Chap 7

CHAPTER 7 – FINANCIAL PERFORMANCE METRICS

Chapter 7 Financial Performance Metrics


Topics • Simple Financial Comparisons & Analysis • Basic Financial Analysis • Financial Performance Metrics – Liquidity – Leverage – Market

• DuPont Analysis • Thomson Financial

- Activity - Profitability - Growth


Simple Financial Comparisons Figure 7.1

2005 Sales ($ millions)

$34,113

Kraft Foods Inc. $19,254

Sara Lee Corporation $14,567

ConAgra Foods, Inc.

$11,244

General Mills, Inc.

$10,667

Industry Average

$10,177

Kellogg Company

$8,912

H.J. Heinz Company

$7,548

Campbell Soup Company

$4,836

The Hershey Company

$4,159

Wm. Wrigley Jr. Company

$2,044

Smucker (J.M.) Company

$488

Tootsie Roll Industries, Inc. $0

$5,000

$10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000


Industry Group • Major branded food processing companies • Most do not compete head-to-head for consumers’ dollars, but do compete for investors’ dollars • Includes aspirant companies or companies that Hershey admires and wants to be like • Excluded some obvious competitors: – Mars: Private company with no public data – Nestle: International company while focus is domestic only


Simple Annual Growth Analysis Figure 7.2

2005 Annual Sales Growth* Tootsie Roll Industries, Inc.

16.1%


14.0%

Hershey Foods Corporation

9.2%

Industry Average Weighted

6.9%


6.2%

Kraft Foods Inc.

6.0%

H.J. Heinz Company

5.9%

Kellogg Company

5.9%

Industry Average*

5.3%

ConAgra Foods, Inc. General Mills, Inc. Sara Lee Corporation * Excludes Smucker (49.2%)

0.0%

3.4% 1.6% 0.7% 4.0%

8.0%

12.0%

16.0%

20.0%


Annual Sales Growth • Calculated as: – Change in 2005 Sales from 2004 Sales divided by 2004 Sales or (Sales 05 – Sales 04)/Sales 04 – 2005 Sales / 2004 Sales minus 1

• Smucker, Tootsie Roll, and Wrigley aided by acquisitions • Hershey aided by new product introduction and acquisitions


Long-Term Growth Analysis Figure 7.3

2005 Sales - Compound Annual Growth Rate From 2000 Smucker (J.M.) Company

26.1%

General Mills, Inc.

16.8%


14.4%

Kellogg Company

10.8%

Indus try Average Weighted

8.5%

Kraft Foods Inc.

8.5%


6.1%

H.J. Heinz Company

5.3%

Industry Average

5.3%


4.8%

Tootsie Roll Indus tries, Inc.

4.2%

Sara Lee Corporation ConAgra Foods, Inc.

-10.0%

3.2% -6.9

0.0%

10.0%

20.0%

30.0%


Basic Financial Analysis • Analyzes Hershey’s position over time • Sales, expenses, and income for the past three years. • % of Sales: All items are divided by Sales providing a relative comparison of cost management and profitability for 3 years. • Sales growth: Annual and two-year CAGR. • Index value: All items are divided by their 2003 values which provides growth analysis.


Basic Financial Statement Analysis Table 7.1

Income Statement Analysis The Hershey Company 2003, 2004, and 2005 ($ millions)

A. Income Statement 2003 2004 2005 Net Sales

$ 4,172.6

Costs and Expenses Cost of Sales Selling, Marketing, and Administrative Business Realignment and Asset Impairment Gain on sale of Business Total Costs and Expenses

