Case Project #1: Krispy Kreme Doughnuts, Inc.
What can the historical income statements (case Exhibit 1) and balance sheets (case Exhibit 2) tell you about the financial health and condition of Krispy Kreme Doughnuts, Inc.?
The income statement and balance sheet provides an overview of the company’s expenditures, future debt constraints, and how the company has done in previous years allowing investors and other relevant parties to make future predictions for investment purposes. Details of the income statement provide insight into Krispy Kreme Doughnut’s current state as well as their future as a company and the balance sheet is more like a snapshot of their assets and liabilities. Reviewing the income statement, the first thing that became apparent was the rise in total revenue as well as operating expenses. The revenues grew from $220MM to about $666MM and net income skyrocketed from about $6MM to $57MM. The operations expenses also increased significantly, over 100%, from $190MM to $507MM. These increases promote that the organization is in good operating health and is likely attributed due to factors such as acquisitions of a new brand that is already established (Mountain Mills) or their expansion of the Krispy Kreme stores nationwide as well as entering the global market. However it is probable as well that it is a combination of profitable new stores in financially sound sectors and the rebound of the Mountain Mills brand. While income from operations reports as a large increase year over year, which is positive, there are some signs of negative growth for the income from interest is significantly low. This provides evidence that they called in some of their accounts receivable or some franchise stores likely closed. Looking at the company’s interest income from the FY2001 through FY2003, the interest income was reported significantly higher due primarily to their aggressive accounting methods, which made the firm appear much healthier to external parties than the company actually was. Additionally, the company continued to report an increasing net income between the FY2001 and FY2004, growing by nearly 104%. Overall however the historical income statements show Krispy Kreme having rapid improvement and that business was profitable. The balance sheets of Krispy Kreme look very similar to their income statement(s). The majority of line items have experienced great growth. On the asset side of the balance sheet, the total assets increased year over year and by over 600% within the four year time-span. The company also eliminated their long-term investments in FY2004 and increased their intangible assets from $0 to $176MM. The dramatic increase of intangible assets was due to their aggressive accounting treatment for franchise acquisitions. Reviewing the liabilities and equities side of the balance sheet, a concerning detail is easily noticed in regards to revolving lines of credit. In a span of four years, it went from $0 to $7.3MM and then jumped significantly to $87MM in just one year. This is particularly concerning and should cause areas of concern for revolving lines of credit are typically used to provide liquidity for a company’s day-to-day operations.
How can financial ratios extend your understanding of financial statements? What questions do the time series of ratios in case Exhibit 7 raise? What questions do the ratios on peer firms in case Exhibits 8 and 9 raise?
Through the use of financial ratios, one is able to understand a company’s short-term and long-term solvency, their asset management or turnover activity, as well as their profitability measures and market value. In addition, financial ratios can also be used as a quick comparison to other companies and to the same company over time. The liquidity ratios of Krispy Kreme doughnuts shed light on the short-term solvency of the company or the ability of the company to cover its short-term bills without...
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