Finanial Analysis of the Tootsie Roll Company

Financial analysis of the tootsie roll company

New York Stock Exchange

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<![endif]> April 8, 2013 Ahmed Alzayer

7401 South Cicero Ave Chicago, IL 60629 Tel: (733) 838-3400

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Brief organization’s description:

Tootsie Roll Industries, Inc. is American manufacturer and seller of chewy candy. The company started in small New York candy store with the introduction of Tootsie rolls in 1896. Now, the company is one of the nation largest candy companies throughout North America and distribution lines in more than 75 countries. The company owns the following brands: Tootsie Roll, Tootsie Pop, Charms Blow Pop, Mason Dots, Andes, Sugar Daddy, Charleston Chew, Dubble Bubble, Razzles, Caramel Apple Pop, Junior Mints, Cella's Chocolate-Covered Cherries, and Nik-L-Nip.

Tootsie Roll company’s History:

            The Tootsie Roll established in 1896, when founder Leo Hirshfield, Austrian-born, opened its first candy store in New York City. Due to his confectioner’s background, Hirshfield hand-made a selection of products in different flavors and different packaging which drew customers' attention and eventually become their favorite. The company was named after Hirshfield’s five-year old daughter whose nickname was “Tootsie”. The company grew in an above average speed and becomes enterprise that has evolved into Multinational Corporation.

            Today, the company produces more than 62 million Tootsie Roll candies each day with the majority of productions from its Chicago headquarters. With the experience and success of Tootsie, the company launched Tootsie Pops “, the world’s number one-selling lollipop, in 1913” according to the company website. Tootsie nowadays owns 22 of the world’s favorite candy brands within its sweet lineup. The company’s annual sales approaching nearly half-a-billion dollars which makes Tootsie Roll Industries recognized as one of the world’s largest candy producers.

Organization:

            Tootsie is a family-run corporate culture; Melvin J. Gordon is the CEO and his wife Ellen R. Gordon is the COO. Tootsie is a family business that is a publicly traded company, but what makes it different is that the management team encourages an entrepreneurial spirit. Tootsie sets the industry standard to deliver the highest quality product at the lowest price with the efficient operations model. The company invests in the finest equipment to improve productivity. The Forbes Magazine rated Tootsie as one of America’s 200 best small business companies. In addition, Staton Financial Advisors recognize it as one of America’s Finest Companies.

            Ethics is one of Tootsie first goals. The company adheres to the highest ethical standards. This commitment makes Tootsie recognized by Business Ethics Magazine and reached the 100 best corporate citizens list. Tootsie social responsibilities have extended to do fundraisers to generate substantial revenues to support a variety of public and private courses.

Main products and geographical area of operation:

            Tootsie operations take place in the U.S. with its largest planet in Chicago, IL. The company distributed its products in 75 countries. Chewy candy is the main product that Tootsie offers to its customers. According to the company’s 2010 annual report, the reason behind the company’s selling success is the company’s “well-known brands, which offer high dollar volume for retailers and attractive values for consumers.” The most important season for the company is Halloween time. Tootsie said that the focused promotional program which was practiced in grocery, mass merchandise, drug store, warehouse club and dollar store trade channels, led to Halloween sales growth. That tells us about the company selling strategies; it targeted specific periods in the year to make promotional offers to targeted customers which makes its champagne more successful.

Recent Development:

            On December 1, 2009 some of the Tootsie Roll Industries have been certified as kosher-certified by Orthodox Union. Products are Tootsie Rolls, Tootsie Fruit Rolls, Frooties and DOTS. “The OU rigorously monitors of all aspects of production. It supervises the process by which the food is prepared, examines the ingredients used to make the food and regularly inspects the processing facilities to make sure that its standards are met.” This certification will add more customers to Tootsie. This shows us that the company is going after new markets and targeted new customer base which eventually will increase the sales of the company.

Sales and income record:

Year	Sales	Net Income	Sales Growth	Sales Growth2
2009	$499,330	$53,160
2010	$521,448	$53,063	4.4%	-0.2%
2011	$532,505	$43,938	2.1%	-17.2%
2012	$549,870	$52,004	3.3%	18.4%
	Avg:		3%	0%

At 2010, the sales growth of the Tootsie Roll reached 4.4% from the prior year. However, Tootsie Roll continues positive sales growth from 2010 to 2012 even with the decrease that occurred in 2011 which affected net income as it dropped from $53,063 in 2010 to $43,938 in 2011. But, as we can see in 2012 increased with reached positive net income growth (18.4%) which was negative from 2010 (-0.2%) to 2011 (-17.2%). Which was a reduction in net income in 2009 ($53,160), 2010 ($53,063) and 2011 ($43,938. However, Tootsie Roll recover its net income in 2012 to reach $52,004. Average rating even with this decrease in sales growth it still positive (3%) as well as net income growth still positive (0%).

