Financial Analysis

Using Financial
Performance Metrics
 Financial Performance Metrics
• Formerly, “Financial Ratios”
• Relative Basis for Comparison
• Thousands of Potential Metrics
– One Number Divided by Another Number
– Multiple Permutations and Combinations
• Six Major Categories
– Liquidity
– Activity
– Leverage
– Profitability
– Market
– Growth
• Applicable to Historical Information as
well as Plan and Outlook Projections

Corporate Financial Policy 2.2

 Metric Categories

• Liquidity Metrics measure the firm’s abilities

to meet its maturing short-term obligations.
• Activity Metrics measure how effectively the
firm is using its resources.
• Leverage Metrics measure the extent to
which the firm has been financed by debt.
• Profitability Metrics measure management’s
overall effectiveness in generating “profits.”
• Market Metrics measure the firms’
relationship to the broader Stock Market.
• Growth measures the firm’s ability to
maintain its economic position in the growth
of the economy and industry.

Corporate Financial Policy 2.3

 1998 Summary Statistics
($ Millions, except per share)

1998 Hers
Hershey Heinz

Sales $ 4,435.6 $ 9,209.3

Cost of Goods Sold 2,625.1 5,711.2
Operating Income 642.7 1,520.3
Interest Expense 85.7 226.0
Pre-Tax Income 557.0 1,255.0
Net Income 340.9 801.6

Cash & Equivalents 39.0 99.4

Accounts Receivable 451.3 1,071.8
Inventory 493.2 1,328.8
Current Assets 1,134.0 2,686.5
Net, Plant, Prop, & Equip 1,648.1 2,394.7
Total Assets 3,404.1 8,023.4

Current Liabilities 814.8 2,164.3

Short-Term Debt 345.9 301.0
Current Portion LTD 0.1 38.6
Long-Term Debt 879.1 2,768.3
Stockholders' Equity 1,042.3 2,216.5

Stock Price Per Share

Beginning 61.94 50.81
Ending 62.19 56.63
Earnings Per Share 2.38 2.19
Shares Outstanding 143.1 366.0

Corporate Financial Policy 2.4

 1998 Normalized Earnings

Net Restructuring Discontinued Cum Effect of Normalized

Income Charges Operations Acctg Change Income

Hershey Foods $ 340.9 $ - $ - $ - $ 340.9

Campbell Soup 660.0 193.0 18.0 11.0 882.0

Conagra 613.2 - - 14.8 628.0
Dean Foods 106.3 - (18.3) - 88.0
General Mills 421.8 100.2 - - 522.0

Heinz 801.6 53.7 - - 855.3

Interstate Bakeries 127.9 - - - 127.9
Kellogg' s 502.0 46.3 - - 548.3

Nabisco (71.0) 362.0 36.0 - 327.0

Quaker 280.0 50.2 - - 330.2
Tootsie Roll 67.5 - - - 67.5
Wrigley 304.5 (6.8) - - 297.7

Corporate Financial Policy 2.5

 Commonly Used Financial
Ratios: Liquidity

Calculation Strength

Current Current Assets

Higher
Ratio Current Liabilities

Quick Current Assets – Inventory

Higher
Ratio Current Liabilities

Cash Cash and Equivalents

Higher
Ratio Current Liabilities

Corporate Financial Policy 2.6

 Commonly Used Financial
Ratios: Activity

Calculation Strength

Total Asset Sales

Higher
Turnover Total Assets

Fixed Sales
Asset Net, Plant, Property & Higher
Equipment
Turnover
Sales
Capital
(Interest Bearing Debt + Higher
Turnover Stockholders’ Equity)

Corporate Financial Policy 2.7

 Commonly Used Financial
Ratios: Activity (Part 2)

Calculation Strength

Accts Rec _______Sales_______

Higher
Turnover Accounts Receivable

Accts Rec ___365 Days___

Days A/R Turnover Lower
Outstanding

Inventory Cost of Goods Sold

Higher
Turnover Inventory

Inventory
_____365 Days_____
Days Inventory Turnover
Lower
Outstanding
Corporate Financial Policy 2.8
 Commonly Used Financial
Ratios: Leverage
Calculation Strength

Debt to Total Liabilities

Lower
Equity Stockholders’ Equity

Financial Total Assets

Lower
Leverage Stockholders’ Equity

STD+ CPLTD + LTD

“Cap”
Interest Bearing Debt Lower
Ratio* + Stockholders’ Eq

Interest PTI + Interest Exp

Higher
Coverage Interest Expense

* Capitalization Ratio

Corporate Financial Policy 2.9

 Commonly Used Financial
Ratios: Profitability

Calculation Strength

Net Net Income

Higher
Margin Sales

Pre-Tax Pre-Tax Income

Higher
Margin Sales

Earnings Before
Operating
Interest and Taxes Higher
Margin Sales

Gross (Sales – COGS)

Higher
Margin Sales

Corporate Financial Policy 2.10

 Commonly Used Financial
Ratios: Profitability (Part 2)

