Operating and leverage ratios are really important for sense checking our model when we're finished building our forecasts. It ensures that our model really hangs together and is actually the main benefit of building a three-statement model. If we were only forecasting earnings and cash flows, we wouldn't be able to look at how those earnings and cash flows impact on the company's assets and financing. And therefore, we wouldn't be able to check whether these impacts are appropriate or even viable. Our income statement statistics shown here, focus on margins. We can look at the trend in these to see whether they're sensible given where the company is in its lifecycle. In particular, be cautious about margins expanding significantly throughout your forecasts, particularly if the company's maturing and these margins are above average for industry levels. Typically, companies which generate high margins attract competition, and this competition then erodes margins during the period where the company has a competitive advantage. In our forecasts, the margins here are fairly stable, which is pretty typical from mature company operating in a mature industry like Hershey.

Our balance sheet operating statistics focus on operating working capital and non-current assets as a percentage of revenue, as well as return on capital which is taxed EBIT divided by net debt plus equity. So, these metrics focus on capital efficiency. The lower the operating working capital, and non-current asset ratios are the more efficient the business as the company can generate more revenue out of fewer assets. Whilst the higher the return on capital the more efficient the business as it can generate more profit out of a smaller capital base. Again, the trend in these ratios is really important for checking whether our assumptions are sensible. If return on capital is growing rapidly whilst the operating working capital and non-current asset ratios are contracting, we're assuming that the company is becoming more and more efficient. Although this might make sense for a young growing company as companies tend to become more efficient as they scale up, it wouldn't make sense for a mature company like Hershey unless we know that its strategy will result in major efficiency improvements. The last set of statistics here focus on leverage. We have net debt to EBITDA, interest cover, and net debt to total capital. Again, we look at the trend in this ratio, and in particular we look out for two things. Firstly, if leverage is increasing, is this the extent that the company's credit risk is becoming concerning? For example, could this trigger a breach of covenants? Secondly, if leverage is decreasing rapidly, is this because net debt is falling because the cash balance is growing rapidly? This could mean that the company is becoming inefficient by hoarding cash. Remember that companies earned relatively low interest rates on their cash balances. So, rather than generating small amounts of interests, they're usually better off investing this cash in their own operations or paying the cash out to shareholders as a dividend. In our Hershey forecasts, we can see that leverage is falling but not dramatically. So, we can take some comfort that our forecasts are broadly sensible.