Access the February 20, 2015, filing of the December 31, 2014, 10-K report of Th
ID: 2424650 • Letter: A
Question
Access the February 20, 2015, filing of the December 31, 2014, 10-K report of The Hershey Company (ticker HSY) at www.SEC.govand complete the following requirements.
Required
Compute or identify the following profitability ratios of Hershey for its years ending December 31, 2014, and December 31, 2013. Interpret its profitability using the results obtained for these two years.
Profit margin ratio.
Gross profit ratio.
Return on total assets.
Return on common stockholders’ equity.
Basic net income per common share.
Explanation / Answer
It is the net profit ratio. It is calculated using the formula,
Net profit/Revenue * 100
As per The Hershey Company 10-K filings, Amounts in Thousands
Revenue for 2013 is $7,146,079
Net Profit for 2013 is $820,470
So the profit Margin ratio for 2013 is $820,470/$7,146,079 * 100 = 11.48% (Rounded off to 2 decimals)
Revenue for 2014 is $7,421,768
Net Profit for 2014 is $846,912
So the profit Margin ratio for 2014 is $846,912/$7,421,768 * 100 = 11.41% (Rounded off to 2 decimals)
To Summarize,
Profit Margin Ratio for 2013 is 11.48%
Profit Margin Ratio for 2014 is 11.41%
The Profit Margin ratios for both years have not much difference. However, if you see in dollars, there is an increase in sales revenue and also in the Net profit amount but the profit margin ratio has been decrease slightly. So the company has to look into other factors affecting the profit margin ratio.
2. Gross Profit Ratio
It is calculated using the formula,
Gross Profit/Revenue * 100
As per The Hershey Company 10-K filings, Amounts in Thousands
Revenue for 2013 is $7,146,079
Gross Profit for 2013 is Net Sales – Cost of Sales = $7,146,079 - $3,865,231 = $3,280,848
So the Gross profit ratio for 2013 is $3,280,848/$7,146,079 * 100 = 45.91% (Rounded off to 2 decimals)
Revenue for 2014 is $7,421,768
Gross Profit for 2014 is Net Sales – Cost of Sales = $7,421,768 - $4,085,602 = $3,336,166
So the Gross profit ratio for 2014 is $3,336,166/$7,421,768 * 100 = 44.95% (Rounded off to 2 decimals)
To Summarize,
Gross Profit Ratio for 2013 is 45.91%
Gross Profit Ratio for 2014 is 44.95%
Although the sales dollar increased, there is an even more increase in the cost of sales. This has resulted in the reduction of Gross profit ratio almost by 1%
3. Return on Total Assets
It is calculated using the formula,
Earnings before Interest and Taxes (EBIT)/Total Assets * 100
As per The Hershey Company 10-K filings, Amounts in Thousands
EBIT for 2013 is $1,339,675
Total Assets of 2013 is $5,357,488
So the Return on Total Assets for 2013 is $1,339,675/$5,357,488 * 100 = 25.01% (Rounded off to 2 decimals)
EBIT for 2014 is $1,389,575
Total Assets of 2014 is $5,629,516
So the Return on Total Assets for 2014 is $1,389,575/$5,629,516 * 100 = 24.68% (Rounded off to 2 decimals)
To Summarize,
Return on Total Assets for 2013 is 25.01%
Return on Total Assets for 2014 is 24.68%
There is a decrease in Return on total assets. It may affect the ability of company’s asset to pay its interest expenses. But currently, it is of not much significance.
4. Return on Common Stockholders’ Equity
It is calculated using the formula,
(Net income – Preferred Dividend)/Average common stockholders’ Equity * 100
As per The Hershey Company 10-K filings, Amounts in Thousands
There is no Preferred stock, so no preferred dividend. All the stock is common stock.
Net income for 2013 is $820,470
Average Common stockholders’ equity for 2013 is the average of 2012 Common stockholders’ equity and 2013 common stockholders’ equity
2012 common stockholders’ equity is $1,048,373 (Taken from Consolidated statement of stockholders’ equity)
2013 common stockholders’ equity is $1,616,052
Average Common stockholders’ equity is ($1,048,373+$1,616,052)/2 = $1,332,212.50
So the Return on Common stockholders’ equity is $820,470/1,332,212.50 * 100 = 61.59% (Rounded off to 2 decimals)
Net income for 2014 is $846,912
Average Common stockholders’ equity for 2014 is the average of 2013 Common stockholders’ equity and 2014 common stockholders’ equity
2013 common stockholders’ equity is $1,616,052
2014 common stockholders’ equity is $1,519,530
Average Common stockholders’ equity is ($1,616,052 + $1,519,530)/2 = $1,567,791
So the Return on Common stockholders’ equity is $846,912/1,567,791 * 100 = 54.02% (Rounded off to 2 decimals)
To summarize,
Return on common stockholders’ equity for 2013 is 61.59%
Return on common stockholders’ equity for 2014 is 54.02%
There is a steep decrease in the return on common stockholder’s equity due to appropriations in the retained earnings.
5. Basic net income per common share.
It is also called basic earnings per share.
This is reported on the face of the income statement.
Basic net income per common share or Basic EPS for 2013 is $3.76
Basic net income per common share or Basic EPS for 2014 is $3.91
The increase is due to increase in the net income and decrease in the common stockholders’ equity. It may look good, but the factors that affected increase in Basic EPS are not favorable.