Tootsie Roll Industries is one of America’s most recognized confectionary companies and has been in business for more than 111 years, manufacturing and selling some of the most popular candies in the world. Tootsie Roll wants to secure a loan that will help increase the company’s total liabilities by 10% in the tune of $2.5 million. This loan package is attached to an updated business plan that provides the lender with the company’s history, a vision statement, its market, products, services, management, how the loan will impact the business, and the method of repayment. This paper will detail different ratio analyses, loan justification, and how the company plans to use the proceeds. Solvency Ratios
Solvency ratio is the process of analyzing the company’s capacity to pay its obligations while keeping the business going (Martin, 2009). Total assets are measured in terms of percentage against total liabilities: Solvency = Total Assets/Total Liabilities
The ratio of at least 1.0 or greater shows a good financial standing and long range financial solvency. During 2007, Tootsie Roll’s total assets were $812,725 against total liabilities of $174,495 or a solvency ratio of 4.656. The company has assets four times of liabilities including cash investments with maturity of three months or less, the investments are marketable securities, and not actively traded (Tootsie Roll Body, 2008). A negative change in valuation of investments if sold is immaterial to affect liquidity ratio for 2007. In 2006, the company had a solvency ratio of 4.818 derived from total assets of $791,639 and total liabilities of $160,958. The ratio trends prove that Tootsie Roll is financially healthy.
Profitability ratios measure the company's success over a period. These ratios help investors assess the company's ability to repay loans. Three important ratios to assess are the profit margin ratio, the gross profit rate, and the payout ratio. These ratios are in the table one below. The profit margin ratio is calculated by dividing net income by net sales. This ratio measures each dollar of sales that equates to net income. In 2007, every dollar of sales added a 10% increase in net income. The second ratio to review is the gross profit rate. This is calculated by taking the gross profit and dividing it by net sales. This ratio is important because it shows the company's ability to have a sales price above the cost of goods sold. The final ratio is the payout ratio that can be calculated by taking the cash dividends declared on common stock and dividing it by net income. Investors will be particularly intrigued by this ratio as it measures the percentage of net income paid out in dividends. Table 1: Profitability Ratios for Tootsie Roll Industries
Net Sales 492,742.00 495,990.00 287,739.00
Net Income 51,625.00 65,919.00 77,227.00
Cash Div Declared on
Common Stock 17,421.00 17,170.00 15,406.00
Total Revenue 497,717.00 501,140.00 491,084.00
Cost of Goods Sold 327,695.00 311,267.00 299,683.00 Gross Profit 170,022.00 189,873.00 191,401.00
Profit Margin Ratio0.10 0.130.27
Gross Profit Rate0.35 0.380.67
A company's liquidity is its ability to meet its near-term obligations, and it is a major measure of financial health. This is done by comparing a company’s most liquid assets; those that can be easily converted to cash against its short-term liabilities (Kimmel, Weygandt, & Kieso, 2009, p. 673). When working capital is negative, a company may not be able to pay short-term creditors, and the company may ultimately be forced into bankruptcy (Kimmel et al., p. 59). A positive working capital means that the company has the cash on hand to pay its current debts should they need to do so. Working capital = (Current Assets) - (Current...