These percentages reveal a slight improvement in performance for Hershey over the first three years of the analysis and a significant decline in the last two years. Tootsie Roll experienced a steady decline over the five-year period. These results indicate potential erosion in profitability for both companies’ recurring core business operations.
In Chapter 5 it was noted that investors are interested in assessing the amount, timing, and uncertainty of future cash flows and that accounting earnings have been found to be more useful than cash-flow information in making this assessment. Future cash-flow and earnings assessments have examined the relationship between corporate earnings and a company’s stock prices. One measure that has been found useful in assessing this relationship is a company’s price-earnings ratio (P/E ratio), which is calculated as follows: