Introduction
This piece of work is an analysis of Krispy Kreme Company. The Company, incorporated in the United States, produced food products majorly doughnuts. Like every Company, Krispy Kreme had a well planned out future and the only thing standing between it and success was time. According to the Company’s strategy, expansion involved opening up new stores in various Countries across the United States. To be specific enough, the case study states 500 new shops within five years. The company successfully opened up various stores like it had earlier planned. The easiest way to manage this was through franchising. The future of the Company started becoming cloudy due to the accounting malpractices. The Company’s accounting department entered unrealized profits in the Company’s books thus disregarding the matching concept. The aggressive acquisition of the franchise jeopardized the profitable relationship between the company and its franchises. The profitability levels of the company declined due to the events surrounding the acquisitions. In order to raise more money, the company sought to divest and close some of its outlets. The move interfered with the financial stability of the company. Below are the analyses of the company’s financial statement to, vividly bring out the picture.
Current financial Health of Krispy Kreme
The financial health of any organization is indicated by the elements of its financial statements. That is, the elements contained in the balance sheet, income statement and statement of changes in equity. To begin with, earning per share (EPS) of the company is currently higher at ($0.63) as compared to the previous year’s figure of ($0.59). Using this information alone, it is evident that the current financial health of the company is good. That is to say, Companies that pay cash dividend must be performing well financially. This is because many a company resorts to paying dividends in the form of shares to eliminate the cash dividend option. Still on the issue of dividend, the company decided to increase the amount of dividend. This is another indication that the company is healthy financially. This is because it has enough money to pay cash dividend and maintain a portion to run operating activities of the company. using net income is another way to measure financial performance of a company. Krispy Kreme’s current net income shows an increase in the figure from $ 8.2-9.6 million. Increase in net income was due to increase in revenue from $102.1-112.7 million indicating an increase in selling activities thus liquidity. Currently the company is less leveraged. This is evident by debt/equity ratio which is (27597/263039) = 0.1. From this ratio, the company has more than enough to pay for the debt since for every $1 equity, only $0.1 is contributed by the leverage. The Company is therefore, not at risk of being dissolved. Companies that are heavily leverage could default on debt repayments during tough financial conditions hence risk being liquidated.
Significance of financial ratios
Financial ratios are obtained by working out a mathematical relationship between the elements in the financial statements. This relationship enables users to better understand the financial health of companies as indicated by the statements. For instance, the government is interested mostly in utility companies like those that deal in energy supply and those that provide public services. In this case, the government will be interested in a company’s survival and ability to pay taxes. The government may also be interested in the employment levels of companies and will therefore use ratios to analyse and understand the financial health of various companies. Time series of ratios raises the questions of what the company could do to avoid negative figures in future. For instance, asset to equity ratio decreased from 1.5-1.46. Another question is why the inventory turnover ratio decreased. Ratios of peer firm enable an analyst to make a comparison of a company’s performance vi’s-Ă -vis other companies within an industry. An example of the question raised by peer ratio is, is the competitor’s performance better? For instance, how Starbucks Corporation managed to expand big enough to own 8500 coffee shops.
Krispy Kreme’s financial health at year end 2004
During this year, Krispy Kreme was in the midst of a downfall. The company had made serious accounting irregularities by engaging in unamortized acquisition of its franchises. It is the same period that the company inflated profit figures to attract investors. On the seventh May the same year, the company forecasted less earning than anticipated earlier. During the same year, Krispy Kreme divested and closed down several of its outlets. These decisions reduced the income level of the company. Lastly, it is during this year that the company’s shares were sold at the lowest price. Since the company’s earnings were declined and shares became less valued, the company is financially ill.
Drop in share price
The drop in share price was caused by poor financial performance of the company. A profitable company attracts investors because they are interested in the viability of a company. They are also interested in establishing whether a company is capable of paying dividends. Market demand for shares of a poor financially performing company is low thus share prices.
Intrinsic value
Intrinsic value is the real value of a firm. Krispy Kreme derives its real value from both market factors and financial statement. The company has developed a strong customer loyalty across the world due to constant delivery of quality. The value of the company’s total assets is another source of an intrinsic value.
In conclusion, during the year 2004, financial statements of the company justify a poor financial health. On the other hand, its current financial health is good.