Chap 7

CHAPTER 7 – FINANCIAL PERFORMANCE METRICS

Strategic Financial Management: Applications of Corporate FinanceSamuel C. Weaver and J. Fred Weston

7.1

Chapter 7Financial Performance Metrics



7.2

Topics

• Simple Financial Comparisons & Analysis• Basic Financial Analysis• Financial Performance Metrics

– Liquidity - Activity– Leverage - Profitability– Market - Growth

• DuPont Analysis• Thomson Financial



7.3

Simple Financial ComparisonsFigure 7.1

2005 Sales($ millions)

$488

$2,044

$4,159

$4,836

$7,548

$8,912

$10,177

$10,667

$11,244

$14,567

$19,254

$34,113

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000

Tootsie Roll Industries, Inc.

Smucker (J.M.) Company

Wm. Wrigley Jr. Company

The Hershey Company

Campbell Soup Company

H.J. Heinz Company

Kellogg Company

Industry Average

General Mills, Inc.

ConAgra Foods, Inc.

Sara Lee Corporation

Kraft Foods Inc.



7.4

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



7.5

Simple Annual Growth AnalysisFigure 7.2

2005 Annual Sales Growth*

0.7%

5.3%

5.9%

5.9%

6.0%

6.2%

6.9%

14.0%

16.1%

1.6%

9.2%

3.4%

0.0% 4.0% 8.0% 12.0% 16.0% 20.0%

Sara Lee Corporation

General Mills, Inc.

ConAgra Foods, Inc.

Industry Average*

Kellogg Company

H.J. Heinz Company

Kraft Foods Inc.

Campbell Soup Company

Industry Average Weighted

Hershey Foods Corporation

Wm. Wrigley Jr. Company

Tootsie Roll Industries, Inc.

* Excludes Smucker (49.2%)



7.6

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



7.7

Long-Term Growth Analysis

Figure 7.3

2005 Sales - Compound Annual Growth RateFrom 2000

3.2%

4.2%

4.8%

5.3%

5.3%

6.1%

8.5%

8.5%

10.8%

14.4%

16.8%

26.1%

-10.0% 0.0% 10.0% 20.0% 30.0%

ConAgra Foods, Inc.Sara Lee Corporation

Tootsie Roll Industries, Inc.Hershey Foods Corporation

Industry AverageH.J. Heinz Company

Campbell Soup CompanyKraft Foods Inc.

Industry Average WeightedKellogg Company

Wm. Wrigley Jr. CompanyGeneral Mills, Inc.

Smucker (J.M.) Company

-6.9-19.4%



7.8

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.



7.9

Basic Financial Statement Analysis

Table 7.1Income Statement Analysis

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

A. Income Statement B. % of Net Sales C. Annual Growth D. Index Value2003 2004 2005 2003 2004 2005 2004 2005 CAGR* 2003 2004 2005

Net Sales 4,172.6$ 4,429.2$ 4,836.0$ 100.0% 100.0% 100.0% 6.1% 9.2% 7.7% 100.0 106.1 115.9 Costs and Expenses

Cost of Sales 2,544.7 2,680.4 2,965.6 61.0% 60.5% 61.3% 5.3% 10.6% 8.0% 100.0 105.3 116.5 Selling, Marketing, and Administrative 841.1 867.1 913.0 20.2% 19.6% 18.9% 3.1% 5.3% 4.2% 100.0 103.1 108.5 Business Realignment and Asset Impairment 23.4 - 96.5 0.6% 0.0% 2.0% n/a n/a n/a n/a n/a n/aGain on sale of Business (8.3) - - -0.2% 0.0% 0.0% n/a n/a n/a n/a n/a n/a Total Costs and Expenses 3,400.9 3,547.5 3,975.1 81.5% 80.1% 82.2% 4.3% 12.1% 8.1% 100.0 104.3 116.9

Income Before Interest and Income Taxes 771.7 881.7 860.9 18.5% 19.9% 17.8% 14.3% -2.4% 5.6% 100.0 114.3 111.6 Interest Expense, Net 63.5 66.5 88.0 1.5% 1.5% 1.8% 4.7% 32.3% 17.7% 100.0 104.7 138.6

