Is The Hershey Company's (NYSE:HSY) ROE Of 42% Impressive?

The Hershey Company (NYSE:HSY), a leading manufacturer of chocolate and non-chocolate confectionery, has been generating impressive returns for its shareholders. With a return on equity (ROE) of 42%, Hershey stands out in the consumer staples sector, particularly when compared to its peers. This article will delve into Hershey's ROE, its drivers, and the sustainability of its high returns.

Hershey's High ROE: A Driver of Shareholder Value

Hershey's ROE of 42% indicates that the company is highly efficient at converting shareholder equity into profits. This high ROE is a testament to Hershey's strong brand portfolio, operational efficiency, and effective capital structure. The company's portfolio of beloved brands, such as Hershey's, Reese's, and Kit Kat, commands premium pricing and high customer loyalty, contributing to its profitability and ROE.



Drivers of Hershey's High ROE

Several factors contribute to Hershey's high ROE:

1. Strong Brand Portfolio: Hershey's iconic brands, such as Hershey's, Reese's, and Kit Kat, are well-known and loved by consumers, enabling the company to charge premium prices and maintain high customer loyalty. This strong brand portfolio contributes to Hershey's profitability and ROE.
2. Efficient Operations: Hershey's operations are highly efficient, with a return on assets (ROA) of 12.75% and a return on capital (ROIC) of 16.44%. This indicates that the company is effectively utilizing its assets and capital to generate profits, which contributes to its high ROE.
3. High Gross Margin: Hershey has a gross margin of 44.46%, which is higher than the industry average. This high gross margin contributes to Hershey's high ROE by providing a larger profit margin to reinvest in the business.
4. Effective Capital Structure: Hershey uses a high amount of debt to increase returns, with a debt-to-equity ratio of 1.24. This leverage boosts Hershey's ROE, but it also puts the company at risk if credit markets change.

Sustainability of Hershey's High ROE

While Hershey's high ROE is impressive, it's essential to consider the sustainability of its debt level in the long term. Hershey's debt-to-EBITDA ratio of 1.88 suggests that its debt level is sustainable in the short to medium term. Additionally, Hershey's interest coverage ratio of 14.52 indicates that the company has a strong ability to cover its interest expenses, further supporting the sustainability of its debt level.

Conclusion

Hershey's ROE of 42% is indeed impressive, driven by its strong brand portfolio, efficient operations, and effective capital structure. While Hershey's high debt levels may pose some risks, its debt-to-EBITDA ratio and interest coverage ratio suggest that its debt is sustainable in the short to medium term. As Hershey continues to generate strong returns for its shareholders, investors should monitor the company's debt levels and interest coverage to ensure the long-term sustainability of its high ROE.