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Balance Sheet Analysis
The balance sheet is analyzed as part of the financial statement analysis. Financial Statement Analysis is the study and evaluation of a company's financial statements to evaluate its financial health. [Inv] The Balance sheet reveals a company's financial health, yet investors often overlook it. [Ear] Investors, shareholders, and managers are some stakeholders who analyze and make decisions based on financial figures. The following article will examine The Hershey Company's 2016 Annual Report.
Assets and Liabilities
Examining an organization's assets and liabilities is the first stage in determining its financial health. Current Assets consist of cash, inventories, and accounts receivable, while Non-current Assets include property, plant, equipment, goodwill, and intangible assets. According to the financial sheet in the 2016 Annual Report, Hershey's total assets rose from $5.3 million in 2015 to $5.5 million in 2016, remaining steady. Investors are drawn to businesses having substantial cash on their balance sheets. Cash flow is an opportunity for corporate expansion.
Additionally, investors examine unsold inventories' final items. A corporation should not tie up too much capital in stocks. The sale of merchandise generates revenue to cover expenses and produce a profit. Inventory turnover is a ratio that indicates the frequency with which a company's inventory is sold or replaced over a certain period. The inventory turnover ratio for The Hershey Company is 5.7%. This ratio is computed by dividing the cost of items sold by the average quantity of inventories. Hershey's population is calculated by dividing 4,282,290 by 748,324 in this case. Following that would be receivables, which are unpaid invoices. According to Hershey's 2016 Annual Report, Walmart and McLane firms represent around 19 percent of their total accounts receivable and a critical concentration of credit risk based on account assessments and analyses. Based on Table 1, non-current assets such as property, plant, and equipment (PP&E) have an average useful life of 13 years.
Liabilities might be either current or non-current. Current liabilities must be paid within a year, while non-current penalties have a maturity of one year or more. [Placeholder1] It is essential to observe a tolerable level of debt while examining a company's obligations. The organization should have more assets than liabilities to have a secure financial position. In 2016, the Hershey Company's total assets and liabilities were $5,500,000 and $4,750,000, respectively. [Sec16] The quick ratio for Hershey is 1.02. A percentage of 1 or above implies that the company has adequate cash to meet its obligations and pay its invoices. Divide Current Assets minus Inventory by Current Liabilities to get the quick ratio. Hershey's debt is manageable, given that its debt-to-equity ratio is 1.02. There is also the calculation of working capital. Essentially, working capital is the gap between current assets and liabilities. Positive working capital indicates that a corporation has more current assets than current liabilities and can pay off the short-term debt in the case of a crisis. [Inv2]
Off-Balance-Sheet Items
What are elements that are not included on the balance sheet? Off-balance sheet items are assets and liabilities that do not appear on a company's balance sheet but are assets and liabilities. [Inv3] Hershey has a variety of legal concerns that are not reflected on the balance sheet but might have a significant impact on the financials. In 2007, the Canadian Competition Bureau started investigating possible violations of the Canadian Competition Act relating to the sale and distribution of chocolate products offered in Canada. In 2007, the United States Department of Justice alerted Hershey that it had begun an investigation. 13 legal complaints were brought against The Hershey Company in Canada, while 91 were filed in the United States. Hershey Canada pleaded guilty in 2013 to one count of price fixing in Canada in 2007 and paid a fine of around $4 million.
