FINANCIAL ANALYSIS The financial analysis for Hershey will be provided giving by liquidity ratios, leverage ratios, activity

ratios, and profitability ratios as following. PROFITABILITY RATIOS From an accounting standpoint, profitability is defined as business gain in an activity. The measures used in this section detail how profitable the firms operations are and how well the firm generates a return on capital. The ratios for profitability analysis are return on assets, sales margin, return on equity, and the dividend payout ratio. Return on Assets: Return on assets (ROA) measures a companys efficiency in generating profits from its available assets. This is calculated by dividing net income by total assets. An increasing ratio indicates higher efficiency. Hersheys ROA improved from 5% in 2007 to 9% in 2008 indicating that Hershey became more efficient over the 2008 fiscal year. Return on Equity: The return on equity (ROE) is a measure of how well a company is able to return a profit using the shareholders investment. It is calculated by dividing net income by the shareholders equity. A higher number indicates a better return from shareholders investments. Hersheys return on equity improved from 36% in 2007 to 98% in 2008, indicating a higher efficiency and better return from shareholders investment. Improvements were noted between 2007 and 2008 for Hersheys ROA, ROE, Gross Profit Margin, Operating Profit Margin, Net Profit Margin and Earning Per Share were increased proportionally. LIQUIDITY RATIOS A companys liquidity can be described by how easily a company can pay off short-term debts, in specific those due in the fiscal year. Current Ratio: The current ratio gives a strong measure of a companys liquidity. It compares the cash and cash equivalents plus any current assets that will be turned into cash within a year to current liabilities that must be paid within the year. This ratio indicates how well a company can pay its current debts. It is calculated by dividing current assets by current liabilities. Hersheys current ratio improved from 0.88 in 2007 to 1.06 in 2008. Although this is an improvement, a ratio of 1 or better is desired in order to show the ability to pay of all current debts with current assets. Quick Ratio: The quick ratio is similar to the current ratio. Instead of using all current assets, the quick ratio only uses cash, market securities, and accounts receivables to compare against current liabilities. This is done to further narrow the assets to those that can more quickly be turn into cash. Hersheys quick ratio improved from 0.51 to 0.59.

Although an improvement can be seen, a more desirable ratio would be closer to 1 so that debts could be paid with current cash and cash equivalents. All measures of liquidity showed improvements for Hershey between 2007 and 2008. This is largely due to Hersheys ability to generate a greater amount of operational cash flows between the two years. The improvement in current ratio and quick ratio shows an improved ability to pay off short term debts with current assets, which is also indicative that future payments of the long term debt will be possible. ACTIVITY RATIOS Activity in a firm is typically categorized as creation of product and moving product out the door for sales. Activity measures focus on these actions and evaluate how a firm uses its assets to generate revenues. If a company is able to utilize its assets efficiently, fewer funds from financing are needed. The ratios analyzed in this section are inventory turnover and asset turnover. Asset Turnover: Asset turnover takes an overall focus on how the company uses all of its assets to generate revenues. A higher number is desired because it indicates that each dollar of asset is producing a greater amount of revenue. It is calculated by dividing the companys revenue by the total amount of assets for the current year. Hersheys asset turnover ratio improved from 1.16 in 2007 to 1.41 in 2008. This shows that Hersheys was more efficient in using its assets between evaluation periods. Inventory Turnover: Inventory turnover is a measure of how often within a year that inventory is sold and replaced. It is calculated by dividing cost of goods sold by inventory. A high ratio indicates efficiency and a high rate of sales. Hersheys inventory turnover slightly improved from 8.24 in 2007 to 8.66 in 2008. Improvements were seen in inventory and asset turnover ratios. Hersheys assets decreased in value while revenues increased, resulting in a more efficient use of assets. LEVERAGE RATIOS A companys leverage defines how a company handles its debt. Companies that have a high leverage can have difficulty paying back debts, securing new debts from creditors, and are usually higher risk. But, these companies can also attain tax advantages and gain large returns from investing. The ratios analyzed in this section include the debt ratio, debt to equity ratio and times interest earned ratio. Debt Ratio: The debt ratio indicates how much debt a company has relative to its assets. This ratio is calculated by dividing total liabilities by total assets. This ratio is one of the components typically used by investors to determine the risk level of a company. A lower number is favored because it shows the company has a larger percentage of assets when compared to liabilities. Hersheys debt ratio increased and deteriorated from 0.762 in 2005

to 0.836 in 2006. This is due to a decrease in company assets while liabilities increased. The increase in liabilities can be noted most in the long-term liabilities. This adds risk to Hersheys from an investment standpoint. Debt to Equity Ratio: The debt to equity ratio is a measure of what proportions of debt and equity are used in its financing. It is also a measure of a companys financial leverage. The ratio is calculated by dividing total liabilities by stockholders equity. A lower number is favored because it indicates a higher amount of shareholders equity when compared to liabilities. Hersheys debt to equity ratio increased and deteriorated from 6.16 in 2007 to 10.42 in 2008. This is largely a result in Hersheys large decrease in shareholders equity. Times Interest Earned Ratio: The times interest earned ratio gives shows how well a company is able to pay its interest expenses with earnings before taxes. The number represents how many times over the interest expense can be paid with the earnings before interest. A higher number is favored. The ratio is calculated by dividing earning before interest and taxes (EBIT) by net interest expense. The times interest earned ratio for Hersheys increase from 3.87 in 2007 to 6.03 in 2008. Hershey achieved many improvements in their financial ratios. Between 2005 and 2006, Hershey showed improvements in many areas. Their overall profitability improved. Liquidity also improved in all areas. This can be attributed to their ability to generate a greater amount of operational cash flows. Because of their increased liquidity, Hershey shows that they are in a better position to pay off their debts and is able to distribute their earnings to stockholders more readily.