Balance Sheet and Market Value

Balance Sheet and Market Value
In order to estimate the company’s liquidity and the ability to pay off long-term debts, two main financial figures are used: debt ratio and debt-to-equity ratio. In order to calculate debt ratio of the company, it is necessary to divide total liabilities by the sum of total liabilities and total equity (Albrecht & Stice & Stice, 2007). In order to calculate the debt-to-equity ratio, it is necessary to divide total liabilities by total equity. The value of debt ratio indicates how much the company relies on debts to finance its equity, and debt-to-equity ratio measures the company’s financial leverage (Albrecht & Stice & Stice, 2007). The aim of this essay is to calculate these two key financial values for the Hershey Company and two of its competitors, and analyze the balance of debt and equity in these companies.

First of all, it is necessary to calculate market value of equity for Hershey Company. Current price of its shares is $47.51 (Google Finance, 2010). According to the balance sheet of Hershey Company by 31.12.2009, its number of shares outstanding was 228 million (Google Finance, 2010). Thus, market value of equity for Hershey Company is: MV(HSY)=228*47.51=10832.28 ($million).

Moreover, according to the balance sheet of the Hershey Company, its total liabilities to the end of 2009 year comprised 2954.57 millions of dollars (furthermore, the calculations will be done in millions of dollars, unless other units are indicated). Short-term liabilities constituted 910.63, and long-term liabilities - 2043.94 (Google Finance, 2010). Thus, the calculations for debt and debt-to-equity ratio for total, long-term and short-term liabilities are the following:

a) for total liabilities:
debt ratio = 2954.57/(2954.57+10832.28)=0.21;
debt-to-equity ratio = 2954.57/10832.28 = 0.27.

b) for short-term liabilities:
debt ratio = 910.63 / (910.63+10832.28) = 0.077
debt-to-equity ratio = 910.63 / 10832.28 = 0.084

c) for long-term liabilities:
debt ratio = 2043.94 / (2043.94+10832.28) = 0.16
debt-to-equity ratio = 2043.94/ 10832.28 = 0.19

Generally, debt-to-equity ratio over 0.4 is the sign that urgent measures have to be taken to improve the company’s financial situation. In my opinion, the total debt and debt-to-equity ratio of the Hershey Company are moderate. Though this value is quite low for the food industry, for the company it would be better to continue reducing debts, especially in case if interest rates are likely to increase. It is also possible to see that short-term debts almost do not influence the key ratios, while long-term liabilities constitute a significant part of debts. At the same time, the dynamics of the balance sheet of previous years for the Hershey Company shows that long-term liabilities and total liabilities are decreasing from year to year, and thus, no special measures should be done in order to reduce debt.

Let us provide the same calculations for two competitors of the Hershey Company: Kraft Foods Inc. and General Mills.
Kraft Foods Inc.: share price - $29.15, shares outstanding – 1477.88; total liabilities - 40,838.00, current liabilities - 11491.00, long-term liabilities - 29347.00 (Google Finance, 2010). Market equity: 29.15*1477.88 = 43080.20.
a) for total liabilities:
debt ratio = 40838.00/(40838.00+43080.20) = 0.51
debt-to-equity ratio = 40838.00/43080.20 = 1.06
b) for short-term liabilities:
debt ratio = 11491.00 / (11491.00+43080.20) = 0.22
debt-to-equity ratio = 11491.00 / 43080.20 = 0.28
c) for long-term liabilities:
debt ratio = 29347.00 / (29347.00+43080.20) = 0.28
debt-to-equity ratio = 29347.00/ 43080.20 = 0.39
General Mills:
share price - $35.41, shares outstanding – 656.50; total liabilities - 12276.00, current liabilities – 3769.10, long-term liabilities - 8506.90 (Google Finance, 2010). Market equity: 35.41*656.50 = 23246.67.

a) for total liabilities:
debt ratio = 12276.00/(12276.00+23246.67) = 0.35
debt-to-equity ratio = 12276.00/23246.67= 0.53

b) for short-term liabilities:
debt ratio = 3769.10 / (3769.10+23246.67) = 0.14
debt-to-equity ratio = 3769.10 / 23246.67= 0.16

c) for long-term liabilities:
debt ratio = 8506.90 / (8506.90+23246.67) = 0.27
debt-to-equity ratio = 8506.90/ 23246.67= 0.37

According to the above-listed calculations, the highest debt-to-equity ratio among three competitors belongs to Kraft Foods Inc. This is quite expectable, because in February 2010 Kraft Foods acquired Cadbury Plc. (Warrilow, 2010), and this decision required significant investment. However, for Kraft Foods it is urgent task to reduce long-term debts, because the values of debt ratio and debt-to-equity ratio are both higher than critical ones. For General Mills, level of debts is also quite high, and steps for reducing debts have to be included into financial planning. Thus, among three competitors Hershey Foods has the lowest debt-to-equity ratio, which indicates its strong market position. Also, this position allows to balance risk and tax issues.

References

Albrecht, Steve V. & Stice, James D. & Stice, Earl K. (2007). Financial Accounting. Cengage Learning.
Google Finance. (2010). Available from http://www.google.com/finance.
Warrilow, Stephen. (2010). Kraft Cadbury - Change Management Implications. Available from http://ezinearticles.com/?Kraft-Cadbury---Change-Management-Implications&id=3607916

Balance Sheet and Market Value 8.2 of 10 on the basis of 1028 Review.