B. % of Net Sales 2003 2004 2005

$ 4,429.2

$ 4,836.0

2,680.4 867.1 3,547.5

2,965.6 913.0 96.5 3,975.1

61.0% 20.2% 0.6% -0.2% 81.5%

60.5% 19.6% 0.0% 0.0% 80.1%

2,544.7 841.1 23.4 (8.3) 3,400.9

100.0% 100.0% 100.0%

C. Annual Growth 2004 2005 CAGR*

D. Index Value 2003 2004 2005

6.1%

9.2%

7.7%

100.0

106.1

115.9

61.3% 18.9% 2.0% 0.0% 82.2%

5.3% 3.1% n/a n/a 4.3%

10.6% 5.3% n/a n/a 12.1%

8.0% 4.2% n/a n/a 8.1%

100.0 100.0 n/a n/a 100.0

105.3 103.1 n/a n/a 104.3

116.5 108.5 n/a n/a 116.9

Income Before Interest and Income Taxes Interest Expense, Net

771.7 63.5

881.7 66.5

860.9 88.0

18.5% 1.5%

19.9% 1.5%

17.8% 1.8%

14.3% 4.7%

-2.4% 32.3%

5.6% 17.7%

100.0 100.0

114.3 104.7

111.6 138.6

Income Before Income Taxes Provision for Income Taxes

708.2 258.9

815.2 237.3

772.9 279.7

17.0% 6.2%

18.4% 5.4%

16.0% 5.8%

15.1% -8.3%

-5.2% 17.9%

4.5% 3.9%

100.0 100.0

115.1 91.7

109.1 108.0

Income before Accounting Change Cumulative Effect of Accounting Change

449.3 7.4

577.9 -

493.2 -

10.8% 0.2%

13.0% 0.0%

10.2% 0.0%

28.6% -14.7% n/a n/a

4.8% n/a

100.0 n/a

128.6 n/a

109.8 n/a

493.2

10.6%

13.0%

10.2%

30.8% -14.7%

5.6%

100.0

130.8

111.6

Net Income

$

441.9

$

577.9

$

*CAGR: Compound Annual Growth Rate from 2003 to 2005.


Basic Financial Analysis Results • % of Sales – Cost of goods sold has fluctuated over this three-year time period. – SG&A has steadily declined – Profitability (net income) declined

• Annual growth – Over this two year period, Hershey has only grown at single digit levels in all areas

• Index value – Sales has a higher index value than any measure of income.


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

CHAPTER 7 – FINANCIAL PERFORMANCE METRICS Table 7.2

Selected Financial Data $ Millions, Except per Share

Hershey 2000 2005 Sales Cost of Goods Sold Administrative Costs Operating Income

Heinz 2000*

2005

$ 3,820.4 2,471.2 726.6 622.7

$ 4,836.0 2,965.5 913.0 860.9

$ 9,407.9 5,788.5 2,350.9 1,268.5

$ 8,912.3 5,705.9 1,851.5 1,354.8

76.0 546.6 334.5 1.21

88.0 772.9 493.2 1.99

244.4 999.1 630.9 1.75

204.6 1,058.6 752.7 2.13

Cash & Equivalents Accounts Receivable Inventory Current Assets Net, Plant, Prop, & Equip Total Assets

32.0 379.7 605.2 1,295.3 1,585.4 3,447.8

67.2 559.3 610.3 1,408.9 1,659.1 4,295.2

154.1 1,237.8 1,599.9 3,169.9 2,358.8 8,850.7

1,083.7 1,092.4 1,256.8 3,645.6 2,163.9 10,577.7

Current Liabilities Short-Term Debt Current Portion LTD Long-Term Debt Total Liabilities Stockholders' Equity

766.9 257.6 0.5 877.7 2,272.8 1,175.0

1,518.2 819.1 0.1 942.8 3,274.1 1,021.1

2,126.1 151.2 25.4 3,935.8 7,254.8 1,595.9

2,587.1 28.5 544.8 4,122.0 7,975.1 2,602.6

23.72 32.19 272.6 0.54

55.54 55.25 240.5 0.93

45.06 34.00 256.8 1.45

38.08 36.87 347.7 1.14

Interest Expense Pre-Tax Income Net Income Earnings per Share - Diluted

Beginning of Year Stock Price Year-End Stock Price Shares Outstanding Dividends per Share

* The 2000 income measures for Heinz were adjusted t o remove the one-time gain for selling Weight Watchers.