Expense distribution:

Cost of Goods Sold		$366,549	73%
S, G & A Expenses		$113,842	23%
Interest Expense		$0	0%
Income Tax		$22,160	4%
	Total	$502,551	100%

Almost three-fourths, 73% of Tootsie Roll expanses in 2012 made up of cost of goods sold. Selling, general and administrative expenses make up most of the remaining 23%. The rest made by taxes. Tootsie Roll has no interest expenses which mean the company did not borrow money in 2012 which might be not usual in this industry.

Asset distribution:

Cash and investment		$82,608	10%
Accounts Receivable		$42,108	5%
Inventory		$62,383	7%
Other current Assets		$9,676	1%
Deferred Taxes		$466	0%
Current Assets		$197,241	23%
Long Term Investments		$126,812	15%
Property Plant and Equipment		$201,290	24%
Goodwill		$73,237	9%
Trademarks		$175,024	21%
Accumulated Amortization		$0	0%
Other Assets		$66,911	8%
Deferred Long Term Asset Charges		$6,222	1%
	Total Assets	$846,737	100%

Tootsie Roll's trademark and goodwill has 30% of total assets. That means Tootsie Roll has great experience and reputation in this field, which has been producing its products for 100 years. Company cash and invest in 2012 $82,608 which is 10% and accounts receivable is $42,108 5% which considered to be appropriate. The highest percentage of total assets is Net property plant and equipment $201,290 which is 24% its good. So, 31% of total assets distributed on other assets.

Capital structure:

Accounts Payable		$8,942	1%
Short-term Debt		$0	0%
Accrued Liabilities		$51,823	6%
Current Liabilities		$60,765	7%
Deferred taxes		$38,748	5%
Other Current Liabilities		$97,409	12%
Total Liabilities		$196,922	23%
Common Stock		$25,450	3%
Class B common stock		$15,018	2%
Capital in excess		$547,576	65%
Retained earnings		$80,210	9%
Treasury stock and other		$(18,439)	-2%
Owner's Equity		$649,815	77%
	Total Equity and Liabilities	$846,737	100%

77% of Tootsie Roll liabilities are owner's equity which is $649,737, this result may not be usual for publicly traded companies. However, Tootsie Roll is private or family business so that is will be usual for this kind of organizations.

Ratio Analysis:

            Ratio analysis is the best method to learn more about the company in term of how it is doing financially; this analysis can answer many questions about the company. However, we should consider comparing the company to the market or to competitors to obtain a solid understanding of the company and make the best decision. Hershey is the biggest competitor of Tootsie Roll so we are going to use it to compare with Tootsie Rolls.

	Tootsie Roll	Tootsie Roll			Hershey	Hershey
	2012	2011			2012	2011
Current ratio	3.24:1	3.60:1		Current ratio	1.44:1	1.74:1
Quick ratio	2.22:1	2.4:1		Quick ratio	1.01:1	1.19:1
Inventory Turnover	8.81 times	7.4 Times		Inventory Turnover	10.5 times	5.18 times
ACP	27.95 Days	28.7 Days		ACP	32 Days	32.2 Days
Debt to equity	30%	29%		Debt to equity	359%	414%
Debt to assets	23.3%	22.4%		Debt to assets	78.2%	80.5%
Interest Coverage	0.0	0.0		Interest Coverage	11.63 times	11.44 times
Gross profit margin	33%	31.22%		Gross profit margin	43.0%	42%
Net Profit margin	9.46%	8.25%		Net Profit margin	9.9%	10.3%
ROA	6.14%	5.12%		ROA	13.9%	14.3%
ROE	8.00%	6.60%		ROE	63.8%	73.4%
Current PE Ratio	35.79				28.44

Analysis:

<![if !supportLists]>1.     <![endif]>Liquidity

Current ratio and quick ratio are two measure of liquidity and show the company’s ability to pay its short term debt. Both ratios represent the dollar amount of total current assets the company has for each dollar in the total liabilities, but quick ratio will not count inventory since it consider only most liquid current assets. An adequate current ratio is 2.0:1or for every $1in current liabilities there is a $2 in current assets. Tootsie’s current ratio in 2012 is 3.24:1 vs Hershey’s current ratio of 1.44:1. In 2011, Tootsie Roll’ s current ratio was 3.60:1 and Hershey’s current ratio is 1.74:1; Tootsie is lowering the current ratio and Hershey is increasing it. As for quick ratio, in 2012, Tootsie Roll’s quick ratio 2.22:1 and Hershey has 1.01:1. In 2011, Tootsie Roll’s quick ratio 2.4:1 and Hershey’s quick ratio was 1.19:1 in 2011. Tootsie Roll is lowering the quick ratio and Hershey is increasing. We can see that both companies are going toward the adequate ratio, however, Tootsie is more liquid than Hershey.