Income Before Income Taxes 708.2 815.2 772.9 17.0% 18.4% 16.0% 15.1% -5.2% 4.5% 100.0 115.1 109.1 Provision for Income Taxes 258.9 237.3 279.7 6.2% 5.4% 5.8% -8.3% 17.9% 3.9% 100.0 91.7 108.0

Income before Accounting Change 449.3 577.9 493.2 10.8% 13.0% 10.2% 28.6% -14.7% 4.8% 100.0 128.6 109.8 Cumulative Effect of Accounting Change 7.4 - - 0.2% 0.0% 0.0% n/a n/a n/a n/a n/a n/a

Net Income 441.9$ 577.9$ 493.2$ 10.6% 13.0% 10.2% 30.8% -14.7% 5.6% 100.0 130.8 111.6

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



7.10

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.



7.11

• 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

Financial Performance Metrics



7.12

Table 7.2

Selected Financial Data$ Millions, Except per Share

Hershey Heinz2000 2005 2000* 2005

Sales 3,820.4$ 4,836.0$ 9,407.9$ 8,912.3$ Cost of Goods Sold 2,471.2 2,965.5 5,788.5 5,705.9 Administrative Costs 726.6 913.0 2,350.9 1,851.5 Operating Income 622.7 860.9 1,268.5 1,354.8 Interest Expense 76.0 88.0 244.4 204.6 Pre-Tax Income 546.6 772.9 999.1 1,058.6 Net Income 334.5 493.2 630.9 752.7 Earnings per Share - Diluted 1.21 1.99 1.75 2.13

Cash & Equivalents 32.0 67.2 154.1 1,083.7 Accounts Receivable 379.7 559.3 1,237.8 1,092.4 Inventory 605.2 610.3 1,599.9 1,256.8 Current Assets 1,295.3 1,408.9 3,169.9 3,645.6 Net, Plant, Prop, & Equip 1,585.4 1,659.1 2,358.8 2,163.9 Total Assets 3,447.8 4,295.2 8,850.7 10,577.7

Current Liabilities 766.9 1,518.2 2,126.1 2,587.1 Short-Term Debt 257.6 819.1 151.2 28.5 Current Portion LTD 0.5 0.1 25.4 544.8 Long-Term Debt 877.7 942.8 3,935.8 4,122.0 Total Liabilities 2,272.8 3,274.1 7,254.8 7,975.1 Stockholders' Equity 1,175.0 1,021.1 1,595.9 2,602.6

Beginning of Year Stock Price 23.72 55.54 45.06 38.08 Year-End Stock Price 32.19 55.25 34.00 36.87 Shares Outstanding 272.6 240.5 256.8 347.7 Dividends per Share 0.54 0.93 1.45 1.14

* The 2000 income measures for Heinz were adjusted to remove the one-time gain for selling Weight Watchers. Please see the discussion regarding "normalized income" later in the chapter.



7.13

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.



7.14

LiquidityHershey Heinz Financial Performance Metric

2000 2005 2000 2005Liquidity

Current Ratio 1.69 0.93 1.49 1.41 Net Working Capital ($ Millions) 528.4$ (109.3)$ 1,043.8$ 1,058.5$ Quick Ratio 0.90 0.53 0.74 0.92 Cash Ratio 0.04 0.04 0.07 0.42 Performance Metrics Summary

Financial Performance Metric Calculation Strength

LiquidityCurrent Ratio Current Assets / Current Liabilities HigherNet Working Capital Current Assets - Current Liabilities HigherQuick Ratio (Current Assets - Inventories) / Current Liabilities HigherCash Ratio Cash / Current Liabilities Higher



7.15

ActivityHershey Heinz Financial Performance Metric

2000 2005 2000 2005Activity

Total Asset Turnover 1.11 1.13 1.06 0.84 Fixed Asset Turnover 2.41 2.91 3.99 4.12 Current Asset Turnover 2.95 3.43 2.97 2.44 Accounts Receivable Turnover 10.06 8.65 7.60 8.16 Average Collection Period 36.3 42.2 48.0 44.7 Inventory Turnover 4.08 4.86 3.62 4.54 Inventory Days Outstanding 89.4 75.1 100.9 80.4


