Krispy Kreme Doughnuts. Inc. Ratio Analysis Liquidity Ratios As shown in Exhibit 1. quick ratio for Krispy Kreme bit by bit rose from 1. 05 to 2. 72. during 2000 to 2004. And current ratio changed with the similar form. Generally. a speedy ratio of 1 is considered good in most industries. As for Krispy Kreme. the speedy ratio is ever higher than 1. and the highest point is 3. 25 in 2004. This means that the company had good liquidness. However. on May 2. 2004 merely about the clip Krispy Kreme announced inauspicious consequences. both the speedy ratio and the current ratio of the company decreased. From the Krispy Kreme’s balance sheets we can see that within three months the company’s current assets decreased by 22. 899. while stock lists increased. And current liabilities increased 9813. as book overdraft and accumulated disbursals increased unusually. Compare to other quick-service eating house as per exhibit 2. Krispy Kreme’s quick ratio and current ratio both are much higher. While the mean liquidness ratios of these 12 companies are 0. 795 and 1. 170. which are lower than half of the ratios from Krispy Kreme. Thus. the Krispy Kreme held much more current assets than needed. And the current assets may lose efficiency.
Leverage Ratios As shown from Exhibit3 & A ; 4. after 2000. both Krispy Kreme’s debt-to-equity ratio ( D/E ) and debt-to-capital ratio ( D/C ) are in a low degree. which is better. It’s more noteworthy when compared with other quick-service eating house. The mean debt-to-equity ratio and debt-to-capital ratio are 53. 41 % and 64. 18 % . Krispy Kreme’s debt-to-equity ratio and debt-to-capital ratio are 11. 26 % and 10. 12 % . Krispy Kreme held less debt compared to shareholders’ equity. So the company raised money chiefly from equity funding than debt funding. Activity Ratios From Exhibit 5. we can garner that the stock list. receivables and plus turnover from 2000 to 2004 are comparatively stable. The activity ratio with the greatest fluctuation is the hard currency turnover ratio. This fluctuation can be attributed to the increased hard currency retentions KKD held from 2000 to 2003.
Exhibit 6 illustrates how Krispy Kreme’s activity ratios are much lower than the industry norm. Receivables turnover for Krispy Kreme was 9. 7. The industry norm was 37. 51. This indicates that debitors of Krispy Kreme are slow in paying back the company. If we calculate the days’ in gross revenues receivable. the industry norm is 9. 73 yearss whereas Krispy Kreme takes 37. 63 yearss to roll up its debts. This increases the opportunities of bad debt. The exhibit besides highlights Krispy Kreme’s hapless stock list turnover. 17. 76. which suggests that the ring company had excessively much capital tied up in stock list particularly when compared to the fact that the industry’s mean stock list turnover was 64. 69. Krispy Kreme’s plus turnover rate. at 1. 01. is besides lower than the industry norm of 1. 615. This conveys the fact that Krispy Kreme isn’t expeditiously pull offing its assets. Profitability Ratios As shown in exhibit 7. the net net income border and operating net income border are swerving upwards from 2000 to 2004. Return on assets and equity declined from 2002 to 2003.
This was partly due to the equity loss incurred by Krispy Kreme on joint ventures. As shown in exhibit 8. Krispy Kreme is on par with the industry norm every bit far as profitableness ratios are concerned. In fact. the EBIT border for Krispy Kreme. 15. 34. is higher than the industry norm of 12. 18. Warning Signs: Below are the warning marks appeared in Krispy Kreme regulative filings good before the stock monetary value started to fall: Changes in CFO/COO Position There was a changeless alteration in the CFO place. Merely after the IPO in 2000. Krispy Kreme replaced longtime Chief Financial Officer Paul Beitbach with John Tate. Breitbach was a traditional conservative CPA. while Tate was a more aggressive fiscal type who was forced out as CFO of Williams-Sonoma after losing two quarterly net incomes prognosiss. ( Intelligibly. he made certain non to lose any net incomes marks while at Krispy Kreme. ) Tate was promoted to COO in 2002. and longtime accountant Randy Casstevens was promoted to the top finance topographic point. Casstevens lasted less than 18 months and turned in a “purely voluntary” surrender merely five months before the company’s foremost quarterly net incomes deficit. To replace Casstevens. the company brought in Michael Phelan. a cardinal member of the investing banking squad that executed Krispy Kreme’s IPO and follow-on offering. who in bend lasted less than two old ages in the place.
