Tootsie Roll Industries Loan Package

Evelyn Davies, Tony Rice, Jeanne’ George, Cody Snell

ACC/561

May 14, 2012

Jill Datema

Tootsie Roll Industries Loan Package

One of America’s most recognized candy companies since 1896, Tootsie Roll Industries Inc., has expanded to become one of the biggest and strongest candy companies in the nation. However, in an effort to increase market share, Tootsie Roll Industries seeks additional funding from creditors. After reading the financial statements of Tootsie Roll Industries, Team “A” conducted research to complete a comprehensive loan package that meets guidelines and requirements by prospective creditors and lending authorities to ensure funding for its new marketing efforts. The loan package created for Tootsie Roll Industries is detailed here to secure a loan that will increase its total liabilities by 10%, or an amount of almost $17.5 million. Extensive research enabled Team A to provide a ratio analysis of the financial statements. The submission justifies the reason for the loan by expounding on its need to re-launch and re-brand. Last, it explains the intended use of the proceeds. This submission further explains how having granted the loan may affect the company.

Ratio Analysis of the Financial Statements

A ratio analysis of the financial statements shows the stability of an organization. In order to receive the most benefit of a ratio analysis, it is best to compare a company’s ratios to others companies within the same industry. In the case of Tootsie Roll, we made comparisons with the D&B key business ratios for Standard Industrial Classification 5145, Confectionery. D&B key business ratios were available as far back as 2009. While Tootsie Roll financials are for year 2007, we feel that the basis for comparison is still relevant, but should be used with caution. The 2009 D&B ratios included a sampling of 32 other confectioneries. Tootsie Roll Industries is a viable company and the ratios reveal that the company is sound and would be a good risk. The ratios reveal that Tootsie Roll Industries can pay short term and long-term debts efficiently. The current assets outweigh the current liabilities 3.445:1, which reveal stability and solidify the company as a lucrative growing company. The liquidity, solvency, and profitability analyses are listed below.

Liquidity

The liquidity ratio is a system used to show a company’s ability to pay its short-term debts. The current ratio reveals if the company is capable of paying its debts within 12 months and working capital reveals the current position of the company. The Liquidity ratios are the following:

Current Assets/Current Liabilities = Current Ratio.

$199,726/$57,972 = Current Ratio of 3.445:1.

Current Assets – Current Liabilities = Working Capital

$199,726 - $57,972 = Working Capital of $141, 754.

When comparing the current ratios, Tootsie Roll was near the upper limit of the D&B ratios at 3.8. This indicates that Tootsie Roll is of strong standing and is very capable of paying short-term debts with comparison to other similar companies. A bank loan would further improve this ratio, and would grant Tootsie Roll the freedom to make aggressive moves in the present without hurting its abilities to repay other financial obligations.

Profitability

Profitability ratios include profit margin on sales, gross profit rate, and return on assets to name a few. Profit margin on sales shows the profitability on sales after cost of goods is deducted, the gross profit rate is the percentage or rate of the profit margin, and the return on assets reveals how a company is using its assets to precipitate earnings. The Profitability ratios are the following:

Net Income/Net Sales = Profit Margin on Sales

$51,625/ $492,742 = Profit Margin on Sales of 10.48%.

Gross Profit/ Net Sales = Gross Profit Rate.

$165,047/$492,742 = Gross Profit Rate of 33.50%.

Net Income/Total Assets = Return on Assets (ROA).

$51,625/812,725 = Return on Assets of 6.35%.

Tootsie Roll is also a very profitable company compared to others in the industry. The upper limit of the D&B ratios indicates that other top performers had a ROA of 7.7%. Using the funds from the loan will allow Tootsie Roll to launch an aggressive advertising that will grow income and improve profitability.

Solvency

Solvency ratios include debt to total asset ratio, free cash flow, and cash debt coverage ratio. According to www.businessdictionary.com, the debt to total asset ratio measures the assets that are financed by the company and reveal its financial risk, free cash flow is the cash available to the shareholders of a company, and the cash debt coverage ratio compares the net cash from operations to liabilities and reveals a company’s ability to pay debts from cash generated by operations. The Solvency ratios are the following:

Total Liabilities/ Total Assets = Debt to Total Assets Ratio.

$174,495/812,725 = Debt to Total Assets Ratio of 21.47%.

Cash provided by operations – Capital expenditures – Cash Dividends = Free Cash flow.

$90,064 – $14,767 – $17,542 = Free Cash Flow of $57,755.

Cash provided by operations/ Average Total Liabilities = Cash Debt Coverage Ratio. $90,064/$167,726.50 = Cash Debt Coverage Ratio of 53.70%.

These ratios all indicate that Tootsie roll is at low risk of defaulting on any loans or other financial obligations. The low debt to total assets ratio indicate little impact on the business even if a large portion of them were to become due. The is supplemented by a high cash debt coverage ratio that indicates that regular operations can cover a large portion of any debt that may come due as well.

Purpose of the Loan

Tootsie Roll Industries will need a significant business loan to launch their Tootsie Roll product into the American spotlight. The loan will be associated with an advertising campaign meant to saturate the market with the Tootsie Roll name. This advertising campaign will place Tootsie Roll candy among today’s hottest sellers. The A-Team has chosen Omnicorp advertising agency, one of the best in New York to head this campaign in its home city. Omnicorp directives are to re-launch the Tootsie Roll candy by targeting a niche market with the introduction of a new

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