Accounting and Finance: Managerial Use
February 19, 2011
Class Project: Ratio Analysis
The gross profit percentage is one of several key measurements a company uses in evaluating its financial performance. It helps a company to see what percentage of its earning after costs (for products and/or services) is profit. A higher gross profit percentage is generally preferred as it provides the company with financial resources to pay for research, product development, and other costs associated with running and growing a business. A company that has little gross profit has limited resources. Tootsie Roll and The Hershey Company both operate above the food processing industry average. Tootsie Roll operated ...view middle of the document...
7% Profit Margin Ratio resulting in 11 cents of every dollar of sales resulted in Net Income for 2009. The Hershey Company has Net Sales of $5,298,668 and a Net Income of
$435,994 giving them a 8.2% Profit Margin Ratio resulting in 8 cents of every dollar of sales resulted in Net Income for 2009.
Return-On-Assets tell you "what the company can do with what it's got", how many dollars of profits they can achieve for each dollar of assets they control. It's a useful number for comparing competing companies in the same industry. Tootsie Roll had an average of $625,886 of Total Assets and $53,475 in Net Income giving them a .06 Return-On-Assets. The Hershey Company had an average of $3,654,875 of Total Assets and $435,994 in Net Income giving them a .12 Return-On-Assets.
After looking at these three ratios and had to determine which company was better it would a tough decision. They are both operating above the food processing industry average, but Hershey’s is operating above Tootsie Roll also. Tootsie Roll does have a higher Profit Margin Ratio than Hershey’s, but Hershey’s does have higher Net Sales by $4,799,337 and Net Income by $382,519. Hershey’s Return-On-Assets is double of what Tootsie Rolls is, making Hershey’s the more profitable company. Tootsie Roll generates 60 cents in sales for every dollar invested in assets to Hershey’s $1.45. Hershey’s operates more efficiently as they get more than two times more money in sales for every dollar invested in assets.
Hershey’s is the more profitable and larger company of the two and would be the best bet to invest in. Hershey’s is a house hold name and has a larger product line than Tootsie Roll therefore generating more sales and profit.