Liquidity Solvency, and Profitability

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Hershey's and Tootsie Roll are companies that at first glance may seem similar. They both produce candy. That is about where the similarities end. Looking at a balance sheet may be misleading in comparing the two companies. Hershey's has more total assets, higher net sales, higher cash dividends, more net income, and higher gross profit. This analyis looks beyond the income statements and the consolidated balance sheets of each company. My analysis will closely look at the liquidity, solvency, and profitability of each company in an effort to obtain the overall view of the financial health of each company.
In a head to head comparison of liquidity for each company, Tootsie Roll appears to be more liquid than Hershey's despite Hershey having a working capital of $319, 142,000 versus $175, 155, 000 of Tootsie Roll. There are several factors that illustrate Tootsie Roll's liquidity. First it is necessary to describe liquidity. Liquidity is simply a companies ability to pay bills that are expected to be due within the next operating cycle. Several tools can be used to gauge the liquidity of a company. In this comparison we use working capital, current ratio, acid test ratio, current cash debt coverage ratio, inventory turnover ratio, days in inventory, cash to daily cash expenses ratio, credit risk ratio, receivables turnover ratio, and average collection period.
A look at the working capital for each company reveals that Hershey has more working capital than Tootsie Roll. Hershey has a working capital of $319,142,000 versue $175,155,000 of Tootsie Roll. Other measures show that this may be a misleading figure. The current ratio for Tootsie Roll is 4.3 versus 1.4 of Hershey's. This indicates that for every dollar in liabilities Tootsie Roll has over $4 and assets while Hershey has about $1.4 of assets for every dollar of liabilities. This indicates that Tootsie Roll has a greater ability to pay its liabilities with their assets than Hershey's. A look at the company's acid test ratio also reveals an advantage for ...