Liquidity
Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash (Kimmel, Weygandt & Kieso, 2005). One liquidity ratio that measures the organizations ability to pay is the current ratio. Current ratios demonstrate the organizations ability to turn short term assets into cash to pay short-term liabilities. An organization with a ratio above one exhibits their ability to pay their current liabilities. An organization with a healthier ratio displays a proficient operating cycle in which receivables are collected rapidly. A ratio below one suggests the organization cannot pay their current liabilities. A quick ratio remove inventory from the current assets to calculate a more accurate analysis. A quick ratio is important to analyze because the current ratio maybe overestimated if inventory cannot be immediately turned into cash. The organization’s financial strength is better understood by the quick ratio. Tootsie Roll is part of the confectionery industry. Tootsie Roll Industries current ratio is 3.4:1 and quick ratio is 1.8:1 based on the second quarter 2012 financial records. Compared to other industry giants like Hershey current ratio of 1.5, Rocky Mountain current ratio of 3.7, and Nestle with current ratio of 1.3, Tootsie Roll is performing well.
Solvency
Solvency ratios indicated the organization’s ability to pay interest as it comes due and to repay the balance of a debt due at its maturity (Kimmel, Weygandt & Kieso, 2005). The debt to asset ratio is a percentage that provided information of how much debt is financed by creditors rather than by stakeholders. Financing through creditors is considered riskier than through stakeholders. Therefore, an organization with a higher percentage is viewed with a greater risk of not paying its debts. Organizations with stable earnings, such as utility companies can have a higher percentage of debt to asset. However, organizations with fluctuating earning high percentage rate is unfavorable. Another solvency ratio important to calculate is the organization’s proportion of equity to debt. This computation displays the organization financing its assets through stakeholders. A total debt to equity ratio determines the organization’s financing approach. The high debt to equity ratio potentially indicates that the organization will generate more revenue than without the financing. By increasing revenue by more than the debt cost then the shareholders benefit. However, if the cost of the debt of financing outweighs the potential return then the organization may suffer. Tootsie Roll’s debt to total asset ratio is 23.1% and the total debt to equity ratio for Tootsie Roll is 1.1% based of the second quarter financials. Industry confectioner’s debt to equity ratio for Hershey is 2%, Nestle is 23%, and Rocky Mountain is 0%. Tootsie Roll is within the industry standards and in comparison to Nestle, Tootsie is performing more efficiently.
Profitability
Profitability ratios measures the income or operating success of a company for a given period of time (Kimmel, Weygandt & Kieso, 2005). Profitability ratios ultimately dictate the operating effectiveness of the organization. Organizations with high profitability ratios suggest management’s effectiveness in utilizing the assets to generate revenue. A ratio that effectively reports the organization’s ability to convert the money it has invested into net income is the return on assets ratio, ROA. The higher the ratio means that the organization is earning more on less investment. Tootsie Roll’s return on assets ratio is 4.30%. An additional ratio to measure the success of an organization is the return on equity. The return on equity measures the percentage of shareholders equity revealing the profit an organization generates with shareholders investments. Tootsie Roll’s return on equity is 6.83%.
Loan Justification
Tootsie Roll Industries in Chicago, IL is a public company categorized under Lollipops and Other Hard Candy. It was launched in 1896 by the popularity of a single product and has grown to become one of the country’s largest candy companies. There are approximately 300 employees. The once small company has expanded with operations throughout North America, and distribution channels in more than 75 countries. The principal officers are Melvin J. Gordon, Chairman and Chief Executive Officer and Ellen R. Gordon, President and Chief Operating Officer. Tootsie Roll Industries has been engaged in the manufacturing and sale of confectionery products for 111 years.
Applying state-of-the-art production technology and exacting quality control checks are the focus of the company. Tootsie Roll Industries assures that every product line that rolls off the conveyor belt are of the highest quality; every time. Tootsie Roll Industries seeks to continue expanding though the latest technology available. The requested loan amount is $1.5 million with a requested loan term of 5 years and a 10-year amortization schedule. The purpose of the loan is to make improvements to several properties and production lines. Tootsie Roll Industries, Inc. has a good credit history and has a business credit rating of 80 with net earnings of $51,625 as of 12/31/2007 (Tootsie Roll Industries Inc., 2012).