ActivityTotal Asset Turnover Sales / Total Assets HigherFixed Asset Turnover Sales / Net Plant, Property, & Equipment HigherCurrent Asset Turnover Sales / Current Assets HigherAccounts Receivable Turnover Sales / Accounts Receivable HigherAverage Collection Period 365 days / Accounts Receivable Turnover LowerInventory Turnover Cost of Goods Sold / Inventory HigherInventory Days Outstanding 365 days / Inventory Turnover Lower



7.16

LeverageHershey Heinz Financial Performance Metric

2000 2005 2000 2005Leverage

Debt to Equity 1.93 3.21 4.55 3.06 Current Debt to Equity 0.65 1.49 1.33 0.99 Long-Term Debt to Equity 1.28 1.72 3.21 2.07 Financial Leverage 2.93 4.21 5.55 4.06 Capitalization Ratio 49.2% 63.3% 72.0% 64.3%Long-Term Capitalization Ratio 42.8% 48.0% 71.1% 61.3%Interest Coverage 8.19 9.78 5.19 6.62


LeverageDebt to Equity Liabilities / Equity LowerCurrent Debt to Equity Current Liabilities / Equity LowerLong-Term Debt to Equity Long-Term Liabilities / Equity LowerFinancial Leverage Assets / Equity LowerCapitalization Ratio Interest Bearing Debt / (Interest Bearing Debt + Equity) LowerLong-Term Capitalization Ratio Long-Term Interest Bearing Debt / (Interest Bearing Debt + Equity) LowerInterest Coverage Earnings Before Interest and Tax / Interest Expense Higher



7.17

ProfitabilityHershey Heinz Financial Performance Metric

2000 2005 2000 2005Profitability

Net Margin 8.8% 10.2% 6.7% 8.4%Pre-Tax Margin 14.3% 16.0% 10.6% 11.9%Operating Margin 16.3% 17.8% 13.5% 15.2%Gross Margin 35.3% 38.7% 38.5% 36.0%Return on Assets 9.7% 11.5% 7.1% 7.1%Return on Net Assets 11.4% 13.7% 9.1% 8.8%Return on Equity 28.5% 48.3% 39.5% 28.9%


ProfitabilityNet Margin Net Income / Sales HigherPre-Tax Margin Pre-Tax Income / Sales HigherOperating Margin Operating Income / Sales HigherGross Margin (Sales - Cost of Goods Sold) / Sales HigherReturn on Assets Net Income / Assets HigherReturn on Net Assets Net Income / (Assets - Non Interest Bearing Current Liabilities) HigherReturn on Equity Net Income / Equity Higher



7.18

Table 7.4Profitiability Analysis: Income Statement

% of Sales

Hershey Heinz2000 2005 2000 2005

Sales 100.0% 100.0% 100.0% 100.0%Cost of Goods Sold 64.7% 61.3% 61.5% 64.0%Gross Margin 35.3% 38.7% 38.5% 36.0%Selling, General Administrative 19.0% 18.9% 25.0% 20.8%Other Expenses 0.0% 2.0% 0.0% 0.0%Operating Margin 16.3% 17.8% 13.5% 15.2%Interest Expense 2.0% 1.8% 2.6% 2.3%Other Expense 0.0% 0.0% 0.3% 1.0%Pre-Tax Margin 14.3% 16.0% 10.6% 11.9%Income Tax Provision 5.5% 5.8% 3.9% 3.5%Net Margin 8.8% 10.2% 6.7% 8.4%



7.19

Table 7.5

Investment Base$ Millions

Hershey Heinz2000 2005 2000 2005

Net Income 334.5$ 493.2$ 630.9$ 752.7$

Total Assets:Beginning of the Year 3,346.7 3,812.8 8,053.6 9,877.2 Average for the Year 3,397.3 4,054.0 8,452.2 10,227.5 End of the Year 3,447.8 4,295.2 8,850.7 10,577.7

Stockholders' EquityBeginning of the Year 1,098.6 1,137.1 1,803.0 1,894.2 Average for the Year 1,136.8 1,079.1 1,699.5 2,248.4 End of the Year 1,175.0 1,021.1 1,595.9 2,602.6

Return on AssetsBeginning of the Year 10.0% 12.9% 7.8% 7.6%Average for the Year 9.8% 12.2% 7.5% 7.4%End of the Year 9.7% 11.5% 7.1% 7.1%

