Krispy Kream is a historic and iconic franchise. Its products have often resulted in cult like followings that have been very beneficial to shareholders and executives alike. However, like many companies during the early 2000's, the company fell on hard times. Accounting mistakes, coupled with executive turnover, and misplace product changes; all hindered the company's growth. As the case indicates, through the confluence of multiple mistakes, the company quickly went from an analyst's favorite stock to its most despised.
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.
The company, according to the financial statements seems to be in good health. The company, during fiscal year 2004 had enough cash and cash equivalents to cover the immediate obligations of the business. The company's long-term debt has risen substantial, but given the companies ability to generate earnings, the debt load does not seem too excessive. The company however does have an excessive amount of accounts receivable which may indicate the company is loosening credit terms for its consumers and suppliers. Removing the roughly $45,000 dollars from accounts receivable would still leave the company with roughly $130,000 of current assets. This is more than two and a half times the company's current liabilities of $54,000. This ratio indicates that the company is able to pay many of its short-term obligations to its creditors. However, by loosening credit terms the company will risk not getting paid appropriately for the services it provides. This could result, if a massive wave of defaults occurs triggered by a massive recession or depression like event. Although unlikely, the possibility that the company may not be compensated is real. The overall long-term debt of the company is questionable given the nature of the food and beverage industry. In some instances, the company may attract favorable credit terms which it can then use to expand, repurchase stock, or otherwise pay off other liabilities. In this case, the company, in recent years is expanding overseas operations in an effort to drive same store sales growth. In order to so effectively, the company is taking on debt to fund the expansion into other...
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