This whole essay is concentrated on the Hershey Company. This essay has been divided into five separate parts. In the first part of an essay, the discussion has been made regarding the Company’s introduction, its major line of operations, the major competitors of the Hershey Company, as well as the expected future growth of this Company. Second part is very important which includes the full discussion of the ratio analysis that has been used for evaluating the Company’s performance. In the third part of an essay, the auditor’s opinion made in the financial statements of the Company for the year ended 2012, has been evaluated include the date of the auditor’s report as well as to whom it is being addressed. Fourth part includes the comprehensive discussion on the different important policies which have been implemented by the Company consistently. Last part includes some kind of general discussion on the main drivers of the Company (as CEO, CFO and their short introduction and chairman of the BOD), major location of the headquarter of the Company, etc. At the very end part of this essay, conclusion has also been drawn on the overall Company’s financial performance and also whether it is good for the investors to invest in this Company or not.
The Hershey Company was formed on 24 October, 1927 holding a number of subsidiaries by which this company has financial controlling interest. The shares of this Company are listed on the New York Stock Exchange (NYSE). The core operation of this Company is the production of superior quality chocolates in the area of North America. The major product lines of this Company are sugar and chocolate combination products, gum and mint products and large varieties of pantry goods including baking, topping and beverages. Thus, Hershey Company holds a significant share in this industry and enjoying the status of being leader in this market area.
After analyzing the sales trend for the past three years (2010-2012), it is showing a positive trend. On the basis of this trend, it is also expected that the Company will continue to grow in the upcoming years because everything is going well for the Company.
Hershey Company is facing tough competition in the market. Mondelez International Inc., Barry Callebaut AG, Tootsie Roll Industries, Petra Foods Limited, Chocoladefabriken Lindt & Spruengli AG and Chocoladefabriken Lindt & Spruengli AG are some of the major competitors of the Hershey Company.
The financial statements of this Company have been presented in a very professional way. The format for presenting the annual reports for this Company is Form 10-K. The management of this Company has used the footnotes in a very professional and descriptive manner for the reader’s convenience. The title used for the annual report of this Company is UNITED STATES SECURITIES AND EXCHANGE COMMISSION.
In this part, lots of important ratios for the years 2012 to 2010 have been calculated for conducting the financial analysis of this Company. Profitability, Liquidity, Efficiency and Growth are the major areas of concerned and that’s why all these areas have been taken into consideration.
Profitability ratios are used to measure a company’s ability to generate income by controlling expenses. Return on capital employed, gross profit margin, operating profit margin, return on assets and asset turnover ratios have been calculated and workings are also shown below along with healthy discussions.
That ratio is commonly used to evaluate the capability of the Company regarding the generation of the income by using the employed capital.
The return on capital employed in the year 2010, 2011 and 2012 was 30.44%, 32.63% and 33.84% respectively. These figures show the increasing trend which is a healthy sign for the Company as well as shareholders of the Company.
After analyzing the above graph, the gross profit margin of the Hershey Company was 42.59%, 41.64% and 43.04% in year 2010, 2011 and 2012 respectively. All these figures is showing that the Company is earning good gross profit margin overall, and that is just because of the reason that the management of the company has controlled the production expenses (cost of sales) very well.
The operating profit margin of the Company was 15.96%, 17.35% and 16.72% in year 2010, 2011 and 2012 respectively. It is shown that these figures are slightly lower despite of the fact that the gross profit figures were high. It has also been observed that the management of the Company is trying hard to increase that figure by controlling the operating expenses, and that’s why the operating profit margin has been increased slightly by 0.76% (16.72-15.96) in the year 2012 as of the year 2010.
The return on assets of the Company was 21.19%, 23.94% and 23.37% in year 2010, 2011 and 2012 respectively. Graphical trend shows that the return of assets has been increased in the year 2012 as of the year 2010 which shows that the management of the Company is trying hard to use the assets effectively and efficiently. For example, the return of assets has been increased by 2.18% (23.37-21.19) in the latest year (2012) as from the year 2010.
It is the most important ratio from the shareholders point of view because this ratio shows that how much a company is generating net income by using the shareholder’s fund .
The return on equity of the Hershey Company was 56.50%, 73.36% and 63.75% in year 2010, 2011 and 2012 respectively. These figures are considered to be high and hence it is a good sign for the Company because it shows the management of the Company is using the investor’s/shareholder’s fund very effectively for the purpose of generating net earnings.
Liquidity section has been used to measure that whether the Hershey Company has enough resources (short-term) to pay its current obligations. Current ratio and acid test ratio have been used who’s working, and discussion has been mentioned below.
The current ratio is used to measure that how many current assets a Company has in order to meet its current liabilities. Generally, ratio two is considered to be a healthy ratio.
The current ratio of the Company was 1.54, 1.74 and 1.44 in year 2010, 2011 and 2012 respectively. Although the Company has almost 50% higher current assets than the current liabilities, but these figures have been decreased significantly in the current year (2012) as compared to the previous year (2011) which is not a good sign for the Company. For example, the current ratio has been decreased by 0.30 (1.74-1.44) in year 2012 as compared to the year 2011.
This ratio is used to check that whether the company has enough liquid assets (highly convertible into cash) to pay its current obligations or not. As a benchmark, ratio 1 is a heavy ratio of any company.
The acid test ratio of the Company was 0.98, 0.93 and 0.81 in year 2010, 2011 and 2012 respectively. These figures show that the Hershey Company has adequate liquid assets (almost equal to its current liabilities) which is considered to be the best sign for this Company because it shows that the Company can operate smoothly without facing liquidity crisis in a day to day activities.
