Ratio Analysis

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  • Topic: Generally Accepted Accounting Principles, Revenue, Profit
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Accounting and Finance: Managerial Use

February 19, 2011

Class Project: Ratio Analysis

The gross profit percentage is one of several key measurements a company uses in evaluating its financial performance. It helps a company to see what percentage of its earning after costs (for products and/or services) is profit. A higher gross profit percentage is generally preferred as it provides the company with financial resources to pay for research, product development, and other costs associated with running and growing a business. A company that has little gross profit has limited resources. Tootsie Roll and The Hershey Company both operate above the food processing industry average. Tootsie Roll operated at 36%, 5.6% higher than the industry average in 2009. The Hershey Company operated at 38.7%, 8.3% higher than the industry average and 2.7% higher the Tootsie Roll in 2009. Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Tootsie Roll has Net Sales of $499,331 and a Net Income of $53,475 giving them a 10.7% Profit Margin Ratio resulting in 11 cents of every dollar of sales resulted in Net Income for 2009. The Hershey Company has Net Sales of $5,298,668 and a Net Income of $435,994 giving them a 8.2% Profit Margin Ratio resulting in 8 cents of every dollar of sales resulted in Net Income for 2009.

Return-On-Assets tell you "what the company can do with what it's got", how many dollars of profits they can achieve for each dollar of assets they control. It's a useful number for comparing competing companies in the same industry. Tootsie Roll had an average of $625,886 of Total Assets and $53,475 in Net Income giving them a .06 Return-On-Assets. The Hershey Company had an average of $3,654,875 of Total Assets and $435,994 in Net Income giving them a .12 Return-On-Assets.

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