Final Project.edited (2)

1 Final Project Shara Banks BUS592 9/10/2023

2 Financial Analysis of Deere & Company and Caterpillar Incorporation Financial analysis is crucial for business because it provides insights into making informed decisions that can be used to ensure the success of a business. Financial managers need to ensure that an effective financial analysis is conducted to provide accurate and reliable information on the financial status of a company. Understanding the financial status of a business is essential for financial management, investors, and all stakeholders. This allows them to make the appropriate decisions, promoting success in their business endeavor. This paper aims to compare the financial analysis of two main companies in the construction equipment manufacturing sector, which are known to be doing great. The two companies are Deere & Company and Caterpillar Inc. Both companies are big-time players whose products are widely known and used globally. The comparison of their financial reports can be used in shedding light on investors in knowing the right Company to put their money in. Comparison of the Statement of Cash Flows A statement of cash flows is an essential financial statement that can be used to monitor and control the cash flow of a business. The statement of cash flows comprises three main elements: operations, investments, and operations. A cash flow statement enables shareholders and investors to see how money flows in and out of the business. The statement of cash flows of both Deere & Company and Caterpillar presents the major inflows and outflows in the three main sections. Deere & company's major inflows from the three sections include net income worth $4,886 million and various adjustments made to reconcile the net income, which includes share-based compensation and amortization (John Deere, 2022). Major inflows from investing activities include receivables related to sales) worth $ 15,774 and Proceeds from equipment sales on operating leases of $ 1,501. The major inflows from financing activities in Deere include

4 common shares repurchased, payments on debt (original maturities greater than three months), including financial products and machinery, energy, and transportation, among others. This Company seems to have more major inflows and outflows items compared to Deere and Company, thus impacting the overall success and operation of the Company. Comparison of Income Statements The income statements of Deere & Company and Caterpillar Inc. show the key financial metrics and trends that can be used to determine their financial stability. Deere's income statement shows that the net sales were approximately $10,413 million, while the net income was $1,667 million, with a profit per common share of $5.32 (John Deere, 2022). From this information, it is clear that the new sales of the Company fluctuated with a sharp drop from the previous year. The net income of the Company has also dropped compared to that of the previous year. The profitability of the Company has not been consistent from the previous year, thus placing the Company at great financial risk. On the other hand, Caterpillar's financial metrics and trends show sales and Revenues of $50,971 million, profit of $6,489 million, and profit per common share of $11.83. From this information, it is clear the Company has a steady growth in sales and revenues, indicating a positive performance over the years. This has also facilitated increased profits, which shows its stability. From the Company's metrics, it is clear that earnings per share have been growing over the years. Looking at both the Companies' financial metrics and sales projections, Deere & Company has been experiencing a decrease in its net sales, which has also affected its profitability and stability. On the other hand, Caterpillar has shown consistent growth in its sales and profitability, meaning that their operations are positive in the market. Therefore, of the two

5 companies, Caterpillar is doing better than Deere & Company in terms of sales, revenues, and profitability. Comparison of Balance Sheet A balance sheet is one of the financial statements used in businesses showing what owns, owes, and the shareholder's residual interest. This indicates the real financial position of a business. Looking at the balance sheets of Deere & Company and Caterpillar Inc. can help determine their positions in terms of finances and stability. The balance sheet of Deere shows that the Company's total assets were $86,817 million, with total liabilities of $67,686 million (John Deere, 2022). Caterpillar, on the other hand, had total assets of $81,943 million and total liabilities of $66,052 million (Caterpillar Inc., 2022). Both companies have higher assets than liabilities, although their difference is not large. In Deere & Company, the total liabilities exceed the shareholders' equity, meaning the Company is unsafe. On the other hand, Caterpillar's total liabilities are lower than shareholders' equity, meaning the business is safe. Both companies have some issues regarding liabilities that they may want to address to promote the survival and success of their businesses. Deere & Company, for example, may want to address its leverage level, which happens to be high due to its long-term borrowings. High long-term borrowings will facilitate a negative impact from increased interest rates since paying the cost of these loans may be high, affecting its overall profitability. Having liabilities that exceed the shareholder's equity poses a great financial risk to the Company, and therefore, this issue should be addressed. Caterpillar, on the other, has a healthy financial position since its liabilities are lower than its shareholder's equity. However, the Company may want to monitor and manage its resources effectively to increase its sales and profitability. The Company can