Types of Metrics • • • • • •

•

Liquidity: How liquid is the company? These metrics measure the firm’s ability to meet its maturing short-term obligations. Activity: How effectively is the company managing its assets? These metrics measure how effectively the company is using its resources. Leverage: How is the company financed? These metrics measure the extent to which the firm’s assets have been financed by debt. Profitability: How profitable is the company? These metrics measure management’s overall ability to generate profits in relation to its sales or investment. Market: How does the company’s performance “translate” in the stock market? These metrics measure the firm’s relationship to the broader stock market. Growth: How has the company been growing? These metrics include annual growth rates and compound annual growth rates over extended time periods of key balance sheet and income statement items and measure the firm’s ability to maintain its economic position in the growth of the economy and industry. Cost Management: What are the underlying cost trends relative to other measures? These metrics include measuring expenses as a percent of each sales dollar as in the common size income statement.


Liquidity Hershey 2000 2005 Liquidity Current Ratio Net Working Capital ($ Millions) $ Quick Ratio Cash Ratio

Financial Performance Metric Liquidity Current Ratio Net Working Capital Quick Ratio Cash Ratio

1.69 528.4 0.90 0.04

$

Heinz 2000

0.93 1.49 (109.3) $ 1,043.8 0.53 0.74 0.04 0.07

Calculation

Current Assets / Current Liabilities Current Assets - Current Liabilities (Current Assets - Inventories) / Current Liabilities Cash / Current Liabilities

2005 1.41 $ 1,058.5 0.92 0.42

Strength

Higher Higher Higher Higher


Activity Hershey 2000 2005 Activity Total Asset Turnover Fixed Asset Turnover Current Asset Turnover Accounts Receivable Turnover Average Collection Period Inventory Turnover Inventory Days Outstanding Financial Performance Metric Activity Total Asset Turnover Fixed Asset Turnover Current Asset Turnover Accounts Receivable Turnover Average Collection Period Inventory Turnover

Heinz 2000

2005

1.11 2.41 2.95

1.13 2.91 3.43

1.06 3.99 2.97

0.84 4.12 2.44

10.06 36.3 4.08 89.4

8.65 42.2 4.86 75.1

7.60 48.0 3.62 100.9

8.16 44.7 4.54 80.4

Calculation

Strength

Sales / Total Assets Sales / Net Plant, Property, & Equipment Sales / Current Assets

Higher Higher Higher

Sales / Accounts Receivable 365 days / Accounts Receivable Turnover Cost of Goods Sold / Inventory

Higher Lower Higher


Leverage Hershey 2000 2005 Leverage Debt to Equity Current Debt to Equity Long-Term Debt to Equity Financial Leverage Capitalization Ratio Long-Term Capitalization Ratio Interest Coverage Financial Performance Metric Leverage Debt to Equity Current Debt to Equity Long-Term Debt to Equity

Heinz 2000

2005

1.93 0.65 1.28

3.21 1.49 1.72

4.55 1.33 3.21

3.06 0.99 2.07

2.93 49.2% 42.8% 8.19

4.21 63.3% 48.0% 9.78

5.55 72.0% 71.1% 5.19

4.06 64.3% 61.3% 6.62

Calculation

Liabilities / Equity Current Liabilities / Equity Long-Term Liabilities / Equity

Financial Leverage Assets / Equity Capitalization Ratio Interest Bearing Debt / (Interest Bearing Debt + Equity) Long-Term Capitalization Ratio Long-Term Interest Bearing Debt / (Interest Bearing Debt + Equity)

Strength

Lower Lower Lower Lower Lower Lower


Profitability Hershey 2000 2005 Profitability Net Margin Pre-Tax Margin Operating Margin Gross Margin Return on Assets Return on Net Assets Return on Equity Financial Performance Metric Profitability Net Margin Pre-Tax Margin Operating Margin Gross Margin Return on Assets Return on Net Assets Return on Equity

