This could explain the company’s issuance of nearly $5 billion of debt in the first nine months of 2012.
Deere was also unable to pay its dividend with its free cash flow as it reached ($2.8) billion. Kubota Corp (NYSE:KUB) also had a negative free cash flow of around (24.6) billion yen, which was nearly ($272) million. This negative free cash flow was related to the company’s sharp drop in working capital. Kubota’s annual dividend yield was at 1.72%.
Despite the rise in Caterpillar’s debt, its debt to equity of Caterpillar reached 2.2, which is lower than the 2.4 it was back in September 2011. Nonetheless, this ratio is much higher than other heavy machinery companies such as Cummins – its debt to equity ratio is only 0.1 – or Kubota – its debt to equity ratio is 0.6. Deere, on the other hand, has a relatively high debt to equity ratio of 4.7, which means that both Deere & Company (NYSE:DE) and Caterpillar are much more leveraged than Kubota or Cummins. This situation along with the negative free cash flow poses a liquidity and financial risk on these companies.
The bottom line: Caterpillar is likely to keep presenting little to no growth in revenues in the coming months. The whole Siwei acquisition debacle might pose additional uncertainty around the company’s finances and could impede its progress in China. The company’s cash flow might also pose a threat, however keep in mind that the situation isn’t better to other leading heavy machinery companies on this front. Finally, I think the housing and infrastructure sectors in the U.S might eventually lead to a rise in revenues for CAT.
For further Reading see: Why Caterpillar isn’t Rising? Just blame Oil
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The article Will This CAT Continue to Lick Its Wounds? originally appeared on Fool.com and is written by Lior Cohen.
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