Return on EquityBeginning of the Year 30.4% 43.4% 35.0% 39.7%Average for the Year 29.4% 45.7% 37.1% 33.5%End of the Year 28.5% 48.3% 39.5% 28.9%



7.20

Table 7.6Financial Performance Metrics

Hershey Foods Normalized Income($ Millions)

1999 2000 2001 2002 2003 2004 2005As Reported

Sales 3,586.2$ 3,820.4$ 4,137.2$ 4,120.3$ 4,172.6$ 4,429.2$ 4,836.0$ Net income 460.3$ 327.8$ 199.3$ 391.2$ 441.9$ 577.9$ 493.2$ Net income margin 12.8% 8.6% 4.8% 9.5% 10.6% 13.0% 10.2% Net income annual growth 35.0% -28.8% -39.2% 96.3% 13.0% 30.8% -14.7%

Normalized Income Adjustments to Net IncomeNet income 460.3$ 327.8$ 199.3$ 391.2$ 441.9$ 577.9$ 493.2$ Restructuring charges - - 171.9 21.5 15.5 - 74.0 Loss (gain) sale of business (165.0) - (1.1) - (5.7) - - Cumulative effect of accounting change - - - - 7.4 - - Tax settlement - - - - - (61.1) - Normalized income 295.3$ 327.8$ 370.1$ 412.7$ 451.7$ 516.8$ 567.2$ Normalized Income Margin 8.2% 8.6% 8.9% 10.0% 10.8% 11.7% 11.7% Normalized Income Growth -13.4% 11.0% 12.9% 11.5% 9.4% 14.4% 9.8%



7.21

MarketHershey Heinz Financial Performance Metric

2000 2005 2000 2005Market

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 Calculation StrengthMarket

Market Capitalization Stock Price Per Share * Shares Outstanding HigherPrice/Earnings Stock Price Per Share / Earnings Per Share HigherMarket to Book Market Value / Book Value HigherShareholder Returns (Capital Appreciation + Dividends) / Beginning Stock Price HigherDividend Yield Dividend Per Share / Beginning Stock Price Higher



7.22

Table 7.7

Performance Metrics Summary


LiquidityCurrent Ratio Current Assets / Current Liabilities HigherNet Working Capital Current Assets - Current Liabilities HigherQuick Ratio (Current Assets - Inventories) / Current Liabilities HigherCash Ratio Cash / Current Liabilities Higher

ActivityTotal Asset Turnover Sales / Total Assets HigherFixed Asset Turnover Sales / Net Plant, Property, & Equipment HigherCurrent Asset Turnover Sales / Current Assets HigherAccounts Receivable Turnover Sales / Accounts Receivable HigherAverage Collection Period 365 days / Accounts Receivable Turnover LowerInventory Turnover Cost of Goods Sold / Inventory HigherInventory Days Outstanding 365 days / Inventory Turnover Lower

LeverageDebt to Equity Liabilities / Equity LowerCurrent Debt to Equity Current Liabilities / Equity LowerLong-Term Debt to Equity Long-Term Liabilities / Equity LowerFinancial Leverage Assets / Equity LowerCapitalization Ratio Interest Bearing Debt / (Interest Bearing Debt + Equity) LowerLong-Term Capitalization Ratio Long-Term Interest Bearing Debt / (Interest Bearing Debt + Equity) LowerInterest Coverage Earnings Before Interest and Tax / Interest Expense Higher

ProfitabilityNet Margin Net Income / Sales HigherPre-Tax Margin Pre-Tax Income / Sales HigherOperating Margin Operating Income / Sales HigherGross Margin (Sales - Cost of Goods Sold) / Sales HigherReturn on Assets Net Income / Assets HigherReturn on Net Assets Net Income / (Assets - Non Interest Bearing Current Liabilities) HigherReturn on Equity Net Income / Equity Higher

MarketMarket Capitalization Stock Price Per Share * Shares Outstanding HigherPrice/Earnings Stock Price Per Share / Earnings Per Share HigherMarket to Book Market Value / Book Value HigherShareholder Returns (Capital Appreciation + Dividends) / Beginning Stock Price HigherDividend Yield Dividend Per Share / Earnings Per Share Higher