Heinz 2000

2005

8.8% 14.3% 16.3% 35.3%

10.2% 16.0% 17.8% 38.7%

6.7% 10.6% 13.5% 38.5%

8.4% 11.9% 15.2% 36.0%

9.7% 11.4% 28.5%

11.5% 13.7% 48.3%

7.1% 9.1% 39.5%

7.1% 8.8% 28.9%

Calculation

Strength

Net Income / Sales Pre-Tax Income / Sales Operating Income / Sales (Sales - Cost of Goods Sold) / Sales


Net Income / Assets Net Income / (Assets - Non Interest Bearing Current Liabilities) Net Income / Equity



Table 7.4

Profitiability Analysis: Income Statement % of Sales

Hershey 2000 2005

Heinz 2000

2005

Sales Cost of Goods Sold

100.0% 64.7%

100.0% 61.3%

100.0% 61.5%

100.0% 64.0%

Gross Margin

35.3%

38.7%

38.5%

36.0%

19.0% 0.0%

18.9% 2.0%

25.0% 0.0%

20.8% 0.0%

16.3%

17.8%

13.5%

15.2%

2.0% 0.0%

1.8% 0.0%

2.6% 0.3%

2.3% 1.0%

14.3%

16.0%

10.6%

11.9%

5.5%

5.8%

3.9%

3.5%

8.8%

10.2%

6.7%

8.4%

Selling, General Administrative Other Expenses

Operating Margin Interest Expense Other Expense

Pre-Tax Margin Income Tax Provision

Net Margin


Investment Base $ Millions

Hershey 2000 2005 Net Income

$

334.5

$

493.2

Heinz 2000 $

630.9

2005 $

752.7

Total Assets: Beginning of the Year Average for the Year End of the Year

3,346.7 3,397.3 3,447.8

3,812.8 4,054.0 4,295.2

8,053.6 8,452.2 8,850.7

9,877.2 10,227.5 10,577.7

Stockholders' Equity Beginning of the Year Average for the Year End of the Year

1,098.6 1,136.8 1,175.0

1,137.1 1,079.1 1,021.1

1,803.0 1,699.5 1,595.9

1,894.2 2,248.4 2,602.6

Return on Assets Beginning of the Year Average for the Year End of the Year

10.0% 9.8% 9.7%

12.9% 12.2% 11.5%

7.8% 7.5% 7.1%

7.6% 7.4% 7.1%

Return on Equity Beginning of the Year Average for the Year

30.4% 29.4%

43.4% 45.7%

35.0% 37.1%

39.7% 33.5%


Table 7.6 Financial Performance Metrics

Hershey Foods Normalized Income ($ Millions)

1999

2000

2001

2002

2003

2004

2005

Sales

$ 3,586.2

$ 3,820.4

$ 4,137.2

$ 4,120.3

$ 4,172.6

$ 4,429.2

$ 4,836.0

Net income

$

$

$

$

$

$

$

As Reported

Net income margin Net income annual growth

460.3 12.8% 35.0%

327.8 8.6% -28.8%

199.3 4.8% -39.2%

391.2 9.5% 96.3%

441.9 10.6% 13.0%

577.9 13.0% 30.8%

493.2 10.2% -14.7%

Normalized Income Adjustments to Net Income Net income

$

Restructuring charges Loss (gain) sale of business Cumulative effect of accounting chang Tax settlement Normalized income Normalized Income Margin Normalized Income Growth