<![if !supportLists]>2.     <![endif]>Asset Management

When evaluating asset management, we should consider two factors, inventory turnover and average collection period. Inventory turnover considers how many times does a company sells and replace its goods. Tootsie had an inventory turnover of 8.81 times in 2012 but it was 7.4 times in 2011. Hershey’s inventory turnover was 10.5 times in 2012, in previous year was 9.37 times in 2011. TR and Hershey are turning their inventory almost equal times. Average Collection Period (ACP) is a measure of how long does it take the company to collect its receivables in term of days. Tootsie’s ACP was 28 days in 2012 which day less than in 2011. However, Hershey has 32 days to collect the receivable in 2012 almost same collecting period in 2011. Hershey needs more time to collect their receivables, but Tootsie Roll manages its assets better way since they collect the money faster.

<![if !supportLists]>3.     <![endif]>Data management

In this section of the analysis we will be looking at how the company manages its debt, in other words, which is the source of financing that the company uses. We will be evaluating the risk that the company has. The first measure is debt to equity, how much credit does the company owe for every $1 of equity. Tootsie Roll debt to equity in 2012 was 30% and it is almost identical to the debt to equity in 2011. Hershey’s debt to equity in 2012 was 359% which is 1.35% less than its debt in 2011 which was 414%. That means Hershey has reduced  its loans in 2012 compared with Tootsie Roll has more loans in 2012 than 2011, for every $1 Tootsie Roll owes $0.30 and Hershey owes $3.59. For the second measure is debt to assets, how much credit does the company owe for every $1 of assets. Tootsie has maintained a debt of 23.3% in 2012 and in 2011 was 22.4%. Hershey’s debt to assets 78.2% in 2012 and 80.5% in 2011, for every $1 Tootsie Roll owes $0.23 and Hershey owes $0.78. The third measure of debt management is interest coverage, which is how many times can earnings before interest and tax cover interest expenses. Tootsie Roll has a small amount in interest expenses which is not significant for this analysis. Tootsie Roll seems very conservatives when it comes to financing and Hershey is taking more leverage.

<![if !supportLists]>4.     <![endif]>Profitability

Determining profitability is a must when analyzing a company’s financial status. These are four indicators of a company’s profitability: Gross profit margin, Net profit margin, ROA and ROE. Gross profit margin (GPM) of the Tootsie Roll in 2012 was 33% for every $1 in gross profit Tootsie Roll make $0.33. GPM was 31% in 2011 that means Tootsie Roll was made for every $1 $0.31 in 2011. Hershey’s GPM for 2012 was 43% which makes $0,43 for every $1, in 2011 GPM was 42% for every $1 made $0.42. Tootsie Roll’s NPM for 2012 was 9.46% and 2011’s NPM was 8.25% which that shows 1% increase from 2011 to 2012. Hershey’s NPM in 2012 was 9.9% and 2011’s NPM 10.3% which that shows a 1 % decrease from 2011 to 2012. Hershey is making more profit from every dollar in revenues. The another indicator of profitability is return on assets (ROA) it shows how much profitable the company generates in relation to its assets. Tootsie Roll’s ROA has increased 1% in 2012. Hershey’s ROA in 2012 decreased to 13.9% from 14.3% in 2011. Tootsie Roll’s ROA seems to be lower when compared to Hershey’s ROA. The last measure of profitability is ROE is how much of income return as owner’s equity. Tootsie’s ROE 8% in 2012 and 6.60% in 2011 which it has increased in 2012. Hershey’s ROE was 63.8% in 2012 and 73.4% in 2011 which has decreased in 2012. As a result Hershey is more profitable than Tootsie Roll.

<![if !supportLists]>5.     <![endif]>Market value ratios

The Tootsie current P/E ratio is 35.38 which mean that investors are willing to pay $35.38 for every $1 in earning. This tells us that investors are expecting a greater earning growth in the future. When comparing Tootsie Roll’s P/E ratios to Hershey’s current P/E ratio is 30.30 that means the investors are willing to pay a greater price for Tootsie Roll compared to Hershey; investor expecting a higher future return to Tootsie Roll.

Summary

            Investing in Tootsie Roll will be recommended compared with Hershey Net income and sales, Tootsie Roll has positive Net income and sales in last fives as well as increase of revenue every year. Tootsie Roll is better for long-term investment than Hershey which has less debt, Tootise Roll doesn’t have a lot of loans, and Tootsie Roll’s current P/E ratio higher than Hershey. Hershey will be better for short-term investment because it has high profitability ratio. Hershey is a large company even with the P/E ratio it may be able to grow in future.