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 companys 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.
Hersheys 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 Rolls current
ratio has significantly increased from 2.3409 in 2004 to 3.0689 in 2006. In addition,
Tootsie Rolls 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