7 The profit margin of Deere decreased from that of 2021, which shows lower profits were earned last year.  Return on Assets Return of assets= Net Income / Total Assets ROA of 2022= 1,885/86,817= 2.2% ROA of 2021= 1,667/84,114= 2.0% The trend shows that the return on assets increased slightly from 2021  Return on Equity Return on Equity= net income /shareholders’ equity ROE of 2022= 1,885/19131= 9.9% ROE of 2021= 1,667/18434= 9.0% The return on equity shows a slight increase in 2022 from 2021, meaning that shareholders got better returns.  Receivable Turnover Receivable turnover = Net Sales / Average Accounts Receivable Receivable turnover of 2022= 13,000/ (4,208 + 5,268)/2= 13413/4738= 2.8 times Receivable turnover of 2021= 10,413/ (5,268+ 4,208)/2= 10413/4738= 2.2 times The receivable turnover indicated an increase from 2021, meaning that the collection of receivables was faster in the last year than in the previous year.  Average Collection Period Average Collection Period= 365 days (I year)/Receivable turnover 2022 average collection period= 365/2.8= 130.4 days 2021 average collection period = 365/2.2=165.9 days The average collection period decreased in 2022 from 2021 indicating faster collection.  Inventory Turnover Inventory turnover= Cost of Goods Sold / Average Inventory Inventory turnover 2022= 9,511/ (6,781+6,410)/2= 9511/6595.5= 1.4 time Inventory turnover 2021=7,574/ (6,410+6,410)/2= 7574/6410 = 1.2 times The inventory turnover showed a significant increase, which suggests proper management of the inventory of the Company.  Current ratio

8 Current ratio= Current Assets / Current Liabilities Current ratio 2022= 63091/32643=1.9 Current ratio 2021= 59957/28448=2.1 The current ratio trend shows a decrease in 2022 from 2021  Working capital Working capital=current assets –current liabilities Working capital 2022= 63091-32643= 30448 Working capital 2021= 59957-28448= 31509 The working of Deere & Company indicates a significant decrease in 2022 from 2021, but the Company was still safe and financially stable.  Debt-to-total assets Debt-to-total assets= total liabilities /total assets 2022 debt-to-total assets=86,817/67,686= 1.3 2021 debt-to-total assets=84,114/65,680= 1.3 The debt-to-total assets of Deere remained constant in the two years, indicating the stability of the Company.  Debt-to-equity Debt-to-equity =total liabilities/shareholders’ equity 2022 Debt-to-equity= 67,686/19131= 3.5 2021 Debt-to-equity=65,680 /18434= 3.5 The debt-to-equity remained the same from 2021.  Earnings per share Earnings per share= (net income-preferred dividends)/weighted average number of shares outstanding 2022 Earnings per share= (1,885-1.05)/ 304.1=6.2 2021 Earnings per share= (1,667-0.90)/ 311.0=5.4 The earnings per share of the Company registered a significant increase in 2022 from 2021, indicating the higher earnings per share within the Company.  Price per earnings ratio Price per earnings ratio= Market Price per Share / Earnings per Share Price per earnings ratio= $375.69 / $6.16= 61

10  Average Collection Period Average Collection Period= 365 days (I year)/Receivable turnover 2022 average collection period= 365/8.9= 41.0 days 2021 average collection period = 365/5.9=61.9 days The average collection period decreased in 2022 from 2021, indicating faster collection.  Inventory Turnover Inventory turnover= Cost of Goods Sold / Average Inventory Inventory turnover 2022= 41,350/ (16,270+14,038)/2= 41,350/15154= 2.7 times Inventory turnover 2021=35,513/ (16,270+14,038)/2= 35,513/15154 = 2.3 times The inventory turnover showed a significant increase, which suggests proper management of the inventory of the Company.  Current ratio Current ratio= Current Assets / Current Liabilities Current ratio 2022= 43,785/31,531=1.4 Current ratio 2021= 43,455/29,847=1.5 The current ratio trend shows a decrease in 2022 from 2021  Working capital Working capital=current assets –current liabilities Working capital 2022= 43,785-31,531= 12254 Working capital 2021= 43,455-29,847= 13608 The working capital of Caterpillar decreased in 2022 from 2021.  Debt-to-total assets Debt-to-total assets= total liabilities /total assets 2022 debt-to-total assets=66,052/81,943= 0.8 2021 debt-to-total assets=66,277/82,793= 0.8 The debt-to-total assets of Caterpillar remained constant in the two years but were below one, indicating stability risk of the Company.  Debt-to-equity Debt-to-equity =total liabilities/shareholders’ equity 2021 Debt-to-equity= 66,052/15891= 4.2 2021 Debt-to-equity=66,277/16516= 4.0

