Case Study in Corporate Finance Krispy Kreme Doughnuts, Inc. Presented by – Group A2
Krispy Kreme Doughnuts, Inc. Ratio Analysis Liquidity Ratios As shown in Exhibit 1, quick ratio for Krispy Kreme gradually rose from 1.05 to 2.72, during 2000 to 2004. And current ratio changed with the similar pattern. Generally, a quick ratio of 1 is considered good in most industries. As for Krispy Kreme, the quick ratio is always higher than 1, and the highest point is 3.25 in 2004. This means that the company had good liquidity. However, on May 2 , 2004 just about the time Krispy Kreme announced adverse results, both the quick ratio and the current ratio of the company decreased. From the Krispy Kreme’s balance sheets we can see that within three months the company’s current assets decreased by 22,899, while inventories increased. And current liabilities increased 9813, as book overdraft and accrued expenses increased remarkably. Compare to other quick-service restaurant as per exhibit 2, Krispy Kreme’s quick ratio and current ratio both are much higher. While the average liquidity ratios of these 12 companies are 0.795 and 1.170, which are lower than half of the ratios from Krispy Kreme. Thus, the Krispy Kreme held much more current assets than needed. And the current assets may lose efficiency.
Leverage Ratios As shown from Exhibit3&4, after 2000, both Krispy Kreme’s debt-to-equity ratio (D/E) and debt-to-capital ratio (D/C) are in a low level, which is better. It’s more notable when compared with other quick-service restaurant. The average debt-to-equity ratio and debt-to-capital ratio are 53.41% and 64.18%. Krispy Kreme’s debt-to-equity ratio and debt-to-capital ratio are 11.26% and 10.12%. Krispy Kreme held less debt compared to shareholders’ equity. So the company raised money mainly from equity financing than debt financing. Activity Ratios From Exhibit 5, we can gather that the inventory, receivables and asset turnover from 2000 to 2004 are relatively stable. The activity ratio with the greatest fluctuation is the cash turnover ratio. This fluctuation can be attributed to the increased cash holdings KKD held from 2000 to 2003. Exhibit 6 illustrates how Krispy Kreme’s activity ratios are much lower than the industry average. Receivables turnover for Krispy Kreme was 9.7. The industry average was 37.51. This indicates that debtors of Krispy Kreme are slow in paying back the company. If we calculate the days’ in sales receivable, the industry average is 9.73 days whereas Krispy Kreme takes 37.63 days to collect its debts. This increases the chances of bad debt. The exhibit also highlights Krispy Kreme’s poor inventory turnover, 17.76, which suggests that the doughnut company had too much capital tied up in inventory especially when compared to the fact that the industry’s average inventory turnover was 64.69. Krispy Kreme’s asset turnover rate, at 1.01, is also lower than the industry average of 1.615. This conveys the fact that Krispy Kreme isn’t efficiently managing its assets. Profitability Ratios As shown in exhibit 7, the net profit margin and operating profit margin are trending upwards from 2000 to 2004. Return on assets and equity declined from 2002 to 2003. This was partially due to the equity loss incurred by Krispy Kreme on joint ventures. As shown in exhibit 8, Krispy Kreme is on par with the industry average as far as profitability ratios are concerned. In fact, the EBIT margin for Krispy Kreme, 15.34, is higher than the industry average of 12.18. Warning Signs: Below are the warning signs appeared in Krispy Kreme regulatory filings well before the stock price started to fall: Changes in CFO/COO Position There was a constant change in the CFO position. Just after the IPO in 2000, Krispy Kreme replaced longtime Chief Financial Officer Paul Beitbach with John Tate. Breitbach was a traditional conservative CPA, while Tate was a more aggressive financial type who was forced out as CFO of Williams-Sonoma...
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