7.23

Table 7.3 Table 7.7

Performance Metrics Performance Metrics Summary

Hershey Heinz Financial Performance Metric2000 2005 2000 2005

LiquidityCurrent Ratio 1.69 0.93 1.49 1.41 Net Working Capital ($ Millions) 528.4$ (109.3)$ 1,043.8$ 1,058.5$ Quick Ratio 0.90 0.53 0.74 0.92 Cash Ratio 0.04 0.04 0.07 0.42

ActivityTotal Asset Turnover 1.11 1.13 1.06 0.84 Fixed Asset Turnover 2.41 2.91 3.99 4.12 Current Asset Turnover 2.95 3.43 2.97 2.44 Accounts Receivable Turnover 10.06 8.65 7.60 8.16 Average Collection Period 36.3 42.2 48.0 44.7 Inventory Turnover 4.08 4.86 3.62 4.54 Inventory Days Outstanding 89.4 75.1 100.9 80.4

LeverageDebt to Equity 1.93 3.21 4.55 3.06 Current Debt to Equity 0.65 1.49 1.33 0.99 Long-Term Debt to Equity 1.28 1.72 3.21 2.07 Financial Leverage 2.93 4.21 5.55 4.06 Capitalization Ratio 49.2% 63.3% 72.0% 64.3%Long-Term Capitalization Ratio 42.8% 48.0% 71.1% 61.3%Interest Coverage 8.19 9.78 5.19 6.62

ProfitabilityNet Margin 8.8% 10.2% 6.7% 8.4%Pre-Tax Margin 14.3% 16.0% 10.6% 11.9%Operating Margin 16.3% 17.8% 13.5% 15.2%Gross Margin 35.3% 38.7% 38.5% 36.0%Return on Assets 9.7% 11.5% 7.1% 7.1%Return on Net Assets 11.4% 13.7% 9.1% 8.8%Return on Equity 28.5% 48.3% 39.5% 28.9%

MarketMarket 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%



7.24

DuPont Analysis



7.25

Table 7.8

Performance Metrics

Hershey Heinz2000 2005 2000 2005

Net Margin NI / Sales 8.8% 10.2% 6.7% 8.4% X

Total Asset Turnover Sales / Total Assets 1.11 1.13 1.06 0.84 =

Return on Assets Net Income / Total Assets 9.7% 11.5% 7.1% 7.1% X

Financial Leverage Total Assets / Equity 2.93 4.21 5.55 4.06 =

Return on Equity Net Income / Equity 28.5% 48.3% 39.5% 28.9%



7.26

DuPont Analysis - Prefix



7.27

Table 7.92005 DuPont Analysis

Pre-Tax After Tax Net Asset Return on Financial Return onMargin Retention Margin Turnover Assets Leverage Equity

Hershey Foods Corporation 16.0% 63.8% 10.2% 1.126 11.5% 4.206 48.3%Campbell Soup Company 13.6% 68.6% 9.4% 1.114 10.4% 5.335 55.7%ConAgra Foods, Inc. 7.4% 59.4% 4.4% 1.145 5.0% 2.618 13.2%General Mills, Inc. 17.4% 63.4% 11.0% 0.622 6.9% 3.183 21.8%H.J. Heinz Company 11.9% 71.1% 8.4% 0.843 7.1% 4.064 28.9%Kellogg Company 14.0% 68.8% 9.6% 0.962 9.3% 4.630 42.9%Kraft Foods Inc. 10.9% 70.6% 7.7% 0.592 4.6% 1.947 8.9%Sara Lee Corporation 4.8% 78.3% 3.7% 1.336 5.0% 4.905 24.5%Smucker (J.M.) Company 9.9% 63.7% 6.3% 0.775 4.9% 1.559 7.6%Tootsie Roll Industries, Inc. 23.3% 68.0% 15.8% 0.599 9.5% 1.318 12.5%Wm. Wrigley Jr. Company 18.1% 68.5% 12.4% 0.933 11.6% 2.014 23.4% Industry Average - Weighted 11.2% 67.9% 7.6% 0.821 6.2% 2.610 16.2% Industry Average 13.4% 67.7% 9.0% 0.913 7.8% 3.253 26.2%

Chap 7

Documents

corporate

strategic

equity current

share earnings

net assets

net margin

net income

cost management