Krispy Kreme

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.?

When viewing the historical income statements and balance sheets, Krispy Kreme Doughnuts appeared to be financially healthy and in great condition. They experienced consistent growth from their IPO through 2004 with regards to total revenue, net income, and sales.

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 raise?

The financial ratios are no different from the financial data that back them, that is, they are just another view of the same data. That said based on the financial ratios, Krispy Kreme seems to be doing very good. Krispy Kreme has good liquidity as shown by looking at the current and quick ratio. Leverage is average, turnover is good, and profitability, which is based on net earnings and operating earnings, show that the firm is capable of covering its costs. Even when being compared to other firms in its industry, Krispy Kreme seems to be doing great.

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

According to the case study, Krispy Kreme experienced rapid growth because they were exaggerating their accounts by absorbing franchises without properly depreciating their value. When the public caught on to the fraud being committed, they reacted accordingly. I do not believe Krispy Kreme is financially healthy at the end of 2004. I believe they need to be audited by an outside accounting firm and they need to maintain their accounts with integrity rather than doing the bare minimum.