Week 2 Case Analysis Essay

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Jeff Tenney

KRISPY KREME DOUGHNUTS, INC.

Study Questions

1. What can the historical income statements (case Exhibit 1) and balance sheets (case Exhibit 2) tell you about the financial health and current condition of Krispy Kreme Doughnuts, Inc.?

The income statement and balance sheets show that Krispy Kreme has been steadily increasing revenues from 2000 to 2004. Total revenues have increased from $220,243 in 2000 to $665,592 in 2004. Additionally net income has exploded from $5,956 in 2000 to $57,087 in 2004; the financial health of the company is stable and the company is improving substantially from quarter to quarter. Furthermore, the company also experienced increased in total assets, liabilities, accrued expenses, equity, and retained earnings. These are all key indicators of long-term company viability.

2. 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? Is Krispy Kreme financially healthy at year-end 2004?

The ratios suggest that Krispy Kreme is continuing to grow into a stable company. The data shows that Krispy Kreme has encouraging liquidity ratios that improve over the years. The company has continues to increase debt however this is not uncharacteristic of a new, rapidly growing company. The question that should be raised here is that if the company is continuing to improve why are equity returns so slow moving. Compared to peers, Krispy Kreme has one of the lowest inventory turnover ratios; significantly lower debt, more receivables, higher operating expenses, and higher profit margins. However, due to end of period losses and decreased stock market activities, the company could be classified as unhealthy year ending 2004.

3. In light of your answer to the previous, what accounts for the firm’s recent share price decline? (see Exhibits 4 and 5)

The recent share price declines are most likely attributed to stockholders losing confidence in
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