Regarding cases in the United States, no trial date has been scheduled for any plaintiffs. "These potential repercussions are not anticipated to have a major effect on our financial position or liquidity at this time, but they might have a material impact on our operating results and cash flows in the period in which any penalties, settlements, or judgments are collected or paid, respectively." [SEC13] In 2014, the court gave a firm summary judgment. The claims were dismissed without prejudice and are susceptible to reinstatement; the Third Circuit might overturn this decision. The lawsuit is now concluded, but several plaintiff organizations may succeed on appeal. It remains unclear at this time. [SEC15] The Hershey Company has the financial resources to address future legal responsibilities even with possible pending cases. In addition, they have asbestos-related environmental contingencies that are not represented on the financial sheet. There is insufficient information to assess the market value of these facilities' asset retirement liabilities. Hershey is anticipated to maintain the impacted facilities via repairs and maintenance that do not entail or need the removal of substantial amounts of asbestos. [Sec16] Also, there were business realignment actions while searching for uncommon or nonrecurring charges. This is associated with their Operational Optimization Program. Hershey is undertaking many corporate restructuring initiatives to optimize efficiency and prioritize growth plans. The expenses and associated benefits pertain to the North American sector by roughly 25 percent and the international and other segments by approximately 75 percent. So far, $88,293 in pre-tax expenses have been incurred, and it is anticipated that about $37 million will be spent over the following two years to finish the program. By 2018, the scheme aims to save $52 million. [Sec16] The Hershey Company's balance sheet analysis indicates potential expansion even with the contingencies and nonrecurring events. They have various strategies and plans to boost earnings and ensure the company's financial stability.
Cash Flow and Management Analysis
Cash management and cash flow are examined as part of the examination of financial statements. Financial Statement Analysis is the review and analysis of a company's financial statements to determine its financial health. [Inv] The statement of cash flows outlines cash inflows and outflows. On the statement of cash flows, sources and uses of cash are segmented by operating, investing, and financing activities. [Sub14] Investors, shareholders, and managers are some stakeholders who analyze and make decisions based on financial figures. The cash flow statement demonstrates the firm's ability to generate cash. Investors use the cash flow statement to assess the investment quality of a company's cash flow. It is possible to assess the company's financial health using ratios and formulas. The following pages analyze The Hershey Company's 2016 Annual Report's Consolidated Statement of Cash Flows.
Cash Flow from Operating Activities
The first section of the consolidated cash flow statement is Operating Activities. Cash flow from operating activities refers to the funds a company obtains through its regular business operations. These actions pertain to working capital, including receivables, inventory, prepayments, payables, and accumulated costs. [Sub14] Operating cash flows are The Hershey Company's primary liquidity source. In 2016, net cash flows were $983.5 million, a decrease from 2015's $1,214.5 million. These factors led to its reduction. The first component is the working capital. Hershey was required to pay $87 million in August 2016 to settle an interest swap rate linked to issuing new debt. The second would be the drop in cocoa prices on the market. Hershey utilizes commodities futures contracts to mitigate the risks associated with raw material price fluctuations. In this instance, Hershey saw a variance of $161 million. Thirdly, the non-cash costs to operations adjustment impacted cash flow by $34 million. This includes depreciation, amortization, deferred income taxes, goodwill, equity investment write-downs, and the gain on liability settlement. [Placeholder2]
Cash Flow from Investing Activities
Cash flow from investing activities is a line item on the cash flow statement representing the cumulative change in a company's cash position caused by a loss or investment gain. [Inv6] Investors will examine a company's financing operations to see how much it spends on property, plant, and equipment. Investing activities include capital expenditures, mergers and acquisitions, investments in partnerships eligible for tax incentives, and short-term investments. The Hershey Company invested (595.5) million dollars in 2016 compared to (477.2) million dollars in 2015. This is primarily due to the company's 2016 purchase of Ripple Brand Collective, LLC, which cost $285,4 million. Additionally, Hershey has invested in initiatives qualifying for tax credits, spending $13.5 million more than in 2015. [Placeholder2] This demonstrates Hershey's expansion, which is desirable for investors.
Cash Flow from Financing Activities
Cash flow from financing operations demonstrates the financial strength of a corporation. "Financing activities are the mechanism through which monies are contributed, withdrawn, and serviced to support company operations. Included are the borrowing and repayment of cash via bonds and other debts. They also contain owner contributions, withdrawals, and returns (dividends) on investment." [Sub14] In 2016, Hershey invested $434,4 million less than it did in 2015 when it invested $755,2 million. This is related to the repayment of $500 million in long-term debt. The dividends paid in cash were $499.4 million, followed by the buyback of ordinary shares for $592 million.