460.3

$

(165.0) $

295.3 8.2% -13.4%

327.8

$

$

327.8 8.6% 11.0%

199.3

$

171.9 (1.1) $

370.1 8.9% 12.9%

391.2

$

21.5 $

412.7 10.0% 11.5%

441.9

$

15.5 (5.7) 7.4 $

451.7 10.8% 9.4%

577.9

$

(61.1) $

516.8 11.7% 14.4%

493.2 74.0 -

$

567.2 11.7% 9.8%


Market Hershey 2000 2005

Heinz 2000

2005

Market Market Capitalization ($ millions) $ 8,773.6 $ 13,287.6 $ 8,731.2 $ 12,819.7 Price/Earnings 26.60 27.76 19.43 17.31 Market to Book 7.47 13.01 5.47 4.93 Shareholder Returns 38.0% 1.2% -21.3% -0.2% Dividend Yield 2.3% 1.7% 3.2% 3.0% Financial Performance Metric Market Market Capitalization Price/Earnings Market to Book Shareholder Returns Dividend Yield

Calculation Stock Price Per Share * Shares Outstanding Stock Price Per Share / Earnings Per Share Market Value / Book Value (Capital Appreciation + Dividends) / Beginning Stock Price Dividend Per Share / Beginning Stock Price

Strength Higher Higher Higher Higher Higher


Performance Metrics Summary Financial Performance Metric

Calculation

Strength

Liquidity Current Ratio Net Working Capital Quick Ratio Cash Ratio

Current Assets / Current Liabilities Current Assets - Current Liabilities (Current Assets - Inventories) / Current Liabilities Cash / Current Liabilities


Activity Total Asset Turnover Fixed Asset Turnover Current Asset Turnover

Sales / Total Assets Sales / Net Plant, Property, & Equipment Sales / Current Assets


Sales / Accounts Receivable 365 days / Accounts Receivable Turnover Cost of Goods Sold / Inventory 365 days / Inventory Turnover

Higher Lower Higher Lower

Liabilities / Equity Current Liabilities / Equity Long-Term Liabilities / Equity

Lower Lower Lower

Assets / Equity Interest Bearing Debt / (Interest Bearing Debt + Equity) Long-Term Interest Bearing Debt / (Interest Bearing Debt + Equity) Earnings Before Interest and Tax / Interest Expense

Lower Lower Lower Higher

Net Income / Sales Pre-Tax Income / Sales Operating Income / Sales (Sales - Cost of Goods Sold) / Sales


Net Income / Assets N et In co me / ( As se ts - No n In ter est Be ari ng Cu rr en t Li ab il it ies ) Net Income / Equity

Higher H ig he r Higher

Stock Price Per Share * Shares Outstanding Stock Price Per Share / Earnings Per Share Market Value / Book Value (Capital Appreciation + Dividen ds) / Beginn ing Stock Price


Accounts Receivable Turnover Average Collection Period Inventory Turnover Inventory Days Outstanding Leverage Debt to Equity Current Debt to Equity Long-Term Debt to Equity Financial Leverage Capitalization Ratio Long-Term Capitalization Ratio Interest Coverage Profitability Net Margin Pre-Tax Margin Operating Margin Gross Margin Return on Assets Ret ur n o n Net As se ts Return on Equity Market Market Capitalization Price/Earnings Market to Book Shareholder Retu rns


.

Performance Metrics

2000 Liquidity Current Ratio Net Working Capital ($ Millions) $ Quick Ratio Cash Ratio Activity Total Asset Turnover Fixed Asset Turnover Current Asset Turnover A cco unt s R ec ei va bl e Tu rn ove r Average Collection Period Inventory Turnover Inventory Days Outstanding Leverage Debt to Equity Current Debt to Equity Long-Term Debt to Equity Financial Leverage Capitalization Ratio Long-Term Capitalization Ratio Interest Coverage Profitability Net Margin Pre-Tax Margin Operating Margin Gross Margin Return on Assets Return on Net Assets Return on Equity

