Krispy Kreme Doughnuts Case Study

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Krispy Kreme Doughnuts Case Study

Krispy Kreme was the hottest brand in America in 2003, however, its stock price plummeted more than 80% in the next 16 months. What had happened to this company? Why investors suddenly fleeing the popular Krispy Kreme? Answer following questions will help us find the solutions.

From the historical income statement and balance sheet, we notice that, from 2000 to 2004, the KK grew very fast and its net income increased substantially. For example, form 2003 to 2004, KK’s net income increased by 71%. In turn, the company experienced an increasing EPS which was rose from 0.15 to 0.92, and the price of company’s share jumped up by 120%. The historical income statement indicates that Krispy Kreme has a
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The debit/equity is lower than other restaurants, this ratio tells us that KKD is mainly rely on equity to raise money and finance the business. According to the balance sheet, we can get the same conclusion that the company is financing more assets with equity than with debt. KKD’s activity ratios, especially the receivables turnovers, are far below any other restaurants in industry. It indicates that KK’s cash collection is too slow and the credit is too loose. Profitability ratios indicate that KK’s profitability is good, for example, the net profit margin is ranked TOP 2 in industry. However, we should keep in mind that, the real net profit margin is under this level.

Although its cash holding is undesirable and its EBIT decreased, In general, Krispy Kreme is not in a financially unhealthy position at the end of 2004.
First of all, KK’s Debt/Equity is 0.34 in Aug, 2004,this ratio indicates that KK has a desirable capital structure and a manageable debt level. The low Debt/Equity means low risk. Also, the interest coverage is 8.7 which is also desirable because if business environment gets tough, KK can use its EBIT cover its interest expense 8.7 times.
But we have to notice that the decreased EBIT and small cash holdings will force KK in a financially inflexible position. If the manager doesn’t pay attention to those problems, the company will become financially unhealthy at last.
Krispy Kreme should focus on selling the

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