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Introduction

The internal grow of Hershey Chocolate Company will be analyzed in this paper by means of utilizing both the liquidity and profitability ratios as shown in the following paragraphs.

The current ratio of the company was 1.5:1 for the first quarter of 2012 (“Hershey Company”, 2012). The significant positive value of the company’s current ratio clearly indicates the sufficiency in terms of liquidity in the company. This is because current ratio implies that the firm operates over a higher margin of safety, according to the conventional expectation. In fact, for a company to possess a satisfactory current ratio, it must attain a two to one (2:1) current ratio. In this regard, Hershey Chocolate with a current ratio of 1.5:1 does not present a higher level of current assets to current liabilities, though this value still indicates the sufficiency of the company’s ability to meet its current obligations. There is no likelihood of liquidity issue in the organization if the trend in the first quarter of the year is something to come up with.

Quick Ratio = (Cash + Marketable Securities + Receivables)/Current Liabilities

Hershey Chocolate’s quick ratio is 0.8 for the first quarter of 2012 (“Hershey Company”, 2012). Provided a quick ratio of 1:1 is considered to be a satisfactory financial condition, Hershey Chocolate is, thus, fairly liquid since 0.8 is rather close to 1. The ratio of 0.8:1 indicates that even if the company’s inventories are not sold, the firm will still be able to meet its current liabilities if they need to be covered immediately. Further, this ratio indicates operational excellence within the company in the first quarter of the current year.

The number of days cost of goods sold (CGS) in the company’s inventory for the first quarter of 2012 records 63 days. The value of 63 days indicates that Hershey Chocolate has sufficient liquid assets that could finance its operations for 63 days without receiving any additional cash from the outside sources. The positive number of days cost of goods sold (CGS) in its inventory could be attributed to the company’s efforts to cut its cost bases. The company is currently implementing strategic policies that are cost driven. The firm focuses on strategies that would ensure efficiency improvement and this has paid off.

Moreover, it is evident, according to the liquidity ratio analysis that the company’s internal growth is in line with its sustainable growth. This is due to the fact that its current ratio of 1.5:1 is within the established industrial benchmark of 2:1. If the ratio were lower than 1.5:1, it would mean that there was no internal growth realized, but since it is 1.5:1, it is certain that certain internal growth was indeed realized. On the other hand, the company’s quick ratio of 0.8:1 is almost within the established financial standard for the satisfactory condition of 1:1. Finally, the number of days cost of goods sold (CGS), which comprises 63 days, is fairly sufficient since it is an average taken from two balance sheets, and then divided by the number of days in one year (365 days).

The gross profit margin for the company under study is established to be 45.4% in the first quarter of 2012 (“Hershey Company”, 2012). The relatively positive value trend indicates the management’s efficiency in converting each $ sales into net profit. The margin ratio also indicates the firm’s capacity to withstand adverse economic conditions, such as the Euro financial crisis and the global economic recession, thus showing some good prospects in the internal growth.

The company has presented a relatively low rate of its returns on assets ratio from the most currently published financial statements of the first quarter of 2012. The value is 14.5% for the period which ended on 31st March, 2012 (“Hershey Company”, 2012). This is indicative of the fact that Hershey Chocolate is not currently efficient in generating profits from the assets employed in the firm. The inefficiency could be attributed to the dynamic structural demands of the service market and the way Hershey Chocolate has mastered the art of servicing its clients applying the appropriate and relevant approaches, thus posing a slow internal growth.

The return on equity ratio of the company has been on a relatively high trend in the first quarter of 2012. The company achieved a return on equity of 77.6% for the period which ended on 31st March, 2012 (“Hershey Company”, 2012). This was a clear indication that the leverage efforts of the stakeholders during the period were sufficient enough to sustain the company.

Calculated Cash flows Analysis

The following calculations can be utilized for the cash flows for the period which ended on 31st March, 2012. The numbers used for the calculations are presented in thousands.

Cash flows from assets = sale of property, plant, and equipment – purchase of plant, property, and equipment

                                   = 0- 91,727

                                   = -$91,727

Cash flows to creditors = increase in payables + repayment of debt

                                   = 16,673 + 10,515

                                   = $27, 188

Cash flows to stockholders = Repurchase of capital stock + payment of cash dividends

                                   = 218, 345 + 82, 063

                                   = $ 300,408

The cash flows from assets show a negative value because no plant, property, and equipment were sold during the first quarter of 2012. Therefore, there were no cash inflows. However, money was spent in purchasing plant, property, and equipment, thus representing the negative ($91, 727) value, that is, cash outflows. During the same period the company spent a total of $27, 188 on paying its creditors. On the other hand, stockholders were paid a sum of $300,408 for the repurchase of capital stock and payment of cash dividends. However, the company is financially stable because the cash at the end of the period comprises $567,339 (“Hershey Company”, 2012). This amount is sufficient to finance its daily operations and urgent expenses.

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