Hershey 2005

1.69 528.4 0.90 0.04

$

Heinz 2000

0.93 1.49 (109.3) $ 1,043.8 0.53 0.74 0.04 0.07

2005 1.41 $ 1,058.5 0.92 0.42

1.11 2.41 2.95

1.13 2.91 3.43

1.06 3.99 2.97

0.84 4.12 2.44

1 0. 06 36.3 4.08 89.4

8.65 42.2 4.86 75.1

7.60 48.0 3.62 100.9

8.16 44.7 4.54 80.4

1.93 0.65 1.28

3.21 1.49 1.72

4.55 1.33 3.21

3.06 0.99 2.07

2.93 49.2% 42.8% 8.19

4.21 63.3% 48.0% 9.78

5.55 72.0% 71.1% 5.19

4.06 64.3% 61.3% 6.62

8.8% 14.3% 16.3% 35.3%

10.2% 16.0% 17.8% 38.7%

6.7% 10.6% 13.5% 38.5%

8.4% 11.9% 15.2% 36.0%

9.7% 11.4% 28.5%

11.5% 13.7% 48.3%

7.1% 9.1% 39.5%

7.1% 8.8% 28.9%

Market Market Capitalization ($ millions) $ 8,773.6 Price/Earnings 26.60 Market to Book 7.47

$ 13,287.6 27.76 13.01

$ 8,731.2 19.43 5.47

$ 12,819.7 17.31 4.93


DuPont Analysis 2.

3.

Net Margin

X

Asset Turnover

=

Return on Assets

Net Income Sales

X

Sales . Total Assets

=

Net Income Total Assets

Return on Assets Net Income Total Assets

X Financial Leverage =

Return on Equity

Total Assets Equity

Net Income Equity

X

=


Table 7.8

Performance Metrics Hershey 2000 2005 Net Margin X Total Asset Turnover = Return on Assets X Financial Leverage = Return on Equity

Heinz 2000 2005

NI / Sales

8.8%

10.2%

6.7%

8.4%

Sales / Total Assets

1.11

1.13

1.06

0.84

Net Income / Total Assets

9.7%

11.5%

7.1%

7.1%

Total Assets / Equity

2.93

4.21

5.55

4.06

Net Income / Equity

28.5%

48.3%

39.5%

28.9%


DuPont Analysis - Prefix

1.

Pre-Tax Margin

X

Pre-Tax Income Sales

X

Pre-Tax Income Sales Pre-Tax Income Sales

X

X

(1 – Tax Rate)

(1 -

(

PTI PTI

Taxes PTI -

Taxes PTI

__PTI – Taxes__ Pre-Tax Income

=

Net Margin

) =

) = =

Net Income Sales


Table 7.9

2005 DuPont Anal sis Pre-Tax Margin

After Tax Retention

Net Margin

Asset Turnover

Return on Assets

Financial Leverage

Return on Equity


16.0%

63.8%

10.2%

1.126

11.5%

4.206

48.3%

Campbell Soup Company ConAgra Foods, Inc. General Mills, Inc. H.J. Heinz Company Kellogg Company

13.6% 7.4% 17.4% 11.9% 14.0%

68.6% 59.4% 63.4% 71.1% 68.8%

9.4% 4.4% 11.0% 8.4% 9.6%

1.114 1.145 0.622 0.843 0.962

10.4% 5.0% 6.9% 7.1% 9.3%

5.335 2.618 3.183 4.064 4.630

55.7% 13.2% 21.8% 28.9% 42.9%

Kraft Foods Inc. Sara Lee Corporation Smucker (J.M.) Company Tootsie Roll Industries, Inc. Wm. Wrigley Jr. Company

10.9% 4.8% 9.9% 23.3% 18.1%

70.6% 78.3% 63.7% 68.0% 68.5%

7.7% 3.7% 6.3% 15.8% 12.4%

0.592 1.336 0.775 0.599 0.933

4.6% 5.0% 4.9% 9.5% 11.6%

1.947 4.905 1.559 1.318 2.014

8.9% 24.5% 7.6% 12.5% 23.4%

11.2% 13.4%

67.9% 67.7%

7.6% 9.0%

0.821 0.913

6.2% 7.8%

2.610 3.253

16.2% 26.2%

Industry Average - Weighted Industry Average

Chap 7

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