Cash Flow Ratios
When analyzing a company's cash flow, the cash flow sufficiency and the cash investment ratios are often used. [Sub14] To calculate the cash flow sufficiency ratio, divide the 3-year total of cash from operations by the 3-year total of capital expenditures, inventory additions, and cash dividends. Hershey's cash flow sufficiency ratio is 0.88. A ratio less than 1 suggests that internal cash sources were inadequate to support dividends and present levels of operational growth. A ratio of 1 indicates that the corporation has sufficient cash to pay expenses without borrowing. To get the cash investment ratio, divide operational cash flow minus dividends by gross plant and investment + other assets plus working capital. Hershey's cash investment ratio in 2016 was 10.2 percent. In general, a 7 to 11 percent ratio is regarded as good. [Sub14] Hershey's cash flow sufficiency ratio is on the verge of insufficiency, yet the company's cash investment ratio indicates growth potential. See Figures 1 and 2 for the numbers used in the computations.
Valuation – Projected Income Statement
A projected income statement is a document generated by finance that examines the amount of money the firm will earn over a given period, less the amount it anticipates spending. Investors use this technique to forecast the company's financial growth over the next year or timeframe. It is also helpful for the organization to discover remedies and formulate strategies to avoid future problems. The following study demonstrates how to generate The Hershey Company's 2017 expected income statement.
Steps for Calculating the Projected Income Statement
To anticipate The Hershey Company's 2017 income statement, begin by analyzing the company's historical trends to forecast future earnings. For revenue, the previous year's revenue ($7,440,181) was multiplied by 0.73 percent sales growth ($7,440,181-$7,386,626/$7,386,626) and added to the previous year's revenue ($7,440,181), yielding $7,494,494. Multiplying the new revenue by the gross profit margin of 45 percent (gross profit/sales revenue) yields a new gross profit of $3,372,522. The difference between income from sales and gross profit is the cost of products sold. To get the predicted amount for research and development, we divide 2016's R&D expenditure cost by 2016's total revenue, yielding 0.5 percent, which is then multiplied by 2016's projected sales to provide $37,472 in forecast R&D expense. Similarly to how R&D expenditures are calculated, Selling, General, and Administrative expenses are estimated by multiplying 25.7 percent (2016 SGA expense/revenue) by $7,494,494 to get a projected expense of $1,926,085. To get the estimated interest expenditure of ($-89,203) for 2016, multiply the starting period's interest-bearing debt ($2,347,455) by 2016's interest expense divided by the prior year's long-term debt ($-90,143/2,347,455) To get at the estimated revenue before taxes of $1,498,168, deduct all expenditures, including R&D, SGA, and Interest, from the gross profit. When the 2016 income tax cost (provision for income taxes) is divided by the 2016 pre-tax income (379,437/1,115,640), the resulting percentage is 34%. This, multiplied by the current annual income of $1,498,168, yields an income tax cost of $509,376. The Hershey Company's expected net income for 2017 is $988,791 after accounting for tax expenditure and annual profit.
The Hershey Company Projected Income Statement for Year-End 2016
Sales 7,494,494
Cost of Goods Sold 4,121,972
Gross Profit 3,372,522
Research and Development 37,472
Selling, General, and Admin 1,926,085
Interest Expense (89,203)
Income before taxes 1,498,168
Tax Expense 509,377
Income from Extraordinary items or discontinued
Net Income (loss) 988,791
References
Early, J., & McClure, B. (n.d.). Fundamental Analysis: The Balance Sheet. Retrieved from Investopedia: https://www.investopedia.com/university/fundamentalanalysis/fundanalysis7.asp? lgl=rira-layout
Investopedia. (n.d.). Cash Flow From Investing Activities. Retrieved from Investopedia: https://www.investopedia.com/terms/c/cashflowfinvestingactivities.asp
n.d.). Financial Statement Analysis. Retrieved from Investopedia: https://www.investopedia.com/terms/f/financial-statement-analysis.asp
Subramanyam, K., & Wild, J. (2014). Financial Statement Analysis, 11th Edition. New York: McGraw-Hill Education.
Thibodeaux, W. (n.d.). What Is an Income Projection Statement? Retrieved from Chron: http://smallbusiness.chron.com/income-projection-statement-24757
