Caterpillar Vs Cnh Industries

In order for a business to be sustainable in the long term, there must be effective financial management. Whether it’s managing assets or liabilities, financial ratio analysis may be a key component to pinpoint a company’s strengths and weaknesses. This paper will analyze net income, total equity, total revenue and total assets of two close competitors Caterpillar (CAT) and CNH Industrial (CNHI). The Return on Equity (ROE) measures the overall profitability of a company; the higher the ROE the more profitable the company may be. ROE ratios compare the net profit of the company to the stockholder’s equity. By calculating a ratio, it is much easier to understand and becomes a basis for comparison among multiple companies. During financial

This would indicate that CAT annual profits are higher than CNHI; in other words, CAT is more efficient at generating profits than CNHI. This efficiency can translate into CAT’s increased ability to make a profit for its stockholders. However, it’s important to keep in mind that because this is a ratio, if total equity decreases at a larger proportion than net income, the ROE may be overstated. Additionally, if a company has significant debt that supports income increases instead of stock equity, the ROE may be overstated and may not be truly indicative of the company’s

A higher ratio implies the company is generating more revenue per dollar spent (Smart, Gitman, & Joehnk, 2014). With the data collected for CAT and CNHI, CAT would appear to be just slightly more efficient than CNHI for 2014. The fourth and final ratio is the equity multiplier (EM); this ratio examines the company’s financial leverage as it is a ratio of total assets to total equity. The data in the table provides CNHI’s EM was 10.547 vs 5.057 for CAT in 2014. Based on this data alone, it would appear that CNHI uses more debt to finance the company’s assets. Accumulating too much debt to generate assets could be critical to a company’s long term stability especially in times of economic crisis. A company with a lower equity multiplier may be more favorable to an investor. Looking back over the data for 2014 CAT would appear to be a better investment than CNHI. However, since the data only includes one year of data for CNHI and three years of CAT it still should be viewed with caution. A more complete picture can be viewed with respect to CAT only as trends can be noticed during the three data