Calculation Strength

Return on _Net Income_

Higher
Assets Total Assets

Return on _Net Income_

Higher
Net Assets Net Assets*

____Net Income_____
Return on
(Interest Bearing Debt Higher
Capital + Stockholders’ Eq)

Return on ____Net Income_____

Higher
Equity Stockholders’ Equity

* Net Assets = Total Assets - Non-Debt Current Liabilities

Corporate Financial Policy 2.11

 Commonly Used Financial
Ratios: Market

Calculation Strength

Price- Stock Price

Higher
Earnings EPS

Market to Market Capitalization*

Higher
Book Stockholders’ Equity

Dividend Dividend
Higher
Yield Stock Price

Shareholder (Pt - P(t-1)) + D

Higher
Return** P(t-1)

* Market Capitalization = Stock Price X Shares Outstanding

** Where: P = Stock Price; D = Dividends; t = Time Period

Corporate Financial Policy 2.12

Financial Performance Metric
Comparison
Hershey Heinz
1996 1997 1996 1997
Liquidity
Current Ratio 1.21 1.30 1.12 1.05
Quick Ratio 0.63 0.67 0.57 0.55
Cash Ratio 0.08 0.07 0.04 0.07

Activity
Total Asset Turnover 1.25 1.31 1.06 1.11
Fixed Asset Turnover 2.49 2.61 3.48 3.77
Capital Turnover 1.87 2.01 1.50 1.59
Acc Rec Turnover 13.54 11.92 7.54 8.36
Acc Rec Days OS 27.0 30.6 48.4 43.6
Inventory Turnover 4.85 4.92 3.87 4.12
Inventory Days OS 75.3 74.1 94.4 88.5

Leverage
Debt to Equity 1.74 2.86 2.19 2.46
Financial Leverage 2.74 3.86 3.19 3.46
Capitalization Ratio 45.5% 60.1% 55.4% 58.6%
Interest Coverage 11.73 8.26 5.40 5.79

Profitability
Net Margin 7.7% 7.8% 7.2% 7.6%
Pre-Tax Margin 12.9% 12.9% 11.2% 12.0%
Operating Margin 14.1% 14.6% 14.1% 15.0%
Gross Margin 42.3% 42.1% 36.6% 36.9%
Return on Assets 9.7% 10.2% 7.6% 8.4%
Return on Net Assets 11.5% 12.2% 9.4% 10.6%
Return on Capital 14.5% 15.7% 10.9% 12.1%
Return on Equity 26.6% 39.5% 24.4% 29.1%

Corporate Financial Policy 2.13

 DuPont Ratio Analysis

2. Net Margin X Asset Turnover = Return on Assets

Net Income ___Sales___ Net Income

X =
Sales Total Assets Total Assets

3. Return on Assets X Financial Leverage = Return on Equity

Net Income Total Assets Net Income

X =
Total Assets Equity Equity

Corporate Financial Policy 2.14

 Hershey and Heinz
DuPont Analysis

Hershey Heinz
1996 1997 1996 1997

Net Margin Net Income / Sales 7.7% 7.8% 7.2% 7.6%

Total Asset Turnover Sales / Total Assets 1.25 1.31 1.06 1.11

Return on Assets Net Income / Total Assets 9.7% 10.2% 7.6% 8.4%

Financial Leverage Total Assets / Equity 2.74 3.86 3.19 3.46

Return on Equity Net Income / Equity 26.6% 39.5% 24.4% 29.1%

Corporate Financial Policy 2.15

 Hershey and Heinz
DuPont Analysis

Hershey Heinz
1992 1997 1992 1997

Net Margin NI / Sales 7.5% 7.8% 7.5% 7.6%

Total Asset Turnover Sales / Total Assets 1.21 1.31 1.03 1.11

Return on Assets Net Income / Total Assets 9.1% 10.2% 7.8% 8.4%

Financial Leverage Total Assets / Equity 1.82 3.86 2.92 3.46

Return on Equity Net Income / Equity 16.6% 39.5% 22.8% 29.1%

Corporate Financial Policy 2.16

 Addendum to DuPont Ratio
Analysis

1. Pre-Tax Margin X (1 – Tax Rate) = Net Margin

Pre-Tax Income Taxes

X (1 - ) =
Sales PTI
Pre-Tax Income X PTI Taxes =
Sales ( - ) =
PTI PTI
Pre-Tax Income __PTI – Taxes__ Net Income
X =
Sales Pre-Tax Income Sales

Sustainable
4. Return on Equity X (1 – Divd Payout) =
Growth Rate
Net Income Dividends
X (1 - ) =
Equity Net Inc
Net Income NI Divd
X ( - ) =
Equity NI NI
Net Income (Net Inc – Divd) (Net Inc – Divd)
Equity X =
Net Income Equity

Corporate Financial Policy 2.17

Corporate Financial Policy 2.18
 Notes to Accompany 1980
DuPont Analysis
Pre-Tax Income
1. Pre-Tax Margin =
Sales
Taxes
2. After-Tax Retention Rate = (1 - )
PTI
Net Income
3. Net Margin =
Sales
_ _Sales___
4. Asset Turnover =
Total Assets
_Net Income_
5. ROA (Return on Assets) =
Total Assets
Net Income
6. Financial Leverage =
Total Assets
Net Income
7. ROE (Return on Equity) =
Equity
Dividend
8. Income Retention Rate = (1 - )
Net Inc
Financial or Sustainable Net Inc - Divd
9. =
Growth Rate Equity

Financial or Sustainable Growth Rate is the rate of growth that a firm can experience
given no equity is issued (or purchased) and balance sheet/income statement
relationships (as reflected in the ratios) are unchanged.

