Tootsie Roll Industry Inc. needs to secure a loan to ensure the company’s growth for the future. To secure the loan the company must assemble a loan package to submit to the lender. In the loan package the company must include a ratio analysis of the company’s financial statements to show the financial stability and profitability of the company. The company must also provide a justification for the loan. In addition, the company must also provide a plan to show how the proceeds will be allocated. It is imperative that Tootsie Roll Industries, Inc. provides each component to receive the loan to grow the company.
Ratio Analysis The ratio analysis consists of three categories: liquidity, solvency, and profitability. The liquidity of the company is important to determine the capability of the company to pay obligations and meet unexpected needs for cash. The solvency is important to determine the ability of the company to survive over a long period. Finally, the profitability is to measure the income and operating success of a company for a given period of time (Financial Analysis, University of Phoenix, 2012). This information is available in the balance sheet, cash flow statement, and the income statement.
To determine the liquidity of Tootsie Roll Industries Inc. the working capital, current ratio, and the inventory turnover ratio was used. To determine the working capital subtract the current liabilities from the current assets. Tootsie Roll Industries Inc. ’s working capital is $141, 754. To determine the current ratio the current assets are divided by the current liabilities, which equals a current ratio of 3. 4 for Tootsie Roll Industries, Inc. Finally, the inventory ratio is found by dividing the cost of goods sold by the average inventory. Tootsie Roll Industries Inc. s inventory ratio equals 5. 4. The liquidity of the company is healthy because the working capital is high, the current ratio is above the 1. 5 threshold, and the inventory turnover is at a good rate. Therefore, the liquidity shows that the company can pay obligations and meet unexpected needs for cash. To determine the solvency of Tootsie Roll Industries Inc. the debt to total asset ratio and the cash debt coverage ratio was used. To determine the debt to total asset ratio the total liabilities is divided by the total assets. This equals a ratio of 0. 21 for Tootsie Roll Industries Inc.
This ratio indicates that the total debt to the total assets is very low. To determine the cash debt coverage ratio the cash provided by operations is divided by the average total liabilities. Tootsie Roll Industries Inc. ’s cash debt coverage ratio is 0. 54, which indicates that cash provided by operations is almost double what the company’s debt is. In all the solvency of Tootsie Roll Industries Inc. can conclude that the company survive over a long period of time. To determine the profitability of Tootsie Roll Industries Inc. the gross profit rate, profit margin ratio, and asset turnover ratio were used.
To determine the gross profit rate the gross profit is divided by the net sales, which equals a rate of 0. 34 for Tootsie Roll Industries Inc. To determine the profit margin ratio the net income is divided by the net sales, which equals 0. 1 for Tootsie Roll Industries Inc. Finally, the asset turnover ratio is determined by net sales divided by the average total assets, which equals 0. 61 for Tootsie Roll Industries Inc. From these calculations it can be determined that the company is profitable over a given period of time. Justification for Loan
The main reason a company like Tootsie Roll, Inc would be subject to the acquisition of a loan is the increase in costs for ingredients in the making of its products. Compared to 2006, sales, net earnings, earnings per share in 2007 decreased whereas costs increased because of the high-demand for ingredients to make the candies and products Tootsie Roll are known for. The decrease in the value of the U. S. dollar also contributed to higher cost of production in outside manufacturing plants in Canada with adverse effects in profitability and margin (Kimmel, Weygandt, & Keiso, 2009, pp.
A-3) Food industry companies have suffered increase is cost in an extreme way, but this is not only reflected by Tootsie Roll alone. The reason Tootsie Roll may need this loan is to offset the high costs of ingredients for expansion in different departments as well as to incur in short-term obligations that can ease currents market conditions and not jeopardize the long term mission and goals and the possibility to increase inventory at lower costs with larger purchase of materials in higher numbers.
Tootsie Roll is a value-oriented organization with over a century of production and experience and is always involved in the latest technology for the creation of its products, this possibly another reason to get the loan to increase the technological capacity and create the best product to Tootsie Roll customers.
