Liquidity Ratios Hershey Company

To consider this we need net credit sales and average receivable balance. This ratio indicates average collection period should be consistent with corporate credit policy. An increase suggests a decline in financial health of customers.

Tootsie Roll Industries Inc., wish to increase their production capacity and improve efficiency. As the company wishes to take pout a plan which will increase total liabilities by 10%, if there are total liabilities of $174,495, the plan is to raise a further $17,445. To undertake this strategy it is necessary to demonstrate that the firm can afford to increase their debt. The first stage is to look at the financials with the use of a ratio analysis to assess whether the debt is affordable.

Although all of Tootsie Roll’s profitability ratios decreased slightly between 2002 and 2004, the results appear fairly consistent. This Company appears to provide a steady profit and rate of return to its investors. Its profit margins and return on equity are slightly higher than that of Hershey, although both companies appear solid in their ability to generate profits. The stock price has also fluctuated less, providing a steady price/earnings ratio. This is another indicator of a strong, steady performance by Tootsie Roll Company, and stable profitability results.

This ratio indicates whether it can respond to the current liabilities by using current assets. As many times, we can cover short-term obligations, as better for the company. This indicates that significant and high improvement in the liquidity. The increase in the current ratio 11.5 % will result in an increase in current assets where the current liabilities increased by 2.1%.

This ratio indicates a company’s liquidity. It depicts how many dollars of current assets exist for every dollar in current liabilities. The ratio is the higher, the better. Home Depot and Lowe’s has increasing current ratio while Home Depot has a slightly higher one.

Working capital is the money that a company has after paying off its current liabilities and with which it can finance its operating and working capital requirements. The higher a number the better a company is able to pay off its debt and have cash for meeting its financial obligations. The current ratio is used to gauge a company 's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. The current ratio denotes the efficiency of a company 's operating cycle or its ability to turn its products into cash, which is a key requirement for business success. Quick ratio is an indicator of a company 's short-term liquidity. The quick ratio measures a company 's ability to meet its short-term obligations with its most liquid assets, essentially cash and cash equivalents. The higher the quick ratio, the better the financial position of the company in terms of its ability to meet its liabilities.

The current ratio shows the level to which the rights of short-term creditors are covered by assets that are expected to be changed to cash in a period consistent to the maturity of the liabilities.

Current Ratio “To calculate the current ratio, we divide current assets by current liabilities. More liquidity is better because it means that the firm has a greater ability, at least in the short term, to make payments” (Parrino, Kidwell, & Bates, 2012).

This ratio is similar to current ratio, except that it excludes inventory from current assets. Inventory is subtracted because it is considered to be less liquid than other current assets, that is, it cannot be easily used to pay for the company’s current liabilities. A company having a quick ratio of at least 1.0, is considered to be financially stable. It has sufficient liquid assets and hence, it will be able to pay back its debts easily (Qasim Saleem et al., 2011).

It indicates the number of times in a year that the company collects its mean accounts receivables. A higher receivables turnover indicates super efficiency for the business regarding collecting its receivables or it operates on cash basis whereas a lower ratio indicates dismal performance in collections. A higher ratio of 12.6 for Under Armour indicates efficiency in credit management and debt collections while the lower 8.5 for Nike could be an implication for inefficient credit management and debt

The liquidity ratios of the firm are slightly below the industry averages. This is due to inventory and accounts receivable making up a significantly larger portion of the current assets than cash and marketable securities. This may be indicative of a problem with inventory management and/or collection on accounts.

Liquidity ratios measure the ability of a firm to meet its short-term obligations. A company that is not able

| This ratio measures a company’s ability to meet its short-term obligations with its most liquid assets, which is why inventory is omitted.

The liquidity position of a company can be evaluated using several ratios which evaluate short-term assets and liabilities and a firm’s ability to settle short-term debts (Gibson, 2011). These ratios can provide insight into a firm’s ability to repay its debts in the short term (Gibson, 2011). In turn they suggest a firm’s capacity for debt-satisfying capabilities into the future (Gibson, 2011). This paper will use financial statement data as cited in Gibson (2011) from 3M Company (3M) to better understand liquidity measures to evaluate a firm’s total liquidity position. The following paper will focus on various liquidity calculations, their meaning, and their interpretation relative to 3M. Finally, an overall view of 3M’s liquidity

These ratios help company in determining its capability to pay short-term debts. Liquidity ratios inform about, how quickly a firm can obtain cash by liquidating its current assets in order to pay its liabilities. General liquidity ratios are: current ratio and quick ratio. Current ration can be obtain by dividing company’s current assets by its’ current liabilities. Generally a current ratio of two is considered as good (Cleverley et al., 2011). Quick ratio also known as acid test determines company’s liabilities that need to be fulfilled on urgent basis. Quick ratio can be obtained by dividing quick assets by current liabilities. Quick ratio is considered as stricter because it excludes inventories from current assets. Generally a quick ratio of 1:1 is considered as good for the company. Higher quick