Cummins Inc. Equity Valuation and Analysis

Identification of Potential “Red Flags”
To valuate any company properly you must go through all the accounting books
and identify any red flags that might be presented that would make a company
appear more valuable than it really is. Cummins Inc. overall, has sound
accounting methods and practices that deliver mostly a clear view of how the
company is currently standing and where it has potential for future growth. It
does, however, have a few minor sections of its financials that are worth looking
into. The first minor red flag has to do with their operational and capital leases
when Cummins Inc. attempts to state that some of the equipment used to make
the engines that are to be sold is stated as being an operational lease and not a
capital lease as it should be. This is usually done to hide some of the liabilities
from an outside entity and to appear more profitable to investors. The second
minor red flag that arose when analyzing the financial statements had to do with
Cummins Inc. pension program, which was drastically under funded by $653
million and in their statement only reports that the program is under funded by
only $310 million. These numbers might seem large, but when you compare
these numbers to Cummins Inc. total liabilities it comes only to about 7.2%.
Undo Accounting Distortions
As was stated in the red flags section, there are some minor distortions in the
liability side of the balance sheet that can be explained even though they are
minor when looking at the company as a whole. The most impacting distortion
has to do with the pension program and its understatement of its liabilities
towards that program. This program’s obligation was $3 billion in the fiscal year
2005 and had a fair value of around 2.3 at end of year which came out to being
$653 million under funded while in the 10k form it states that the benefit plan is
only under funded by $310 million. The remaining 343 million dollars was
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