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Financial Analysis

Using Financial
Performance Metrics
Corporate Financial Policy 2.2
Financial Performance Metrics
Formerly, Financial Ratios
Relative Basis for Comparison
Thousands of Potential Metrics
One Number Divided by Another Number
Multiple Permutations and Combinations
Six Major Categories
Liquidity
Activity
Leverage
Profitability
Market
Growth
Applicable to Historical Information as
well as Plan and Outlook Projections
Corporate Financial Policy 2.3
Metric Categories
Liquidity Metrics measure the firms
abilities to meet its maturing short-term
obligations.
Activity Metrics measure how effectively
the firm is using its resources.
Leverage Metrics measure the extent to
which the firm has been financed by debt.
Profitability Metrics measure
managements overall effectiveness in
generating profits.
Market Metrics measure the firms
relationship to the broader Stock Market.
Growth measures the firms ability to
maintain its economic position in the
growth of the economy and industry.
Corporate Financial Policy 2.4
1998 Summary Statistics
($ Millions, except per share)
1998 Hershey
Hershey Heinz
Sales 4,435.6 $ 9,209.3 $
Cost of Goods Sold 2,625.1 5,711.2
Operating Income 642.7 1,520.3
Interest Expense 85.7 226.0
Pre-Tax Income 557.0 1,255.0
Net Income 340.9 801.6
Cash & Equivalents 39.0 99.4
Accounts Receivable 451.3 1,071.8
Inventory 493.2 1,328.8
Current Assets 1,134.0 2,686.5
Net, Plant, Prop, & Equip 1,648.1 2,394.7
Total Assets 3,404.1 8,023.4
Current Liabilities 814.8 2,164.3
Short-Term Debt 345.9 301.0
Current Portion LTD 0.1 38.6
Long-Term Debt 879.1 2,768.3
Stockholders' Equity 1,042.3 2,216.5
Stock Price Per Share
Beginning 61.94 50.81
Ending 62.19 56.63
Earnings Per Share 2.38 2.19
Shares Outstanding 143.1 366.0
Corporate Financial Policy 2.5
1998 Normalized Earnings
Net Restructuring Discontinued Cum Effect of Normalized
Income Charges Operations Acctg Change Income
Hershey Foods 340.9 $ - $ - $ - $ 340.9 $
Campbell Soup 660.0 193.0 18.0 11.0 882.0
Conagra 613.2 - - 14.8 628.0
Dean Foods 106.3 - (18.3) - 88.0
General Mills 421.8 100.2 - - 522.0
Heinz 801.6 53.7 - - 855.3
Interstate Bakeries 127.9 - - - 127.9
Kellogg' s 502.0 46.3 - - 548.3
Nabisco (71.0) 362.0 36.0 - 327.0
Quaker 280.0 50.2 - - 330.2
Tootsie Roll 67.5 - - - 67.5
Wrigley 304.5 (6.8) - - 297.7
Corporate Financial Policy 2.6
Commonly Used Financial Ratios:
Liquidity
Calculation Strength
Current
Ratio
Current Assets
Current Liabilities
Higher
Quick
Ratio
Current Assets Inventory
Current Liabilities
Higher
Cash
Ratio
Cash and Equivalents
Current Liabilities
Higher
Corporate Financial Policy 2.7
Commonly Used Financial Ratios:
Activity
Calculation Strength
Total Asset
Turnover
Sales
Total Assets
Higher
Fixed
Asset
Turnover
Sales
Net, Plant, Property &
Equipment
Higher
Capital
Turnover
Sales
(Interest Bearing Debt +
Stockholders Equity)
Higher
Corporate Financial Policy 2.8
Commonly Used Financial Ratios:
Activity (Part 2)
Calculation Strength
Accts Rec
Turnover
_______Sales_______
Accounts Receivable
Higher
Accts Rec
Days
Outstanding
___365 Days___
A/R Turnover
Lower
Inventory
Turnover
Cost of Goods Sold
Inventory
Higher
Inventory
Days
Outstanding
_____365 Days_____
Inventory Turnover
Lower
Corporate Financial Policy 2.9
Commonly Used Financial Ratios:
Leverage
Calculation Strength
Debt to
Equity
Total Liabilities
Stockholders Equity
Lower
Financial
Leverage
Total Assets
Stockholders Equity
Lower
Cap
Ratio*
STD+ CPLTD + LTD
Interest Bearing Debt
+ Stockholders Eq
Lower
Interest
Coverage
PTI + Interest Exp
Interest Expense
Higher
* Capitalization Ratio
Corporate Financial Policy 2.10
Commonly Used Financial Ratios:
Profitability
Calculation Strength
Net
Margin
Net Income
Sales
Higher
Pre-Tax
Margin
Pre-Tax Income
Sales
Higher
Operating
Margin
Earnings Before
Interest and Taxes
Sales
Higher
Gross
Margin
(Sales COGS)