Corporate Financial Policy 2.19

Corporate Financial Policy 2.20
Common Size Income Statement

Hershey Tootsie
Foods Roll Wrigley

Common Size Income Statement

Sales 100.0% 100.0% 100.0%
Cost of Goods Sold 59.2% 48.3% 42.3%
Gross Income 40.8% 51.7% 57.7%
S, G, & A 26.3% 25.7% 37.1%
Operating Income 14.5% 26.1% 20.6%
Interest Expense (Income) 1.9% -1.2% -0.9%
Pretax Income 12.6% 27.3% 21.5%

Corporate Financial Policy 2.21

 Total Asset Turnover Analysis

Hershey General Quaker

Foods Mills Oats

Other Turnovers
Accounts Receivable 9.828 15.270 17.087
Inventory 5.322 6.131 9.083
Fixed Assets 2.691 5.086 4.525
Total Assets 1.303 1.562 1.929

Common Size Balance Sheet

Cash 1.1% 0.2% 14.1%
Accounts Receivable 13.3% 10.2% 11.3%
Inventories 14.5% 10.1% 10.4%
Current Deferred Taxes 1.7% 3.5% 4.6%
Other Current Assets 2.7% 2.8% 4.0%
Current Assets 33.3% 26.8% 44.4%
Net, Plant, Property, & Equip 48.4% 30.7% 42.6%
Intangibles (Goodwill) 15.6% 16.3% 9.8%
Other Assets 2.7% 26.1% 3.2%
Total Assets 100.0% 100.0% 100.0%

Corporate Financial Policy 2.22

 Financial Leverage Analysis

Hershey Campbell
Foods Soup Kellogg' s

Other Ratios
Capitalization Ratio 63.2% 116.5% 89.2%
Debt to Equity 2.266 5.445 4.677
Short-Term Debt / Equity 0.332 1.603 0.698
Long-Term Debt / Equity 0.843 1.338 1.814

Common Size Balance Sheet

Accounts Payable 4.6% 9.0% 7.7%
Accrued Liabilities 8.6% 13.0% 14.1%
Accrued Income Taxes 0.5% 2.9% 0.0%
Short-Term Debt 10.2% 24.9% 12.3%
Current Portion of LTD 0.0% 0.0% 0.0%
Current Liabilities 23.9% 49.8% 34.0%
Long-Term Debt 25.8% 20.8% 32.0%
Other Long-Term Liabilities 19.6% 14.0% 16.4%
Stockholders' Equity 30.6% 15.5% 17.6%
Total Liabilitites and SE 100.0% 100.0% 100.0%

Corporate Financial Policy 2.23

 1998 Net Sales
($ Millions)

Conagra $23,840.5

Heinz $9,209.3

Nabisco $8,400.0

Kellogg's $6,762.1

Campbell Soup $6,696.0

Industry Average $6,551.2

General Mills $6,033.0

Quaker Oats $4,842.5

Hershey Foods $4,435.6

Interstate Bakeries $3,265.8

Dean Foods $2,735.8

Wrigley $2,004.7

Tootsie Roll $388.7

$0 $5,000 $10,000 $15,000 $20,000 $25,000

Corporate Financial Policy 2.24

 1998 Annual Growth in
Net Sales

Dean Foods 11.2%

General Mills 7.6%

Wrigley 3.5%

Tootsie Roll 3.5%

Hershey Foods 3.1%

Industry Average 1.8%

Interstate Bakeries 1.7%

Campbell Soup 1.2%

-0.7% Conagra

-1.0% Kellogg’s

-1.6% Heinz
-3.5% Quaker Oats
-3.8% Nabisco

-6% -3% 0% 3% 6% 9% 12%

Corporate Financial Policy 2.25

 1998 Net Sales CAGR*
1994 to 1998

Dean Foods 8.0%

Tootsie Roll 7.0%

Heinz 6.9%

Wrigley 5.9%

Industry Average 5.8%

Hershey Foods 5.3%

Campbell Soup 5.1%

General Mills 3.2%

Nabisco 2.2%

Conagra 0.8% Excludes Interstate Bakeries’ 30.0

1994-1998 CAGR
Kellogg's 0.8%
* CAGR: Compound Annual
-5.0% Quaker Oats Growth Rate

-6% -3% 0% 3% 6% 9% 12% 15%

Corporate Financial Policy 2.26

 Net Sales Comparison
1994 to 1998

150

Hershey Foods
123.0
125 119.3

111.9
106.7
112.3 112.6
110.6

100
102.3 Industry Average

75

50
1994 1995 1996 1997 1998

Corporate Financial Policy 2.27