By creating this quality, sales will increase and create a strong financial position that enables the company to distribute dividends, support Tootsie Roll brand in the marketplace, repurchasing of stock, and creation of new and innovative products, and the consideration of acquisition and expansion (Kimmel, Weygandt, & Kelso, 2009, pp. A-2). The best way to reach the consumer is through marketing.
Loan provisions can be applied to the creation of new marketing strategies that can target and reach new customers. The careful and effective promotion of Tootsie Roll marketing will create the desire for customers to take the product out of retailer’s shelves because with promotion and the recognition of brand name all kinds of demographics will find satisfaction in the sorted variety of products and quality of flavor.
The loan package can have different reasons and interpretations on how to distribute the funds in the company and how these funds will affect the operation and functionality without mentioning the long-term debt that this loan represents to the company and how this long-term liability will increase and affect the current financial rations within the organization. A positive aspect is that Tootsie Roll, Inc. s a profitable, solvent, and liquid company with the ability to repay debt with high working capital and low debt ratios and high collateral instruments that create attraction to any bank or loan institution to credit easily Tootsie Roll with a corporate loan. Tootsie Roll has the credible financial statements, according to General Accepted Accounting Principles (GAAP) and with accordance with Securities Exchange Commission (SEC) guidelines. These justifications for loan acquisitions will make Tootsie Roll a stronger company to secure it long-term accomplishments and goals.
Loan proceeds and effect to the company Tootsie Roll will allocate the funds to the areas like product cost and technology that will drive the company to continue growth. The loan will permit Tootsie Roll to acquire new updated equipment for better production. More over part of the allocation of these funds will open the research, development, and manufacture of healthier and cheaper ingredients for its products will contribute to the diversification.
Acquiring new robotic production machines or equipment will decrease labor wages and require fewer employees in production; new technology and updated management techniques will be delivered through the funds. Approval of the loan will affect Tootsie Roll in the way its products are manufactured and distributed. Loan acquisition will increase the productivity of the company because of the acquisition of new assets to benefit production. Through the downturn in the economy Tootsie Roll Industries continues to focus on the bottom line.
The company has adjusted product prices or package weights to offset the higher costs (Kimmel, Weygandt, & Kieso, 2009). The proceeds of the loan will also let the company to create a bigger advertising and public relations campaign, and expand their web presence by expanding the websites, creating different languages sites to serve better the customers of each country Tootsie Roll serves. Incorporating the company in to social networking and e-commerce into the web marketing program will let any customer, anywhere in the world order products online. How many licks” Tootsie pop theme through campaigns on several children’s channels on cable television, several of our products received extensive exposure through showing of popular special interest features, including segments on the Food Networks Unwrapped programs, a segment exploring “snack food technology” on the History channels’ Modern Marvels, and John Ratzenberger’s Made in America Show on the Travel Channel (Kimmel, Weygandt, & Keiso, 2009, pp. A-5). Conclusion
Conclusively, this loan package explains Tootsie Roll past, present, and future of the company and where the loan funds will be secure through current assets outweighing its liabilities and increasing its profitability. Paying off this loan will increase the value of its assets and reduce its liabilities. With the plan on how the loan money will proceed, Tootsie Roll will pay off the loan before its maturity. Furthermore, the grant of the loan will enable Tootsie Roll to a global expansion of the brand, products, and customers.
Because of Tootsie Roll strengths the company will continue its contribution with the environment and community to keep their support. Tootsie Roll is confident that the reputation of many years in business and its good financial stability will provide the information required for lenders to secure the money needed for continue success.
Kimmel, P. D. , Weyhandt, J. J. , & Kieso, D. E. (2009). Accounting: Tools for business decision making (3rd. ed). Hoboken, NJ: John Wiley & Sons. University of Phoenix. (2012). Financial Analysis: The Big Picture. Retrieved from University of Phoenix, ACC561-Accounting website.