Executive Summary for the Krispy Crème Case: Financial Ratio Analysis

Executive Summary for the Krispy Crème Case
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Executive Summary for the Krispy Crème Case
Financial Ratio Analysis
Historical income statements from Case Exhibit 1, as well as balance sheets (Case Exhibit 2), are invaluable for explaining the financial health of Krispy Crème as of August 1, 2004. Accordingly, key financial ratios can be used to determine the company’s financial progress over a specific period as compared to competitors. Analysis dimensions include short-term solvency, long-term solvency, asset management, profitability, and overall company value. Time series ratios in Exhibit 7, as well as ratios for peer firms in Exhibits 8 and 9, raise various questions. Firstly, it is puzzling how the company’s current ratio continues to grow and surpasses its biggest competitors with current ratio values of 1 or below 1. While short term solvency is good, a very high current ratio may indicate that the company has missed some opportunities. Therefore, a second question arises concerning what Krispy Crème may have been doing with its liquid assets which could have increased its profitability like other players in the industry.
The equity ratio also provides perspectives on the financial health of the company, particularly how it manages leverage. In the foregoing, Krispy Crème has had a fairly consistent equity ratio since 2001 but is below par when compared to its competitors’ equity ratio. This raises a third question which builds on the second one concerning what else Krispy Crème should invest or something that should be done to utilize its leverage just like the competitors to achieve performance efficiency. Another ratio is the total asset turnover which consistently decreased every year between 2000 and 2004; an indication that the firm was inefficient in the way it used its assets to drive sales. Growing companies typically find it difficult to maintain high total asset turnover as noted in competitors like McDonald's and Wendy’s. However, a fourth question arises which is why Krispy Crème ...