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project 1 Ratio analysis

project 1 Ratio analysis - Caterpillar Inc Ratio Analysis...

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Caterpillar Inc. : Ratio Analysis With more than $7 billion in assets, Caterpillar is the world's largest manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. This analysis chooses four ratiosi return on assets, inventory turnover rate, long term debt to common equity, and current ratio that have significance to analyze the financial situation for Caterpillar inc. Return on Assets ROA = Profi t Margin x Asset Turnover Rate = Net IncomeSales x SalesTotal Assets = Net Income / Total Assets Return on Assets (ROA) is one of the most important measures of firms’ profitability, and it shows how profitable a company's assets are in generating revenue from its total assets. During the years of 2008 to 2010, Caterpillar’ ROA decreased from 7.53% to 5.86%, representing a 22.18% decrease. Especially in 2009, Caterpillar’ ROA dropped severely to 2.91%, which can be attributed to the economic recession. Because Caterpillar inc. is a manufacturer firm of construction and mining equipment, it owns huge amount of fixed assets, like land and plants. If the demand for its products decreased as overall economic shrinking during the recession, its sales as well as net income will reduce sharply. However, as the
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economy began to recover from middle 2010, Caterpillar’s ROA also increased eventually from 2.91% to 5.86%. When comparing Caterpillar’ ROA to the industry average, we can also see that the company is below the average level, through 2008 to 2010. The fact that Starbucks’ ROA is lower than the industry average can be attributed to several reasons. However, the key factor is the overall environment of economic and industrial development. Given the recent economic conditions, many countries have slowed down the pace of development on its industry and economics. As a result, manufacturer of heavy construction and mining equipment companies, such as Caterpillar, have faced severe decrease in demand. This trend is clearly reflected in Caterpillar’s ROA.
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project 1 Ratio analysis - Caterpillar Inc Ratio Analysis...

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