Krispy Kreme Doughnuts, Inc.

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 sheet are two accounting instruments that in conjunction are used to gage a company’s overall financial health.  Through table 1 and table 2, we can find out that KKD has some problems in the financial health. Although the revenues is still increasing year by year, the income of the second quarter is less than $6 million 908 thousand compared to the first quarter. Obviously, all kinds of expenses are increasing. Even the income from operations and interest are increasing, the expenses are increasing much faster. We could see the net income is growing on the whole but it's a lot less than the same period. Through exhibit 2 we can find out the total current assets and total assets are increasing. It’s seems like great but we need to pay attention to receivable account and inventories are increasing at the same time. There is one more thing we need to notice that is the liabilities increasing so fast. The financial health of KKD is not that good and his market share is shrinking. And one more thing we need to focus on that is the reacquired franchise rights dramatically increasing. Through this phenomenon we can infer one thing that is the profit would increasing quickly in a period of time. However, that may cause some problems in the future.

2.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 rises?

Both quick ratio and current ratio for Krispy Kreme experienced a consistent increase from 2000 to 2004. Through the current ratio for Krispy Kreme in 2004, we can find out that its current assets are 3.25 times their current liabilities. Current ratio of assets to liabilities of 2:1 is considered to be acceptable.  Obviously 3.25 was exceeding 2, the company had good market liquidity and great ability to meet debt. Generally, the quick ratio should be 1:1 or better.  Quick ratio for Krispy Kreme in 2004 was 2.72 exceeding 1, the company should be good now. It is important to compare these liquidity ratios relative to other firms in the Quick-Service Restaurants industry. Above all, compared to other firms in this industry, both quick ratio and current ratio for Krispy Kreme are the highest values. Since the average current ratio in this industry was 1.17 and the average quick ratio in this industry was 0.79 in 2004, it seems that Krispy Kreme did well in market liquidity. The inventory turnover, the asset turnover, and the receivables turnover for Krispy Kreme from 2000 to 2004 were very stable. And the cash turnover for Krispy Kreme in 2000 is 69.19, then it decreased to 15.26 in 2003, then it increased to 32.79 in 2004. Above all, I have to say through table 7and table 8 the company looks fine.

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

According to the case we can know the price of stock dramatically going down at may, 2004. Based on this, we can say，at the end of 2004, KKD’s financial is not healthy anymore.

4.In light of your answer to question 3, what accounts for the firm’s recent share price decline?

According to the question 3 there are five reasons cause the share price decline. There are two reasons for why the price going down. The first is about the “healthy claim”, doughnuts are not healthy enough, and people would like to eat something healthier. Because of this claim, many investors choose to not invest KKD anymore. On the other hand, there is no longer a high expectation for the development of this company. The company has developed too fast in the past few years. It looks good on the surface, but in fact, too fast will bring a lot of problems to the company.