16.776 Question: What do the ratios calculated communicate about the financial s

Question

16.776

Question: What do the ratios calculated communicate about the financial strengths and weaknesses of Hershey?

Question: Based on your calculations, would you invest in Hershey Company, why or why not?

Historical Ratios Projected Ratios 12/31/2014 12/31/2015 12/31/2016 12/31/2017 4/1/2018 Current Ratio 1.161 0.833 Current Ratio 0.951 0.964 0.613 Quick Ratio 0.522 0.426 Quick Ratio 0.46 0.466 0.294 Total Debt-to-Total-Assets Ratio 0.73 0.804 Debt-to-Total-Assets Ratio 0.85 0.832 0.865 Total Debt-to-Equity Ratio 2.82 4.306 Debt-to-Equity Ratio 5.976 4.962 6.525 Times-Interest-Earned Ratio 16.618 13.359 Times-Interest-Earned Ratio 14.376 15.802

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Explanation / Answer

1)

Current ratio is the measure of company's ability to pay its short term obligations. Current Ratio less than 1 means company will not be able to pay its short terms obligations with its current assets.

As it can be seen that current ratio of the company has continuously decreased to 0.613 in 2018 which shows that company will not be able to pay its short term obligations.

Also debt to total assets and the debt to equity of the company is increased significantly in 2018 which shows there is high financial risk for the company.

Time interest earned ratio is well above 10 which shows company will be able to pay its loan payments easily.

Thus lower current ratio and quick ratio and higher leverage are weaknesses for the company whereas times interest earned is positive for the company.

2)

Since current ratio and quick ratio of the company are very low, company may face liquidity problem in near future. Also higher Debt to asset and debt to equity shows that the firm is highly leveraged.

Therefore there is higher financial risk with the company and hence one should not invest in the company.

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