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Krispy Kreme Financial Health Analysis ACC 226 Depreciation Analysis: Depreciation is the term used for the decline of an object value over time. Krispy Kreme’s depreciation is calculated using the straight line method. Benefits from asset are more likely to be constant over its live, thus making straight line method of depreciation more appropriate as it results in a constant annual depreciation change. Krispy Kreme uses SFAS-142 for accounting of intangible assets.

Per this method intangible assets identified with an indefinite life are not amortized and now are subject to an impairment test. Use of SFAS-142 results in more volatility in reported income as impairment losses may occur irregularly and in varying amounts. A possible explanation for the difference is amounts is that Krispy Kreme may have acquired plant assets for a note to pay later, another possible explanation is Krispy Kreme disposed of some plant assets at a loss during the year. Company Stock Analysis:

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The No of common shares outstanding increased from 54,271 thousand to 56,295 thousand in 2003, a rise of 3. 73%. For 2003, the weighted average common shares used were 55,093 and for 2002 were 53,703. For both years the shares outstanding at year-end were slightly higher than the average shares outstanding during the year. As of February 3, 2003 Krispy Kreme did not hold any treasury stock. Krispy Kreme also has no preferred stock or outstanding. No cash dividends were paid to common stockholder’s for fiscal years 2003 and 2002.

This indicates that Krispy Kreme’s stock is a “Growth Stock” and explains why it has not paid any dividends. Krispy Kremes basic earnings per common share figure have consistently grown over this 3 year period. The 2003 amount is considerably larger than the prior years. This could have improved more if not for the higher than proportional increase in depreciation and the amortization for the arbitration award in 2003. In the years 2002 and 2003 Krispy Kreme did not report any hanges in accounting principals nor had any occurrence of extraordinary items for fiscal years 2002 or 2003. There are also no gains or losses on disposal of business segment for fiscal years 2002 or 2003. Cash Flow Statement Analysis: Krispy Kreme used the indirect method of reporting operating cash flows. Krispy Kreme did not pay dividends in 2002 and 2003. In 2001 the cash provided by operating activities was $32,112 (thousand), while the cash dividends were $7,005 (thousand). Cash provided by operating activities exceeded the cash paid for dividends.

In 2001, the largest item in reconciling the difference between net income and cash flow from operations is the increase in accrued expenses of $7,966 (thousand), while in 2002 the largest item in reconciling the difference between net income and cash flow from operations is the $13,317 increase in receivables; and finally in 2003, the largest item in reconciling the difference between net income and cash flow from operations was the tax benefit from the exercise of nonqualified stock options of $13,795,000.

In 2002, the largest amount in investing activities is $37,310 (thousand) for additions to property and equipment. In 2003, the largest amount in investing activities is $83,196 also for additions to property and equipment. The cash outflow in investing has increased in 2003 In 2002, the largest amount in financing activities is the cash inflow of $17,202 (thousand) which are the proceeds from sales of stock. While is 2003, the largest amount in financing activities is the $2170 (thousand) cash outflow for repayment of long term debt.

Liquidity has improved from 2002 to 2003 which is evident from the fact that the increase in the cash flow provided by operating activities has increased from $36, 210 (thousand) in 2002 to $51,036 (thousand) in 2003. Krispy Kreme is funding capital requirements primarily through cash flow generated from operation. Income Statement Trend Analysis: For both years 2002, and 2003, the trend percents for operating expenses (which solely consists of cost of goods sold) are less than that for revenues. This shows that the Krispy Kreme is effectively controlling its costs of sales since they are growing slower than the growth in revenues.

The trend percents for General and Administrative expenses however exceed those of revenues in 2002, but this has changed in 2003. In both years the trend percents for income tax are noticeable higher that that for revenue, but the bottom line trend percents for net income is well above those for revenues which is a positive sign. “The growth in General and Administrative expenses is due to increases prototype expenses, increases personnel and related salary and benefit costs to support our expansion, and other cost increases necessitated by the growth of the company. ? Management Analysis: From the “Management Discussion & Analysis” section, it is evident that Krispy Kreme is facing many risks that are being faced by almost all companies in the market. Those risks include: • The company’s abilities to manage growth • Possible delays in store openings • Quality of franchise store operations • Changes in consumer’s preferences • Competition • Compliance with government regulations Forward looking statements are based on management’s beliefs, assumptions, and expectations of our future economic performance…Forward looking statements involve risks and uncertainties that may cause our actual results, performance or financial condition to differ materially from the expectations of future results…Factors that could contribute to these differences include, but are limited to: the company’s ability to continue and manage growth; delays in store openings; the quality of franchise store operations; the price and availability of raw materials needed to produce doughnut mixes and other ingredients…”?

Financial Ratios Analysis: (Exhibit I) On examining the financial statements of Krispy Kreme, it is clear that the company is a healthy company as can be seen from the following report. The company’s Current ratio has increased from 1. 94 to 2. 36 for the years 2002, and 2003, respectively. Quick ratio increased from 1. 63 to 1. 96, and the cash ratio has increase from 0. 42 to 0. 54 for the same period. This indicates an improvement in the company’s liquidity (ability to meet its short-term obligations as they become due).

Kripsy Kreme’s Total Debt ratio has increased from 0. 27 in 2002 to 0. 33 in 2003, and the Debt-to-Equity ratio has increased from 0. 36 to 0. 50 in the same period. This shows that the company is now relying more on debt financing rather than equity financing which would reduce its cost of capital, but exposed the firm more to the threat of bankruptcy if it does not meet its interest obligations as they become due. The sharp drop in the Times Interest earned ratio from 127. 25 in 2002 to 31. 5 in 2003 serves only to confirm the fact that the company’s long-term solvency ratios have been deteriorating. The company’s Inventory Turnover has decreased from 22. 49 in 2002 to 18. 83 in 2003, and the Day’s Sales in Inventory has increased from 18. 61 to 23. 31 for the same period, this shows that the company’s ability in managing its inventory has dropped. The Receivables Turnover ratio has dropped from 16. 87 in 2002 to 16. 05 in 2003, while the Day’s Sales in Receivables have increased from 24. 89 to 25. 2 over the same period. The Total Assets Turnover ratio has also deteriorated from 1. 85 to 1. 48 for the same period. The deterioration in the above ratios show that the company has experienced a decline in asset efficiency which is a negative point concerning the health of the company. Krispy Kreme has experienced a slight growth in the Profit Margin from 6. 69% in 2002 to 6. 81% in 2003, while the Return on Assets has declined from 10. 33% to 8. 16%, and the Return on Equity has declined from 14. 06% to 12. 25%, for the same period.

The decline in the Return on Assets is a direct consequence of the decline in asset efficiency; Krispy Kreme has to revise its asset utilization. The ratios discussed above are solely bases on the analysis of Krispy Kreme’s financial statements, yet these ratios need to be compared to industry averages to fully judge the financial position of the company compared to the industry. Conclusion: Krispy Kreme appears to be a successful company, yet it has to pay more attention the way it manages its assets since these are the resources that the company is using to generate revenue. ?Ibid ?Ibid

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