Insider Share Dumping When Krispy Kreme went public in 2000. about 75 % of its portions were “locked up” – insiders who owned them were non permitted to sell for an eighteen-month period. Equally shortly as the lockup period expired. executives and board members sold 1. 85 million portions. or 20 % of the portions subject to the lock-up understanding. By 2004 CEO Livengood had sold over 1 million portions ( about 40 % of his retentions ) for net returns of over $ 40 million. despite holding antecedently made pledges that he wouldn’t sell company stock. The high degree of stock gross revenues by insiders while the company was publishing glowing fiscal studies should hold alerted stockholders to a possible job. Man-made Leasing Soon after it went public. Krispy Kreme arranged to finance a new $ 35 million mill in Effingham. Illinois with a man-made bank-financed rental. which would let them to maintain a big long-run debt off their balance sheet and avoid raising their debt ratio from 26 % to 36 % .
Executive Conflict Of Interest ( 1 ) In early 2003 Krispy Kreme spent $ 39 million to get Montana Mills. a concatenation of 30 upscale “village staff of life stores” based in Rochester. N. Y. Almost $ 30 million of the purchase monetary value was allocated to goodwill. although the construct was unproved and Montana Mills had ne’er antecedently shown a net income. In what appears as an obvious struggle of involvement. COO John Tate had served on the Montana Mills Board of Directors for 14 months old to the acquisition. Not surprisingly for a non-core venture. Montana Mills showed a $ 2 million loss in the twelvemonth after it was acquired. and in mid-2004 the concatenation was closed down. doing a $ 35 million income statement charge. ( 2 )
In its first two old ages as a public company. Krispy Kreme had a policy which allowed senior executives to do private investings in newly-established country franchisees. and Scott Livengood finally had ownership bets in seven big franchised operations. In an agreement reminiscent of antique extortion operations. Livengood and other Krispy Kreme executives were allowed to “muscle in” on new franchise trades – they could buy equity bets even when the franchisee group did non desire them as spouses. Krispy Kreme Accounting Red Flags: A Authoritative Case of “Accounting Fraud” 1 ) Krispy Kreme was really aggressive in its gross acknowledgment. 2 ) The largest individual franchise buyout ( $ 67 million ) was owned by two present and past Krispy Kreme Board members. 3 ) The monetary value paid for most of the buyouts was $ 11. 2 million per shop at a clip when a new franchise could be set up an equipped for approximately $ 1. 5 million. 4 ) They bought out a fighting Michigan franchisee and agreed to raise the purchase monetary value from $ 26 million to $ 32 million so that the franchisee could afford to shut two shops and to settle its delinquent debts owed to Krispy Kreme. therefore avoiding a bad debt loss.
CONCLUSION During the Krispy Kreme stock monetary value runup of 2000-03. a series of early warning marks appeared. but investors seemed to disregard them. While each of these marks separately do non bode a approaching catastrophe. when taken as a whole they should hold served as a warning to investors: Extensive insider share-selling Significant struggles of involvement among senior directors and the Board of Directors An unwise investing in a non-core concern High turnover in the CFO place A willingness to purchase out the franchise rights of insiders at premium monetary values History of operating losingss at the franchisee degree. a willingness to utilize accounting games to avoid seting debt on the balance sheet A disturbingly consistent tendency of crushing quarterly EPS marks by merely plenty to gain important fillips for executives.
Wise investors should non hold been surprised when the stock monetary value began to fall sharply in 2004. And from our point of position this company would hold done better with its conservative attack and high morality on portion of top Management.