Financial Analysis of The Hershey Company

Topics: Generally Accepted Accounting Principles, Balance sheet, Financial ratios Pages: 8 (2282 words) Published: March 20, 2014
Liquidity ratios measure a company’s ability to meet its maturing short-term obligations. In other words, can a company quickly convert its assets to cash without a loss in value if necessary to meet its short-term obligations? Favorable liquidity ratios are critical to a company and its creditors within a business or industry that does not provide a steady and predictable cash flow. They are also a key predictor of a company’s ability to make timely payments to creditors and to continue to meet obligations to lenders when faced with an unforeseen event. Current Ratio

Current Assets/Current Liabilities

This ratio reflects the number of times short-term assets cover short-term liabilities and is a fairly accurate indication of a company's ability to service its current obligations. A higher number is preferred because it indicates a strong ability to service short-term obligations. The composition of current assets is a key factor in the evaluation of this ratio. Depending on the type of business or industry, current assets may include slow-moving inventories that could potentially affect analysis of a company's liquidity how long could it potentially take to convert raw materials and inventory into finished products? (For this reason, the quick ratio may be preferable to the current ratio because it eliminates inventory and prepaid expenses from this ratio for a more accurate gauge of a company's liquidity and ability to meet short-term obligations.)

The current ratio for Hershey Company is 1.44 indicates the company’s ability to service short-term obligations is satisfactorily. However, the value of the quick ratio will provide a clearer indication of the company’s success in this area.

Quick Ratio
(Cash + Marketable Securities + Trade Accounts Receivable)/ Current Liabilities

This ratio, also known as the acid test ratio, measures immediate liquidity - the number of times cash, accounts receivable, and marketable securities cover short-term obligations. A higher number is preferred because it suggests a company has a strong ability to service short-term obligations. This ratio is a more reliable variation of the Current ratio because inventory, prepaid expenses, and other less liquid current assets are removed from the calculation.

The quick ratio for Hershey Company is 0.81 indicates the company’s ability to service short-term obligations is unfavorable.

Accounts Receivable to Working Capital
Trade Accounts Receivable / (Current Assets - Current Liabilities)

This ratio measures the dependency of working capital on the collection of receivables. A lower number for this ratio is preferred, indicating that a company has a satisfactory level of working capital and accounts receivable makes up an appropriate portion of current assets.

The accounts receivable to working capital ratio for Hershey Company is 0.72 indicates that the company’s performance is sufficient in this area. Inventory to Working Capital
Inventory / (Current Assets - Current Liabilities)
This ratio measures the dependency of working capital on inventory. A lower number for this ratio is preferred indicating that a company has a satisfactory level of working capital and inventory makes up a reasonable portion of current assets.

The inventory to working capital ratio for Hershey Company is 0.99 indicates that this ratio is in line with company goals. Long Term Liabilities to Working Capital
Long Term Liabilities / (Current Assets - Current Liabilities) This ratio measures the degree to which a company's long-term debt has been used to replenish working capital versus fixed asset acquisition. The long-term liabilities to working capital ratio for Hershey Company is 3.42 indicates the value of this ratio is meeting the company’s expectations. Sales to Working Capital

Sales / (Current Assets - Current Liabilities)
This ratio measures a company's ability to finance current operations. Working capital (current...
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