Krispy Kreme

1. From the Income Statement and Balance Sheets, the following observations are noted:

• The number of outstanding shares has increased significantly. This in effect reduces the EPS (Earning per share). EPS is considered one of the foremost factors to evaluate a company’s performance. Since, EPS is so low, it makes the company less lucrative in the eyes of the investors.

• The revenue has gone down and at the same time operating expenses, SG&A expenses have gone up, thus reducing the Operating Income.

• The Net Income has gone down by over 56 percent in the final 3 months.

• The Depreciation expense shows an increasing trend. This reduces the taxable income, but at the same time it increases the cash flow, which might not always give the right picture about the company’s performance as the accounting principles are not in line with the GAAP.

• The company’s balance sheet shows a rapid increase under the Net property and equipment section. This shows that a lot of new stores were opened, but the income statements for the same period is not very bright. Hence the ratio of income earned per unit investment is abysmal.

2. From the financial ratios we can make the following observations.

• The ideal current ratio of any firm is expected to be 2. I case of KKD it is much higher than that. But looking at the balance sheet for KKD tells us that a sizeable contribution for this has been the inventories and deferred income taxes (this actually represents a future liability). This makes the current assets unusually high w.r.t the current liabilities. The current liabilities has very low values under “Taxes payable”. This is the reason behind the high Current and Quick ratio.

• Leverage ratio is used to measure how much a firm relies on debt financing. Greater the debt, higher is the leverage. The leverage ratios in the case of KKD show good numbers and its ability to pay its interest expenditure is seen.

• Inventory turnover gives us an idea about the efficiency with which the inventory is being utilised to generate revenues. When this figure for KKD is compared to others in the industry, it shows that KKD has not done too well. The inventory is too large and there has to be some efficient management for handling it.

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