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 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
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