One critical component of financial analysis involves comparing a firm’s financial statements with other firms in the industry. Through such a comparison, financial managers can reveal useful information about risks, investment opportunities, market indicators, and economic factors.
Throughout this course, you have been researching and analyzing various financial statements for Deere & Company. For this Final Paper, you will culminate your analysis with an in-depth comparison of Deere & Company and Caterpillar Inc.
In your project, you will complete the following items based on the files you previously downloaded:
Examine the four primary financial statements for each firm and address the following:
Statement of Cash Flows:
Compare the statement of cash flows for the two firms, noting the major inflows and outflows of cash.
Income Statement:
Compare the income statements for the two firms, noting the issues each one faces regarding sales projections.
Balance Sheet:
Compare the balance sheets for the two firms, noting any issues each firm may want to address regarding liability, and how each firm might be impacted by increasing interest rates.
Shareholder Equity:
Calculate the shareholder equity for each firm.
Calculate the following ratios and provide a trend analysis on each company:
ROI analysis
Ratio analysis, to include the following ratios (please be sure to show calculations):
Profit margin
Return on assets
Return on equity
Receivable turnover
Average collection period
Inventory turnover
Current ratio
Working capital
Debt-to-total assets
Debt-to-equity
Earnings per share
Price to earnings ratio
Create a horizontal, vertical, and trend analysis of the Income statement and Balance Sheet.
Compare and contrast the two firms in the context of the global economy, noting which types of cultural differences might impact each firm as it does business in other countries.
Include examples to illustrate your point.
Compare and contrast each firm’s global strategic plan based on the information in the annual report from two years ago.
Propose which company would be better to invest in, based on the above comparisons. Your proposal should include the key metrics you used to make your decision.
| Major Outflow: Regular payment of dividends and significant outflows for debt repayment (often related to their financial services segment). Key Inflow: New borrowing to support the large financial services loan portfolio. | Major Outflow: Regular payment of dividends and significant share repurchases (stock buybacks) to return value to shareholders. Key Note: Share repurchases indicate a company has sufficient cash and sees its stock as undervalued. |
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Comparison: The key difference is the complexity introduced by Deere's Financial Services segment. While CAT's cash flow is simpler (primarily manufacturing), DE's is intertwined with lending, resulting in large, offsetting inflows and outflows in both the investing and financing sections related to customer loans.
Income Statement Comparison
| Issue | Deere & Company (DE) | Caterpillar Inc. (CAT) |
| Sales Projections | Focus: Heavily reliant on agricultural commodity prices and farmer income. Issues arise from volatility in crop prices, government subsidies, and farm debt levels. Sales projections are tied to replacement cycles of expensive, long-life farm equipment. | Focus: Heavily reliant on global construction activity, mining capital expenditures, and oil & gas investment. Issues arise from global recessions, infrastructure spending policies, and the highly cyclical nature of the mining and energy sectors. |
| Revenue Streams | Strong division between Equipment Operations and Financial Services. Stability is provided by the recurring interest income from the financial segment. | Primarily relies on sales of machinery, energy & transportation equipment, and spare parts/services (a more stable, higher-margin revenue stream). |
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Balance Sheet Comparison
Liability and Interest Rate Impact
| Firm | Liability Issue/Note | Impact of Increasing Interest Rates |
| Deere & Company (DE) | High Debt Load driven largely by the Financial Services segment. The debt is used to fund the loan portfolio for customers to buy equipment. Issue: Financial debt-to-equity ratios are inherently high, but must be managed carefully to ensure creditworthiness. | High Negative Impact: Increased borrowing costs directly raise the cost of funding their loan portfolio (a core business model). Higher rates also make their equipment less affordable for customers, potentially suppressing sales. |
| Caterpillar Inc. (CAT) | Debt Load is primarily focused on funding manufacturing operations and general corporate purposes. Issue: The company's large size means substantial capital is tied up in inventory, which can become a drag during sales downturns. | Moderate Negative Impact: Higher rates increase the cost of corporate borrowing for capital expenditures and operational funding. The impact is less severe than DE's, but higher rates can still slow down the construction and mining projects that generate their demand. |
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Shareholder Equity Calculation
Shareholder Equity (SE) is the residual claim on assets after liabilities are paid.
Shareholder Equity=Total Assets−Total Liabilities
Since specific current figures aren't provided, use the formula as the basis for your calculation. You would insert the most recent reported figures from each company's balance sheet.
| Metric | Deere & Company (DE) (in Millions) | Caterpillar Inc. (CAT) (in Millions) |
| Total Assets | $X | $Y |
| Total Liabilities | $A | $B |
| Shareholder Equity (SE) | $X - $A = $SE_{DE}$ | $Y - $B = $SE_{CAT}$ |
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Ratio Analysis and Trend
The table below provides the formula for each ratio. A trend analysis would require 3-5 years of data (not provided here), but key expectations are noted.