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.
Sample Answer
This comprehensive financial analysis and comparison of Deere & Company (DE) and Caterpillar Inc. (CAT) requires access to their specific financial statements (Income Statement, Balance Sheet, Statement of Cash Flows, and Shareholder Equity) and annual reports for the relevant periods. Since I do not have the files you previously downloaded, the following response will outline the methodology and key areas of focus for your analysis, using generalized knowledge of the firms and industry benchmarks where specific data is needed for illustration.
You must substitute the placeholder values and perform the calculations using the data from your downloaded files.
1. Financial Statement Analysis and Comparison
This section outlines the comparison of the four primary financial statements for Deere & Company and Caterpillar Inc.
Statement of Cash Flows
The analysis should compare the cash flow statements, focusing on the three main activities: Operating, Investing, and Financing.
| Component | Deere & Company (DE) | Caterpillar Inc. (CAT) | Comparison Focus |
| Cash from Operating Activities (CFO) | Insert DE CFO value | Insert CAT CFO value | Major Inflows: High and consistent positive CFO is critical, typically from net income adjusted for non-cash items (depreciation/amortization) and changes in working capital. For both, an increase in accounts payable or a decrease in accounts receivable is an inflow. |
| Major Outflows: Significant outflows often relate to increases in accounts receivable (a working capital use) or decreases in accounts payable. A key note for both is the impact of their financial services segments, where providing financing to customers is an operating activity cash use. |
| Cash from Investing Activities (CFI) | Insert DE CFI value | Insert CAT CFI value | Major Inflows/Outflows: Both are capital-intensive. Expect significant outflows for Capital Expenditures (CapEx) (purchase of Property, Plant, and Equipment - PP&E) to maintain and expand manufacturing capacity. Inflows may come from the sale of assets or, for the financial segments, from principal collections on financing receivables. |
| Cash from Financing Activities (CFF) | Insert DE CFF value | Insert CAT CFF value | Major Inflows: Issuance of debt (bonds, commercial paper) to fund operations, CapEx, or the financial services segment. Issuance of stock is less common. |
| | | Major Outflows: Repurchase of common stock (share buybacks), payment of cash dividends, and repayment of debt. |
Export to Sheets
Financial Statement Analysis and Comparison
This section outlines the comparison of the four primary financial statements for Deere & Company and Caterpillar Inc.
Statement of Cash Flows
The analysis should compare the cash flow statements, focusing on the three main activities: Operating, Investing, and Financing..
| Component | Deere & Company (DE) | Caterpillar Inc. (CAT) | Sales Projection Issues |
| Revenue/Sales | Insert DE Revenue | Insert CAT Revenue | Cyclicality: Both firms operate in highly cyclical industries (agriculture, construction, mining, energy). Sales projections are heavily reliant on global commodity prices, government infrastructure spending, and the health of the global agricultural sector. An economic downturn can lead to a sharp, unpredictable drop in equipment demand and sales. |
| Cost of Goods Sold (COGS) | Insert DE COGS | Insert CAT COGS | Raw Material Volatility: Both face challenges in predicting costs due to the volatility of raw material prices (steel, aluminum, energy). This impacts the gross margin and makes cost-of-sales projections difficult. |
| Net Income | Insert DE Net Income | Insert CAT Net Income | Macroeconomic Sensitivity: Sales projections are sensitive to forecasting GDP growth in key regions (North America, Europe, Asia), making accurate projections prone to significant error if the macroeconomic environment shifts unexpectedly. |