Tootsie Roll Industries, Inc. has been engaged in the manufacture and sale of candy since 1896. Its products are sold under the familiar brand names Tootsie Roll, Tootsie Roll Pops, Charms, Blow Pops, Cella's, Mason Dots and Mason Crows. Tootsie Roll operates four plants in Illinois, New York, Tennessee and Mexico. Tootsie Roll is traded on the New York Stock Exchange and maintains its head office in Chicago, Illinois.
Tootsie Roll's financial statements for Year 5 and Year 6 are provided below.
Tootsie Roll Industries Inc.
Balance Sheet
As of December 31, Year 6 ($000s)

-Tootsie Roll Industries Inc.
Income Statement
As of December 31,Year 6 ($000s)

Selected Financial Ratios

Referring to the financial statements for Tootsie Roll and based on the Du Pont analysis,what main reasons explain the difference(s)between Tootsie's ROE and the industry average ROE?
I.Tootsie does not have enough leverage.
II.Tootsie has more leverage than the industry.
III.Tootsie manages their assets poorly - low total asset turnover.
IV.Tootsie manages their assets poorly - high total asset turnover.

Question

Tootsie Roll Industries, Inc. has been engaged in the manufacture and sale of candy since 1896. Its products are sold under the familiar brand names Tootsie Roll, Tootsie Roll Pops, Charms, Blow Pops, Cella's, Mason Dots and Mason Crows. Tootsie Roll operates four plants in Illinois, New York, Tennessee and Mexico. Tootsie Roll is traded on the New York Stock Exchange and maintains its head office in Chicago, Illinois.
Tootsie Roll's financial statements for Year 5 and Year 6 are provided below.
Tootsie Roll Industries Inc.
Balance Sheet
As of December 31, Year 6 ($000s)
 
-Tootsie Roll Industries Inc.
Income Statement
As of December 31,Year 6 ($000s)

Selected Financial Ratios

Referring to the financial statements for Tootsie Roll and based on the Du Pont analysis,what main reasons explain the difference(s)between Tootsie's ROE and the industry average ROE?
I.Tootsie does not have enough leverage.
II.Tootsie has more leverage than the industry.
III.Tootsie manages their assets poorly - low total asset turnover.
IV.Tootsie manages their assets poorly - high total asset turnover.

Quizplus · Accepted Answer

Tootsie has a lower amount of leverage than the industry.
Tootsie has a much higher net profit margin than the industry (12% v. 8.2%), but this advantage is offset by poor asset management. The total asset turnover for Tootsie is 1.22 but it is 1.64 for the industry. Despite the poor asset management, Tootsie has a higher ROA than the industry. But the ROA would be even higher were it able to take advantage of its higher profitability (net profit margin) through greater asset management. Thus, total asset turnover and leverage both explain Tootsie's poor ROE relative to the industry.