Krispy Kreme Doughnuts, Inc.

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Krispy Kreme Doughnuts, as discussed in Darden Business Publishing Case UVA-F-1479, appears to be at a crossroads. After years of astronomical growth, the company find its share price plummeting in the midst of discoveries about faulty accounting practices. The following paper examines several issues behind the sudden decline First, the historical income statements and balance sheets are examined to determine the financial health and current condition of the company. This is followed by an analysis of key financial ratios across time and versus industry standards. Next, the paper addresses if Krispy Kreme is financially healthy at year-end 2003 and, if so, what accounts for the firm’s recent share price decline. The paper concludes…show more content…
Figure 1. Krispy Kreme Analytical Financial Ratios The debt-to-equity ratio in 2003 and 2004 imply the company is also using more long-term debt from shareholder equity to run the company. In 2004, the balance sheet shows a jump in the number of share of common stock. The selling of more stock to pay for long term debt is not usually a good signal to investors. It may mean a corporation wants more cash to finance activities, which in conjunction with other figures could mean it is trying to offset some losses. A lower times interest earned ratio may also mean fewer earnings are available to meet interest payments and that the business is more vulnerable to increases in interest rates. This ratio has declined dramatically since 2002. Negative findings of the company are apparent when looking at the activity ratios. The receivables turnover ratio has been declining since 2001. This decline in receivables turnover implies that company is not being as efficient in the collection of accounts owed as it should be. Not collecting the credit in a timely manner means that they are not gaining interest for the firm, but potentially giving others a free loan for the time being. Furthermore, the asset turnover ratio for Krispy Kreme has been declining since the company went public in 2000. As seen in Figure 1, the ratio was at a high in 2000 at 2.10 and

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