Sales
Higher
Corporate Financial Policy 2.11
Commonly Used Financial Ratios:
Profitability (Part 2)
Calculation Strength
Return on
Assets
_Net Income_
Total Assets
Higher
Return on
Net Assets
_Net Income_
Net Assets*
Higher
Return on
Capital
____Net Income_____
(Interest Bearing Debt
+ Stockholders Eq)
Higher
Return on
Equity
____Net Income_____
Stockholders Equity
Higher
* Net Assets = Total Assets - Non-Debt Current Liabilities
Corporate Financial Policy 2.12
Commonly Used Financial Ratios:
Market
Calculation Strength
Price-
Earnings
Stock Price
EPS
Higher
Market to
Book
Market Capitalization*
Stockholders Equity
Higher
Dividend
Yield
Dividend
Stock Price
Higher
Shareholder
Return**
(Pt - P(t-1)) + D
P(t-1)
Higher
* Market Capitalization = Stock Price X Shares Outstanding
** Where: P = Stock Price; D = Dividends; t = Time Period
Corporate Financial Policy 2.13
Financial Performance Metric
Comparison
Hershey Heinz
1996 1997 1996 1997
Liquidity
Current Ratio 1.21 1.30 1.12 1.05
Quick Ratio 0.63 0.67 0.57 0.55
Cash Ratio 0.08 0.07 0.04 0.07
Activity
Total Asset Turnover 1.25 1.31 1.06 1.11
Fixed Asset Turnover 2.49 2.61 3.48 3.77
Capital Turnover 1.87 2.01 1.50 1.59
Acc Rec Turnover 13.54 11.92 7.54 8.36
Acc Rec Days OS 27.0 30.6 48.4 43.6
Inventory Turnover 4.85 4.92 3.87 4.12
Inventory Days OS 75.3 74.1 94.4 88.5
Leverage
Debt to Equity 1.74 2.86 2.19 2.46
Financial Leverage 2.74 3.86 3.19 3.46
Capitalization Ratio 45.5% 60.1% 55.4% 58.6%
Interest Coverage 11.73 8.26 5.40 5.79
Profitability
Net Margin 7.7% 7.8% 7.2% 7.6%
Pre-Tax Margin 12.9% 12.9% 11.2% 12.0%
Operating Margin 14.1% 14.6% 14.1% 15.0%
Gross Margin 42.3% 42.1% 36.6% 36.9%
Return on Assets 9.7% 10.2% 7.6% 8.4%
Return on Net Assets 11.5% 12.2% 9.4% 10.6%
Return on Capital 14.5% 15.7% 10.9% 12.1%
Return on Equity 26.6% 39.5% 24.4% 29.1%
Corporate Financial Policy 2.14
DuPont Ratio Analysis
2. Net Margin X Asset Turnover = Return on Assets
Net Income
Sales
X
___Sales___
Total Assets
=
Net Income
Total Assets
3. Return on Assets X Financial Leverage = Return on Equity
Net Income
Total Assets
X
Total Assets
Equity
=
Net Income
Equity
Corporate Financial Policy 2.15
Hershey and Heinz
DuPont Analysis
Hershey Heinz
1996 1997 1996 1997
Net Margin Net Income / Sales 7.7% 7.8% 7.2% 7.6%
X
Total Asset Turnover Sales / Total Assets 1.25 1.31 1.06 1.11
=
Return on Assets Net Income / Total Assets 9.7% 10.2% 7.6% 8.4%
X
Financial Leverage Total Assets / Equity 2.74 3.86 3.19 3.46
=
Return on Equity Net Income / Equity 26.6% 39.5% 24.4% 29.1%
Corporate Financial Policy 2.16
Hershey and Heinz
DuPont Analysis
Hershey Heinz
1992 1997 1992 1997
Net Margin NI / Sales 7.5% 7.8% 7.5% 7.6%
X
Total Asset Turnover Sales / Total Assets 1.21 1.31 1.03 1.11
=
Return on Assets Net Income / Total Assets 9.1% 10.2% 7.8% 8.4%
X
Financial Leverage Total Assets / Equity 1.82 3.86 2.92 3.46
=
Return on Equity Net Income / Equity 16.6% 39.5% 22.8% 29.1%
Corporate Financial Policy 2.17
Addendum to DuPont Ratio
Analysis
1. Pre-Tax Margin X (1 Tax Rate) = Net Margin
Pre-Tax Income
Sales
X (1 -
Taxes
PTI
) =
Pre-Tax Income
Sales
X
(
PTI
PTI
-
Taxes
PTI
) =
=
Pre-Tax Income
Sales
X
__PTI Taxes__
Pre-Tax Income
=
Net Income
Sales
4. Return on Equity X (1 Divd Payout) =
Sustainable
Growth Rate
Net Income
Equity
X (1 -
Dividends
Net Inc
) =
Net Income
Equity
X (
NI
NI
-
Divd
NI
) =
Net Income
Equity
X
(Net Inc Divd)
Net Income
=
(Net Inc Divd)
Equity
Corporate Financial Policy 2.18
Corporate Financial Policy 2.19
Notes to Accompany 1980
DuPont Analysis
1. Pre-Tax Margin =
Pre-Tax Income
Sales
2. After-Tax Retention Rate = (1 -
Taxes
PTI
)
3. Net Margin =
Net Income
Sales
4. Asset Turnover =
_ _Sales___
Total Assets
5. ROA (Return on Assets) =
_Net Income_
Total Assets
6. Financial Leverage =
Net Income
Total Assets
7. ROE (Return on Equity) =
Net Income
Equity
8. Income Retention Rate = (1 -
Dividend
Net Inc
)
9.
