Recent balance sheet information for two companies in the food industry, H.J. He
ID: 2350059 • Letter: R
Question
Recent balance sheet information for two companies in the food industry, H.J. Heinz Company and The Hershey Company, are as follows (in thousands of dollars):Net property,plant,and equipment:
H.J.Heinz:$1,998,302
Hershey:1,458,942
Current liabilities:
H.J.Heinz:2,062,846
Hershey:1,270,212
Long-term debt:
H.J.Heinz:5,076,186
Hershey:1,505,954
Other long-term liabilities:
H.J.Heinz:1,305,214
Hershey:540,354
Stockholder's equity:
H.J.Heinz:1,219,938
Hershey:318,199
a. Determine the ratio of liabilities to stockholders' equity for both companies. Round to one decimal place
H.J.Heinz:?
Hershey:?
b. Determine the ratio of fixed assets to long-term liabilities for both companies. Round to two decimal places.
H.J.Heinz:?
Hershey:?
c. Interpret the ratio differences between the two companies.
Explanation / Answer
liabilities to stockholders' equity H.J.Heinz:1,305,214 +2,062,846 +5,076,186 /1,219,938=6.922 Hershey:1,270,212 +1,505,954 + 540,354 /318,199 = 10.42 b. fixed assets to long-term liabilities H.J.Heinz:$1,998,302 /1,305,214 = 1.53 Hershey:1,458,942 /540,354= 2.7 c. H.J. Heinz uses much more debt than does Hershey Foods. This is evident in both ratios. The total liabilities to stockholders’ equity ratio shows debt at 6.992 times the stockholders’ equity for H.J. Heinz, compared to 10.42 times stockholders’ equity for Hershey Foods. H.J. Heinz’s ratio of total liabili- ties to stockholders’ equity is very high, and would indicate little additional capacity for debt. The ratio of fixed assets to long-term liabilities suggests the same relationship. This ratio divides the property, plant, and equipment (net) by the long-term debt. The denominator should not include the other long-term liabilities such as pensions and deferred tax credits because these items are not related to financing fixed assets. The ratio for H.J. Heinz is, again, aggressive with only 1.53 times of fixed assets covering the long-term debt. That is, the creditors of H.J. Heinz have $1.53 of property, plant, and equipment covering every dollar of long-term debt. The same ratio for Hershey Foods shows fixed assets covering 2.7 times the long-term debt. That is, the creditors of Hershey Foods have $2.7 of property, plant, and equipment covering every dollar of long-term debt. This would suggest that Hershey has stronger creditor protection and borrowing capacity than does H.J. Heinz.
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