Financial Statement Analysis Project–Hershey Corp. & Tootsie Roll Industries Liquidity Based on the ratio analysis performed, it appears that the Hershey Company’s liquidity is sufficient to meet cash needs and current obligations. The current ratio and current debt coverage ratios were decreasing from 2002 through 2004, which corresponds to an increase in short-term debt and a decrease in cash on the Company’s balance sheet over the same periods. Hershey attributes the increase in debt to corporate consolidations, capacity expansion, and modernization and efficiency improvements.
Outside of the increase in debt, accounts receivable turnover and average days’ collections appear to be steady, which indicates that Hershey is able to effectively manage its receivables and employs effective credit policies. The Company’s inventory ratios also indicate stable levels of inventory size and turnover. Despite the fact that Hershey appears to be shifting to reliance on short-term debt to fund current liquidity needs, the Company’s overall liquidity position appears to be stable. As of 2008, the Company’s liquidity position had improved and is showing ratios above industry average.
Hershey’s current ratio and cash debt coverage have improved since 2004. It’s accounts receivable management has remained consistent and inventory management has improved. Over time Hershey has increased it’s ability to meet current obligations and is out-performing competitors in this area. Tootsie Roll Industries’ current ratio and debt coverage ratios fluctuated between 2002 and 2004, with an overall small decrease. The Company’s financial statements indicate a decrease in cash and investments, as well as an increase in accounts payable and accrued liabilities.
Tootsie Roll also took out a bank loan in 2004 creating short and long-term debt that did not exist in 2003 and 2002. According to the annual report, this debt financed the Company’s largest acquisition to date, and was done without creating undue leverage or placing the Company in financial risk. Considering the increase in debt from this acquisition, it appears the Company’s liquidity position was not severely affected since its net sales increased correspondingly and its liquidity ratios still indicate a strong liquidity position.
Tootsie Roll’s accounts receivable and inventory ratios also fluctuated, but generally indicate a strong and consistent ability to manage its receivables (significantly higher collection and turnover of receivables than Hershey), employ effective credit policies, and effectively turn over its inventory. Solvency During 2002 through 2004, Hershey Company’s debt to assets and interest coverage ratios both increased. This indicates a heavier reliance on debt, increase in total liabilities and interest expense, and decrease in shareholder’s equity.
These changes, however, were not large enough to make a significant impact on the Company’s overall solvency since the ratios only changed only slightly. Also, Hershey’s debt coverage ratio indicates a strong ability to retire debt, and the Company’s free cash flow is positive. Overall, Hershey appears to have strong leverage in its capital structure, sufficient ability to generate cash flows, therefore its long-term solvency appears to be very good. As of 2008, Hershey’s solvency position has deteriorated compared to 2004.
The Company appears to be in a weaker cash position and relying more heavily on debt than in previous years. Tootsie Roll Industries’ debt to assets ratio is low compared to that of Hershey Company. This indicates that Tootsie Roll has more assets relative to its liabilities. Tootsie Roll also has a very high interest coverage ratio and cash debt coverage, which could be due to the relatively low level of debt, especially considering the Company’s recent acquisition. This company appears to be sufficiently generating cash flows to cover its debt obligations.
Although Hershey Company has much more free cash flow than Tootsie Roll, both companies appear to have strong leverage, cash flow generation, and are both strong in their long-term solvency positions. Profitability Hershey’s ratios indicate that the Company’s ability to earn income is increasing across the periods analyzed. Increasing profit margins and gross profit rates indicate that the Company is managing its costs effectively. Increasing return on assets indicates that the Company has been effectively using its assets to generate earning power.
The Hershey Company appears to be profitable and is effectively managing costs and resources to generate increased income and provide greater return to its investors, demonstrated by increases in return on equity and earnings per share. Although all of Tootsie Roll’s profitability ratios decreased slightly between 2002 and 2004, the results appear fairly consistent. This Company appears to provide a steady profit and rate of return to its investors. Its profit margins and return on equity are slightly higher than that of Hershey, although both companies appear solid in their ability to generate profits.
The stock price has also fluctuated less, providing a steady price/earnings ratio. This is another indicator of a strong, steady performance by Tootsie Roll Company, and stable profitability results. As of 2008, Hershey Company still appears to be providing strong investor returns. Although its profit margin has decreased, its gross profit rate has remained steady, indicating that the Company is still effectively managing its product costs. Hershey is also providing a solid return on equity and price/earnings ratio, and shows profitability results that are above others in its industry.
Summary I think both companies show strong operating results and would be good long-term investments. If I had to choose one, I would invest in the Hershey Company. Although Tootsie Roll does reflect stability in its operating results and appears to be a little stronger than Hershey in some of it’s ratios, such as liquidity (stronger in its ability to meet short-term obligations and higher accounts receivable turnover) and solvency (lower debt to assets ratio and better cash debt coverage), as well as higher profit margin ratios.
From an investor return standpoint, however, Hershey Company has consistently provided a higher return to its investors and has a significantly higher return on equity, indicating a strong measure of profitability on stockholder’s investments. Hershey also provides better earnings per share and price/earnings ratios. Overall, Hershey appears to be stronger in terms of profitability and investor returns, and performs well above industry averages.