Financial or Sustainable
Growth Rate
=
Net Inc - Divd
Equity
Financial or Sustainable Growth Rate is the rate of growth that a firm can experience
given no equity is issued (or purchased) and balance sheet/income statement
relationships (as reflected in the ratios) are unchanged.
Corporate Financial Policy 2.20
Corporate Financial Policy 2.21
Common Size Income Statement
Hershey Tootsie
Foods Roll Wrigley
Common Size Income Statement
Sales 100.0% 100.0% 100.0%
Cost of Goods Sold 59.2% 48.3% 42.3%
Gross Income 40.8% 51.7% 57.7%
S, G, & A 26.3% 25.7% 37.1%
Operating Income 14.5% 26.1% 20.6%
Interest Expense (Income) 1.9% -1.2% -0.9%
Pretax Income 12.6% 27.3% 21.5%
Corporate Financial Policy 2.22
Total Asset Turnover Analysis
Hershey General Quaker
Foods Mills Oats
Other Turnovers
Accounts Receivable 9.828 15.270 17.087
Inventory 5.322 6.131 9.083
Fixed Assets 2.691 5.086 4.525
Total Assets 1.303 1.562 1.929
Common Size Balance Sheet
Cash 1.1% 0.2% 14.1%
Accounts Receivable 13.3% 10.2% 11.3%
Inventories 14.5% 10.1% 10.4%
Current Deferred Taxes 1.7% 3.5% 4.6%
Other Current Assets 2.7% 2.8% 4.0%
Current Assets 33.3% 26.8% 44.4%
Net, Plant, Property, & Equip 48.4% 30.7% 42.6%
Intangibles (Goodwill) 15.6% 16.3% 9.8%
Other Assets 2.7% 26.1% 3.2%
Total Assets 100.0% 100.0% 100.0%
Corporate Financial Policy 2.23
Financial Leverage Analysis
Hershey Campbell
Foods Soup Kellogg' s
Other Ratios
Capitalization Ratio 63.2% 116.5% 89.2%
Debt to Equity 2.266 5.445 4.677
Short-Term Debt / Equity 0.332 1.603 0.698
Long-Term Debt / Equity 0.843 1.338 1.814
Common Size Balance Sheet
Accounts Payable 4.6% 9.0% 7.7%
Accrued Liabilities 8.6% 13.0% 14.1%
Accrued Income Taxes 0.5% 2.9% 0.0%
Short-Term Debt 10.2% 24.9% 12.3%
Current Portion of LTD 0.0% 0.0% 0.0%
Current Liabilities 23.9% 49.8% 34.0%
Long-Term Debt 25.8% 20.8% 32.0%
Other Long-Term Liabilities 19.6% 14.0% 16.4%
Stockholders' Equity 30.6% 15.5% 17.6%
Total Liabilitites and SE 100.0% 100.0% 100.0%
Corporate Financial Policy 2.24
1998 Net Sales
($ Millions)
$388.7
$2,004.7
$2,735.8
$3,265.8
$4,435.6
$4,842.5
$6,033.0
$6,551.2
$6,696.0
$6,762.1
$8,400.0
$9,209.3
$23,840.5
$0 $5,000 $10,000 $15,000 $20,000 $25,000
Tootsie Roll
Wrigley
Dean Foods
Interstate Bakeries
Hershey Foods
Quaker Oats
General Mills
Industry Average
Campbell Soup
Kellogg's
Nabisco
Heinz
Conagra
Corporate Financial Policy 2.25
1998 Annual Growth in
Net Sales
-3.8%
-3.5%
-1.6%
-1.0%
1.2%
1.7%
1.8%
3.1%
3.5%
3.5%
7.6%
-0.7%
11.2%
-6% -3% 0% 3% 6% 9% 12%
Campbell Soup
Interstate Bakeries
Industry Average
Hershey Foods
Tootsie Roll
Wrigley
General Mills
Dean Foods
Conagra
Heinz
Kelloggs
Quaker Oats
Nabisco
Corporate Financial Policy 2.26
1998 Net Sales CAGR*
1994 to 1998
-5.0%
0.8%
0.8%
2.2%
5.1%
5.3%
5.8%
5.9%
6.9%
7.0%
8.0%
3.2%
-6% -3% 0% 3% 6% 9% 12% 15%
Quaker Oats
Kellogg's
Conagra
Nabisco
General Mills
Campbell Soup
Hershey Foods
Industry Average
Wrigley
Heinz
Tootsie Roll
Dean Foods
Excludes Interstate Bakeries 30.0
1994-1998 CAGR
* CAGR: Compound Annual
Growth Rate
Corporate Financial Policy 2.27
Net Sales Comparison
1994 to 1998
102.3
110.6
112.3 112.6
119.3
123.0
111.9
106.7
50
75
100
125
150
1994 1995 1996 1997 1998
Industry Average
Hershey Foods