Investors pursuing a solid, dependable stock investment can often be led to Caterpillar Inc (NYSE:CAT), a large-cap worth US$89.78B. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, the key to extending previous success is in the health of the company’s financials. This article will examine Caterpillar’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into CAT here. See our latest analysis for Caterpillar
How much cash does CAT generate through its operations?
CAT’s debt levels have fallen from US$36.78B to US$34.88B over the last 12 months , which is made up of current and long term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$7.38B , ready to deploy into the business. Moreover, CAT has produced cash from operations of US$5.70B over the same time period, resulting in an operating cash to total debt ratio of 16.35%, meaning that CAT’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational 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 pay its short-term liabilities?
At the current liabilities level of US$26.93B liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$36.24B, with a current ratio of 1.35x. Usually, for Machinery companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.figure data-type="image" itemscope="" itemprop="associatedMedia image" itemtype="https://schema.org/ImageObject" data-reactid="33"">
Is CAT’s debt level acceptable?
With total debt exceeding equities, Caterpillar is considered a highly levered company. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. The sustainability of CAT’s debt levels can be assessed by comparing the company’s interest payments to earnings. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. In CAT’s case, the ratio of 13.63x 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.
CAT’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. Keep in mind I haven’t considered other factors such as how CAT has been performing in the past. You should continue to research Caterpillar to get a more holistic view of the stock by looking at:
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.
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.
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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