Focus of Loan
Tootsie Roll Industries has been a staple part of American history for many generations. With rapid changes in technology, as well shifting in demographics, Tootsie role realized it must invest in the company in order to maintain its heritage.
Once received, the primarily goals for the loan are to continue to upgrade facilities, equipment and business system to add capacity, increase efficiency as well improve quality. (Wiley, 2012). With advanced production processes available, it is important for Tootsie Roll management to review existing systems and determine where investment in production systems will be advantageous. Replacing antiquated machinery and technology will be the focal reason for using the extend credit. The production system of any large-scale operations such as Tootsie Roll is significant to managing inventory, product tracking and quality assurance assessments. Investing in the company’s production infrastructure will provide increased opportunities for gaining momentum and assure the company’s competitive advantages throughout the world.
The secondary use of the loan will be to restructure and reintroduce the company’s longstanding commitment to quality to its customers regardless of age or geography. The iconic legacy of Tootsie Rolls is recognized by its assortments of great tasting candy as well as its distinguishable packaging. With changing needs of each generation, it is important to re-launch a legacy marketing campaign that seeks to again make the popular brand a household name.
There is no question that Tootsie Roll is a recognizable brand; however, its nostalgic memory may be fading with the younger generation as well as many its overseas customers. The loan will be utilized to launch a marketing project that once again creates memories and generate new ones to its customers. Investing in the company and redefining its brand is important to Tootsie Roll Industries. Through its production improvements and customer marketing it will again become a symbol of America’s iconic company.
Tootsie Roll Industries is conservative when managing the assets and minimizes cost where necessary. Tootsie turns to outsourcing to minimize cost as it aims for long-term growth. Tootsie Roll Industries states “We seek to outsource functions where appropriate and to vertically integrate operations where it is financially advantages do so.” (Kimmel, 2009, pp. A-2)
As a candy manufacturer Tootsie has many avenues for bringing in revenue. Candy is sought by movie goers at concessions stands, employees seek for a snack during breaks, students look for sugar during breaks. The famous brand is sold by bulk and in small packages that many can purchase to satisfy the craving for a piece of gum or chocolate. The sales increase during the Halloween season. “These gains were offset by the conclusion of a contract to manufacture product under a private label for a third party and non-recurring sale of certain inventory to a foreign distributor in 2006” (Kimmel, 2009, pp. A-3)
Looking at the financial highlights Net property, plant and equipment stands out in December 2006 being at $ 202,898 and decreases in 2007 $201,401, an adjustment in the machinery and operations to increase product and revenue.
In presenting the loan package, Tootsie Roll Industries must disclose cost of food has risen; therefore, the main ingredients utilized in the making of the famous candies have risen as well. Soybean oil, non-fat milk, and corn are the ingredients used in producing the candy. “Corn, of course, the key ingredient in corn syrup, which is one of our highest volume commodities. Milk and soybean oil are also important ingredients used in Tootsie Roll and other product that we manufacture.” (Kimmel, 2009, pp. A-5)
In the Management’s Discussion and Analysis of financial Condition and results of operations over view, management discusses that the “ company used cash flow in 2007 to pay cash dividends to $17, 542 to repurchase and retire $27,300 of outstanding shares and make capital expenditures of $14,767.” (Kimmel, 2009, pp. A-6)
Although prices on main ingredients, milk, packaging, and crude oil (used for delivering of goods) remain high Tootsie Roll Industries has plans to continue to use competitive bidding and purchasing in volume to reduce cost. Tootsie Roll Industries continuously invests in making operations better to serve customers, however the decision in continuously making changes of new software or operational improvements can create a bigger expense because employees need to be trained for using new tools. The goal is to continue to invest capital and keep production and distributions high.
the proceeds from the loan for Tootsie Roll will continue to be used as cash flow to pay dividends and retire outstanding shares to make capital expenditures; due to the continuous rise in prices, the company has not been able to recover.
The loan approval will allow Tootsie Roll to continue to expand in areas such as Canada, Mexico, Europe, Asia and South and Central America where higher sales and bigger profits are made. The loan agency will take into consideration the risk factors such as fluctuations in the cost of ingredients, competition, and marketing, and the effects of discount rates, sales growth and profit, the effects of currency rates and interests, taxes, law and regulations.
