Hersheys Debt Analysis - Case Study Example

Hershey’s Debt Analysis Submitted By: ***** Number: ****** ****** *************** ******* *********** University of ******** Table of Contents Table of Contents 1 Introduction: 2 Debt Analysis: 2 Debt – equity Ratio: 3 Times Interest Earned Ratio: 4 Conclusion: 5 Bibliography 6 Introduction: Hershey’s was founded in 1894, by Milton S. Hershey. It was incorporated on 24 October 1927. Hershey’s has grown to become the largest chocolate manufacturer in the North America. The company has recorded revenues of over $5 billion and it has as many as over 13000 employees. Hershey’s has built a strong range of market icon brands across the world and is known for its fast growing premium dark chocolate. The company has built a number of different partnerships with a large number of companies across the globe. Its partnership with Starbucks is one of the strongest. Starbucks offers a premium chocolate experience which combines the coffee house flavours with the quality chocolate of Hershey (Hershey, 2009). This report aims at providing a comprehensive debt analysis of the company based on the published financial statements of 2007. Debt Analysis: In order to assess the current position of Hershey’s debts and the investments, it is essential to gain a deeper analysis of a few of the ratios of the company. Debt Ratio: Firstly, the Debt ratio of Hershey’s has been calculated. This ratio allows to gain an understanding of the proportion of debt a company has when compared to its assets (Drury, 2005). Debt Ratio       Total liabilities     $362,593 Total assets     $4,247,113 The debt ratio is:     0.09 The debt ratio has been computed as 0.09 indicating that the company does not have much of long term loans and liabilities. It is also imperative to note that Hershey’s can be quite attractive for the investors as the levels of risks are relatively much lower in this case. Debt – equity Ratio: The second essential ratio that requires to be discussed here is the Debt – Equity ratio. This ratio is another leverage ratio, and this ratio allows for comparison of the company’s total liabilities to the shareholder’s equity. This mainly highlights the amount, the suppliers, creditors, obligors and the lenders have committed to the company when compared to the commitment of the shareholders. Debt-Equity Ratio       Long-term debt     $1,279,965 Stockholders equity     $592,992 The debt-equity ratio is:     2.16 A company with a high debt – equity ratio would simply mean that the company’s financing is aggressive and the financing grows with the debt. This however, can also cause the earnings to be more volatile mainly due to the additional interest expense. In the case of Hershey’s the Debt – equity ratio has been calculated to be 2.16. This is a very good ratio for the company and it highlights that the company is ‘highly leveraged’. A company is said to be highly leveraged if it uses more debt than equity, including stock and retained earnings. The balance between debt and equity is called the capital structure (Drury, 2005). Debt has a lower cost because creditors take less risk; they know they will get their interest and principal. However, debt can be risky to the firm because if enough profit is not made to cover the interest and principal payments, it can result in bankruptcy. Times Interest Earned Ratio: This Ratio measures the extent to which a company’s gross profit covers its annual interest payments. If this ratio is below 1, then the company is considered to be almost insolvent (Pendlebury & Groves, 2003). In the case of Hershey’s, the times – covered ratio has been calculated to be almost 3.87. This signifies that the current situation of the company is extremely profitable and the company has enough funds to cover the interest payables. Times Interest Earned Ratio       Earnings before interest and taxes     $459 Interest expense     $119 The times interest earned ratio is:     3.87 Cost of Debt: The cost of debt indicates the cost spent on raising debt for the company. This is the ratios of the interest expenses to the total debt of the company. Cost of Debt = i / D = $118,585 / $ 1,279,965 = 9.27% This is a relatively lower cost of debt proving Hershey’s has effectively raised long term financing for the company. Hence for future ventures it will be cheaper to raise finance in terms of debt. Conclusion: Based on the above mentioned information and the calculation of the various ratios, there has been a clear understanding of the current position of the company. A careful analysis of the company’s finances is very essential as it provides the concreter results of the company’s strategy and structure. Based on the above calculations it is clear that Hershey’s is a highly leveraged company, which proves to extremely beneficial and also highlights that the amount of risk that the investors will face from investing in the company is relatively low. Also the company has a higher debt equity ratio, which highlights the amount of debt that is used y the company to finance its equity and the higher the ratio the better it is for the company (Pendlebury & Groves, 2003). Also Hershey’s times – covered ratio is extremely high which is very beneficial for the company. The overall analysis allow a clear understanding that the company has been extremely strategic and a lot of care has been taken while deciding the capital structuring of the company. Also the company’s figures show a constant growth of the company which in turn highlight better results of the company and also express companies growth. This analysis highlights the effective and efficient use of the debts by the company. Also the company has ensured to keep the gearing ratios balanced. All these help communicate to the investors that this company is interested in ensuring long term growth. Also the financial figures show that the stakeholders have gained a lot in the past and the figures also show a promising future for the company in terms of long terms development plans and possible success. Thus in conclusion it is safe to say that this company is a safe investment for all investors and the company has sure probabilities of success and a number of long term development possibilities. Thus investing in this company will prove to be very beneficial both in the short as well as the long term for all investors. Bibliography Drury, C., 2005, ‘Management Accounting for Business’, 31 March 2005, 3rd edition, Thomson Learning Hershey, 2009, ‘About the Hershey’s Company’, 11 June 2008, Accessed on 23 February 2009, retrieved from http://www.thehersheycompany.com/ Pendlebury, M., & Groves, R., 2003, ‘Company Accounts: Analysis, Interpretation and Understanding’, 25 September 2003, 6th edition, Cengage Learning Business Press Read More