Financial Analysis: Hershey Corp. & Tootsie Roll Industries

Financial Analysis: Hershey Corp. & Tootsie Roll Industries

Financial Analysis: Hershey Corp. & Tootsie Roll Industries

Hershey and Tootsie Roll are both companies in the confection industry. We compared both companies for the years 2004, 2005, and 2006 against each other and against the industry averages in order to make a decision about which company we would choose to invest in. The comparisons we used to make our decision were ratios for liquidity, solvency, and profitability. As a result of our analyses, we have chosen the Hershey Company.

Liquidity

Liquidity ratios "measure short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash" (Kimmel Weygandt, & Kieso, 2007, p. 74). The higher the ratio value the larger the margin of safety that the company possesses to cover short-term debts. The liquidity ratios we used in analyzing both Hershey and Tootsie Roll are the current ratio, current cash debt coverage ratio, accounts receivable turnover ratio, average collection period (average age of receivables), inventory turnover, and days in inventory (average age of inventory).

Current Ratio Results

Current ratio is "a measure used to evaluate a company's liquidity and short-term debt-paying ability; computed as current assets divided by current liabilities" (Kimmel et al, 2007, p. 73). A current ratio of 1.0 means the company could theoretically survive for one year, even if it made no sales.

Hershey's current ratio has slightly improved from .9199 in 2004 to .9754 in 2006; however, this is still significantly below the industry average of 1.30. Tootsie Roll's current ratio has significantly increased from 2.3409 in 2004 to 3.0689 in 2006. In addition, Tootsie Roll's current ratio has been above the industry average for all three years. Therefore, Tootsie Roll is able to pay its current debt more than Hershey.

Current Cash Debt Coverage Ratio

Current cash debt coverage is "a cash-basis ratio used to evaluate liquidity, calculated as cash provided by operations divided by average current liabilities" (Kimmel et al, 2007, p. 618). The cash debt coverage ratio shows the percent of debt that current cash flow can retire. A cash debt coverage ratio of 1:1 (100%) or greater shows the company can repay all debt within one year.

Hershey declined from 0.8420 in 2004 to 0.3327 in 2005; however, in 2006, it increased 0.4913. Tootsie Roll declined from 1.0499 in 2004 to 0.8422 in 2005 to 2006 to 0.6329. Therefore, Hershey generated sufficient cash provided by operating activity to meet its current obligations and Tootsie Roll continued to decline in its ability to meet its current obligations. We could not locate an industry average against which to compare both companies.

Accounts Receivable Turnover

Receivable turnover ratio is "a measure of the liquidity of receivables, computed by dividing net credit sales by average net receivables" (Kimmel et al, 2007, p. 396). A high ratio indicates a tight credit policy. A low or declining ratio indicates a collection problem, part of which may be due to bad debts.

Hershey declined from 10.8173 in 2004 to 9.1397 in 2006, which is below the industry average of 11.8 for all three years. Tootsie declined from 13.3212 in 2004 to 12.8482 in 2006; however, remained above the industry average. Therefore, we conclude Tootsie Roll collects its accounts in a more timely fashion than Hershey.

Average Collection Period (Average Age of Receivables)

Average collection period is "the average amount of time that a receivable is outstanding, calculated by dividing 365 days by the receivables turnover ratio" (Kimmel et al, 2007, p. 396). It is used to assess the effectiveness of a company's credit and collection policies. An increase in collection period may suggest a decline in financial health of customers.

Hershey increased considerably from 33.7423 days in 2004 to 39.9357 days in 2006. Tootsie Roll increased from 27.4000 days 2004 to 28.4088 days 2006. We could not locate an industry average against which to compare both companies. Even though both companies' ratios increased, Tootsie Roll was one day while Hershey was 6.1934; therefore, we have concluded Tootsie Roll is able to turn its receivables into cash quicker than Hershey.

Inventory Turnover

The inventory turnover ratio "measures the number of times on average the inventory sold during the period; computed by dividing cost of goods sold by the average inventory during the period" (Kimmel et al, 2007, p. 292). This indicates how quickly a company sells its goods and a high ratio "suggests that management is reducing the amount of inventory on hand, relative to sales" (Kimmel et al, 2007, p. 287).

Hershey declined in all three years from 5.0907 in 2004 to 4.8872 in 2006. However, Tootsie Roll increased from 4.6632 in 2004 to 5.2191 in 2006. Both companies are above the industry average of 4.2. We have concluded that Tootsie Roll has a higher inventory turnover rate than Hershey. In addition, Tootsie Roll is reducing the amount of inventory on hand, relative to sales.

Days in Inventory (Average Age of Inventory)

Days in inventory is a "measure of the average number of days inventory is held; calculated by dividing 365 by inventory turnover ratio" (Kimmel et al, 2007, p. 292).

Hershey increased over all three years from 71.6994 days in 2004 to 74.6856 days in 2006. Tootsie Roll declined from 78.2717 days in 2004 to 69.9356 days in 2006. Both companies are above the industry average of 52 days. However, we have concluded that Tootsie Roll is reducing its amount of inventory on hand relative to sales while Hershey is not.

Overall Liquidity Evaluation

We have found Tootsie Roll to have a better liquidity ratio overall than Hershey. Tootsie Roll has a better current ratio, accounts receivable turnover, average collection period, inventory turnover, and days in inventory than Hershey. However, the overall liquidity of Hershey does not deter us in our choice to invest in Hershey. Hershey has a better current cash debt coverage ratio than Tootsie Roll. Hershey is able to generate sufficient cash funds to meet its current debt obligations.

Solvency

Solvency ratios "measures the ability of the company to survive over a long period of time" (Kimmel et al, 2007, 74). "It is the ability to