This analysis concerns the liquidity, solvency, and profitability ratios of the Hershey and Tootsie Roll companies. One website, Value Based Management (VBM) considered the Cash Ratio Formula as a means of measuring Liquidity. This formula is as follows: Cash Ratio (CR) = Cash Equivalents + Cash/Current Liabilities = Cash Equivalents + Cash/Accruals + Accounts Payable + Notes Payable (VBM 2007). Results of the Liquidity Ratio analysis for both companies are listed in the chart. It was said that “Profitability ratios measure how well a company is performing by analyzing how profit was earned relative to sales, total assets and net worth.
’ ‘D&B uses three key financial business ratios to measure a company’s efficiency’” (qtd. in Profitability Ratios 2007). Return on Sales (Profit Margin) Ratio = Net Profit After Taxes/Net Sales. High returns help a company when things begin to plummet due to adverse conditions (Profitability Ratios 2007). Return on Assets (ROA) Ratio = Net Profit After Taxes/Total Assets. Any time this ratio yields a high return, it is better for the company (Profitability Ratios 2007). Return on Net Worth Ratio = Net Profit After Taxes/Net Worth (Profitability Ratios 2007).
This information is listed in the chart above as well as demonstrated below. Also, “Solvency ratios measure the financial soundness of a business and how well the company can satisfy its short- and long- term obligations. ’ ‘D&B uses six key financial business ratios to measure a company’s solvency’” (qtd. in Solvency Ratios 2007). Quick Ratio = Cash + Accounts Receivables/Current Liabilities. Current Ratio = Current Assets/Current Liabilities. Current Liabilities to Net Worth Ratio = Current Assets/Net Worth. Anything in excess of 80% means the business is having trouble (2007).
Current Liabilities to Inventory Ratio = Current Liabilities/Inventory. Total Liabilities to Net Worth Ratio = Total Liabilities/Net Worth. High percentages equal high risk and little protection for creditors (Solvency Ratios 2007). Fixed Assets to Net Worth Ratio = Fixed Assets/ Net Worth. Percentages over 75 create extra vulnerability to uncontrollable events and business climate changes (Solvency Ratios 2007). Again, this information is listed in the chart on previous pages as well as demonstrated below. Conclusions Based upon Net Worth Ratios alone (Profitability), Hershey appears to be a better investment.
In dollars, Hershey earned $403,578 for Net Worth in 2002 and $147,217 in 2004. However, Tootsie Roll earnings were only $66,388 in Net Worth for 2002 and $129,869 in 2004. Given the fact Hershey’s Net Worth was almost three times more within two years and Tootsie Roll’s only doubled within two years, Hershey’s is a better investment. Yet, Tootsie Roll is a better long-term investment based upon Return On Assets (ROA) as well as Return On Net Worth (RONW). This information concerns the year 2002. Only the fourth quarter has been presented for Hershey in 2004.Thus, Tootsie is a better investment because the company’s information reflects an Annual Report versus one quarter for 2004.
References
Hershey. com. “Hershey Foods Corporation management’s discussion and analysis. ” 2002. A-1-A-66. Hershey. com. 22, Feb. 2007 <http://media. corporate-ir. net/media_files/NYS/HSY/reports/HSY_MDA-2002. pdf> Hershey. com. “FORM 10-Q: Quarterly Reports. ” 1, Nov. 2004. Hershey. com. 22, Feb. 2007 <http://10kwizard. ccbn. com> “Profitability Ratios. ” 2007. Yahoo Search! 22, Feb. 2007 <http://kbr. dnb. com/help/Ratios/Profitability_Ratios. htm> “Solvency Ratios.
” 2007. Yahoo Search! 22, Feb. 2007 <http://kbr. dnb. com/help/Ratios/Solvency_Ratios. htm> Tootsie. com. Financial: Financial Information. 2002. 2002 Annual Report. 1-23. 22, Feb. 2007 <http://www. tootsie. com/pdf/annualreport2002. pdf> Tootsie. com. Financial: Financial Information. 2004. 2004 Annual Report. 1-24. 22, Feb. 2007 <http://www. tootsie. com/pdf/annualreport2004. pdf> Value Based Management. net (VBM). “Cash Ratio Model—Method for measuring liquidity. ” 16, Feb. 2007. Value Based Management. net. 22, Feb. 2007 <http://www. valuebasedmanagement. net/methods_cash_ratio. html>