caterpillar Inc (NYSE:CAT): Time For A Financial Health Check

The size of Caterpillar Inc (NYSE:CAT), a US$85.68b large-cap, often attracts investors seeking a reliable investment in the stock market. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. However, the key to their continued success lies in its financial health. I will provide an overview of Caterpillar’s financial liquidity and leverage to give you an idea of Caterpillar’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into CAT here. View out our latest analysis for Caterpillar

Does CAT produce enough cash relative to debt?

CAT’s debt levels have fallen from US$36.78b to US$34.88b over the last 12 months – this includes both the current and long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$7.38b , ready to deploy into the business. On top of this, CAT has generated cash from operations of US$5.70b over the same time period, resulting in an operating cash to total debt ratio of 16.35%, signalling that CAT’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CAT’s case, it is able to generate 0.16x cash from its debt capital.

Can CAT meet its short-term obligations with the cash in hand?

Looking at CAT’s most recent US$26.93b liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$36.24b, with a current ratio of 1.35x. Generally, for Machinery companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.

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NYSE:CAT Historical Debt June 21st 18

Does CAT face the risk of succumbing to its debt-load?

Caterpillar is a highly levered company given that total debt exceeds equity. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. The sustainability of CAT’s debt levels can be assessed by comparing the company’s interest payments to earnings. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For CAT, the ratio of 17.83x suggests that interest is comfortably covered. Large-cap investments like CAT are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.

Next Steps:

At its current level of cash flow coverage, CAT has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for CAT’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Caterpillar to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for CAT’s future growth? Take a look at our free research report of analyst consensus for CAT’s outlook.

  2. Valuation: What is CAT worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CAT is currently mispriced by the market.

  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.

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Caterpillar Inc (NYSE:CAT): Time For A Financial Health Check

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Caterpillar Inc (NYSE:CAT): Time For A Financial Health Check