Efficiency ratios have been used to check the efficiency of the Company in terms of managing working capital (i.e. payables, receivables and inventory turnover). Receivables collection days, payables payment days and inventory turnover days ratios, have been calculated and shown as below with some important discussions on this segment of the business.
The receivable collection days ratio show that how much time the debtors are taking in order to pay what they owe to the company. Lower days are beneficial for the company because it shows that the recovery process is fast, and cash conversion cycle is short.
As shown in the working and in the above presented chart, the receivable’s collection days of the Hershey Company were 25, 24 and 25 in year 2010, 2011 and 2012 respectively. These figures show that the recovery process is very fast, and the debtors are paying what they owe in less than a month that is a great sign for the Company. It shows that the debtor management staff of the Company is proactive.
This ratio shows that how much time a company is taking in order to pay its suppliers. The payment period should not be too long because it may damage the company’s reputation in the market and also there may be a danger that the supplier may stop the supply of the material because of poor credit terms of the company.
The payables payment days of the Company were 46, 43 and 43 in year 2010, 2011 and 2012 respectively. It has been observed that overall these figures are not very high which means that the creditor staff of the Company is not taking too much time to pay its suppliers. The management is still trying hard to fast up the payment process, and that’s why the payable payment days have been decreased by three days (46-43) in the year 2012 as of the year 2010 which is a healthy sign for the Hershey Company.
The inventory turnover days ratio has been used to evaluate the period by which the inventory is being held by the Hershey Company (in the form of stock). The lower ratio indicates that the company is efficient in terms of converting the inventory into sales. .
The inventory turnover days of the Company were 60, 67 and 61 in year 2010, 2011 and 2012 respectively. All these figures show that the conversion time of the inventory into sales is not very fast which is not a good sign for the Company. This may be because of the slowdown in trading or poor advertising strategies of the Company.
In order to check the growth of the Hershey Company, gearing ratio has been calculated and shown below.
This ratio is very useful because it shows that whether the company has adequate equity or the company is more aggressive towards external debt. Generally, A ratio greater than 50% is considered to be the high gear, which is not a good sign for any company because it shows that the company is facing a high burden of the long-term loan which may affect the going concern of the company.
The gearing ratio of the Company was 51.85%, 54.08%, 46.62% and in year 2010, 2011 and 2012 respectively. These figures show that the Company is facing high geared but the management is also trying to reduce that ratio by paying the principal amount of the long-term loans, and that’s why the gearing ratio has been reduced slightly (by 7.46%) in year 2012 as compared to the year 2011.
After analyzing the “RESPONSIBILITY FOR FINANCIAL STATEMENTS” (page # 50) section of the annual report for the year ended 2012, it has been identified that the statutory auditors of this Company are KPMG LLP. Independent auditors of the Hershey Company give the unqualified opinion by stating that the financial statements present a true and fair picture of the entity’s operation. They also stated that the financial statements are being prepared in accordance with the applicable U.S. generally accepted accounting principles (U.S. GAAP). It has been identified by the auditors that the management of the Company has been succeeded in establishing and maintaining adequate internal controls which also give reasonable assurance that financial statements are free from material misstatement. So, this section adds more to the credibility of the Company, which will result in a positive impact of the existing and potential investors of the Company. The date of the auditor’s opinion is February 22, 2013 and it is addressed explicitly to the board of directors and shareholders of the Company.
After carefully studying the “NOTES TO CONSOLIDATED FINANCIAL STATEMENTS” (Page # 58) section of the annual report for the year ended 2012, there are lots of accounting policies which have been established by the Company and the major details of the major accounting policies have been discussed in the below section.
It has been the policy of the Company to use the equity method for the equity investments. In this method, investments are recognized in the financial statements at cost after adjusting the undistributed profits or losses.
Revenue is recognized by the Company if the established criteria have been met. This criterion includes that a genuine customer order has been acquired, the relevant products have been handover/delivered to the customer, the entity does not have the right on the products delivered after the delivery made to the customer and the revenue from the sale is reasonably expected.
The Company uses the straight line method for the depreciation of the Property, plant and equipment and the amount recognized in the financial position for this item is at cost adjusted by the depreciation and impairment (if any).
The Company account for the cost of the research and development as a period cost which means that these costs are accounted for as an expense in the period they incur and hence do not capitalize any portion of the research and development cost.
Transfer agents of this Company are Computershare. The main function of this agent is to keep the shareholder’s record, to issue new shares and do the proceedings in the case of the shares lost, destroyed, etc. This transfer agent is outside the big4 firms.
The headquarters of this Company are in Pennsylvania, U.S. The CEO of this Company is John P. Bilbray. He has been the CEO of this Company since May 17, 2011. The CFO of this Company is Humberto P. Alfonso. He has a vast expertise in the field of accountancy.
James Nevels is currently the chairman of the board of directors of the Hershey Company.
After analyzing all the important areas of the Hershey Company, it has been observed that the Company is in a very strong position in terms of generating income, controlling expenses and also using the resources efficiently and effectively. Moreover, the Company also has enough current resources and the working capital condition is also good.
The auditors also gave the unqualified opinion which shows that the Company has been following all the statutory requirements very well. So all the factors are in the favor of the Company, and there is a good opportunity for the investors to invest in the Company but after carefully viewing the long-term loan dealings of the Company because it is the only area which is a kind of slight fear factor for the prospective investors because the Company is facing high geared during all the three years (2010-2012).
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