11 The debt-to-equity slightly increased in 2022 from 2021.  Earnings per share Earnings per share= (net income-preferred dividends)/weighted average number of shares outstanding 2022 Earnings per share= (6705-12.72)/ 526.9=12.7 2021 Earnings per share= (6489-11.93)/ 544.0=11.9 The earnings per share of the Company registered a significant increase in 2022 from 2021, indicating the higher earnings per share in Caterpillar Inc. Horizontal, vertical, and trend analysis of the Income statement and Balance Sheet Horizontal analysis: Income statement Metric Deere & Company 2022 Deere & Company 2021 Caterpillar Inc. 2022 Caterpillar Inc. 2021 Sales and Revenues 14,102 11,527 59,427 50,971 Operating Profit 2,539 2,150 7,904 6,878 Net Profit 1,884 1,667 6,705 6,489 Earnings Per Share (EPS) 6.2 5.4 12.7 11.9 Horizontal analysis: balance sheet Metric Deere & Company 2022 Deere & Company 2021 Caterpillar Inc. 2022 Caterpillar Inc. 2022 Total assets 86,817 84,114 81,943 82,793 Total liabilities 67,686 65,680 66,052 66,277 Shareholder’s equity 19,131 18,434 15,891 16,516 Current ratio 1.9 2.1 1.4 1.5 Vertical analysis: Income statement Metric Deere & Company (%) Caterpillar Inc. (%) Sales and Revenues 100 100 Operating Profit 18.0 13.3 Net Profit 13.4 11.3 Vertical analysis: Balance sheet Metric Deere & Company (%) Caterpillar Inc. (%) Total assets 100 100

13 cultural differences may include different regulatory requirements in the different countries, which may hinder its operations or take more resources to meet them. Different customer expectations may also affect Caterpillar's operation in the global economy since the Company needs to understand how to operate effectively. However, both companies have developed different strategies to ensure their success in the global market. Comparison of Deere’s and Caterpillar’s Global Strategic Plan Both Deere and Caterpillar operate in local and global markets, applying various strategic plans to survive in the competitive markets in their line of business. Deere, for example, established a smart industry strategy to unlock new values for customers from both local and global markets. Through the Deere smart industrial strategy, the Company has invested in various countries while overcoming stiff competition from other manufacturers across the globe. The strategy is used to understand the needs of customers and how they work, making it easier for the Company to venture into other markets promoting its success in both local and foreign markets (John Deere, 2021). The smart industrial strategy also assists the Company to respond the market conditions quickly and efficiently. Caterpillar's global strategic plan is establishing an operating and execution model that aims to enable the Company to invest in the areas that will create value for the business (Caterpillar Inc., 2021). The Company applies this strategy to identify areas both locally and globally that can be used to invest or expand its operation to increase profit. The model utilizes facts and data to determine the most effective markets to invest in, where the implementation of other strategies is done to improve the Company's competitiveness in local and global markets. The strategy also helps the Company to create a strong network with global dealers, which makes it easier to survive in the global market.

14 Proposal of the Company that would be better to invest Both companies are doing great in their line business, meaning investing in either can be a great idea. However, based on the above comparison, Caterpillar would be a better investment choice. The Company utilizes the most effective strategy to identify areas to invest in or expand its operations, promoting its success. This means that the Company is not likely to make investment mistakes, so investors are ever safe with Caterpillar. The Company has also implemented strategies to ensure quick and effective response to the market changes before negatively impacting the business. Therefore, investing in Caterpillar would be better compared to Deere & Company. Conclusion Financial analysis is crucial for business because it provides insights into making informed decisions that can be used to ensure the success of a business. Understanding the financial status of a business is essential for financial management, investors, and all stakeholders. Financial analysis can be done by comparing financial statements such as statements of cash flows, income statements, and balance sheets, among others. This is done to determine the stability of a company in terms of financial stability. Looking at both Deere's and Caterpillar's financial statements, it is clear that Caterpillar is more stable and, therefore, may be considered safer by investors. In terms of global strategic plans, Deere uses a smart industrial model, while Caterpillar uses an operating and execution model. Both companies are doing great both in local and global markets.