FINANCIAL STATEMENT ANALYSIS

Financial Statement Analysis

Financial Statement Analysis

Introduction

Credit analysis is significant tool for an investor and portfolio managers to assess the ability of any company to meets its debt obligations. This analysis could be performed on various companies and debt issuing entities. The credit analysis seeks to identify the risk at appropriate level with investing in particular entity. This paper aims to discuss and analyse various aspects of finance by performing credit analysis in a holistic context. Therefore, I have chosen the Caterpillar, Inc for analysing its credit position. The analysis will start from the brief history and introduction about the company, its operations and its market position. Secondly, the paper will discuss about the process of credit analysis and implementation of it on Caterpillar, Inc. Then, the paper will proceed towards credit analysis of Caterpillar, Inc by calculating four major ratios which include the current ratio, quick ratio, debt to equity ratio and net profit to sales ratio. The selected ratios for credit analysis of Caterpillar, Inc will cover the year 2008, 2009 and 2010. Finally, on the basis on calculated ratios the analysis and interpretation would be conducted in order to find the credit worthiness of Caterpillar, Inc.

Company Description

Caterpillar Inc. (NYSE: CAT) is a Corporation of America with headquartered in Peoria, Illinois. Caterpillar Inc. is the world's largest manufacturer of construction equipment, manufactures earthmoving equipment, power plants (operating on natural gas and associated gas), turbines, diesel engines, industrial gas and other products. The company bought in 2003 the Italian brand Bitelli asphalt paver and compactor, now Caterpillar manufactures equipment for distribution over Europe and Africa. Caterpillar Inc. has more than 480 units located in 50 countries on five continents (Caterpillar, 2012).

Credit Analysis Theory

The process of credit analysis starts with the collection of records concerning the eligibility of client credit history. Credit analysis is a complex process which includes the following milestones: (1) the analysis of the justification for the loan represented by a potential borrower. (2) Analysis of financial statements (3) Analysis of the preliminary financial statements (4) Reviewing the plan of cash flow for the planning of income payments and determining the likelihood of delay, the estimate on this basis the possibility of the borrower to repay a loan (5) Scenario analysis and evaluation of the stability of the borrower to extreme changes in the economic environment (WAHLEN, et.al, 2011, p. 192) (6) Analysis of the situation of the company in the market relative to other competitors in the industry (7) Evaluation of senior management company, its strategies, management practices and performance based on the results achieved (8) Making the necessary documentation for the loan, reflecting such conditions as to ensure repayment of the loan, limiting the size of the debt; assessing the financial status and obligations of the borrower; guarantee of the parent enterprise (subsidiary) or a third party, the conditions of default, etc (SUBRAMANYAM & WILD, 2009, p. 89).

According to the classical approach to credit analysis, credit risk assessment process is to assess the creditworthiness ...