Krispy Kreme Case – Discussant
Krispy Kreme’s rapid expansion may have been the reason for its rapid fall. Recently becoming a publicly traded company in April 2000, Krispy Kreme shares had seen amazing growth as they were selling for 62 times earnings. Naturally, this created a buzz around Wall Street, and an “obsession” with Krispy Kreme began as it became one of the hottest stocks on the market. Yet, analysis of the fundamentals of Krispy Kreme needed to by analyzed to see the true threats the company had brought upon itself.
Analysis of Krispy Kreme’s business model and strategy gives a good insight as to how the company …show more content…
This insight can lead us to believe that the value of Krispy Kreme was inflated, yet when addressing if this was sufficient evidence to drive the large amount of value out of Krispy Kreme, we can look at how the accounting practices could be fixed and how comparable firms are operated. Taking a look at the ratios of comparable firms, we how Krispy Kreme differs from the norm within the quick-service restaurants.
The first number that needs to be analyzed would be the Debt/Equity ratio. For Krispy Kreme, we find a number of 11.26 which is substantially lower than those of comparable firms. When looking at the balance sheet, we a huge increase from 2002 to 2003 in long-term debt, an amount of nearly $46 million dollars up from $4 million. This increased their debt level by a multiple of 11, yet their D/E ratio was still significantly lower than that of comparable firms. Most of the comparable firms had a ratio between 30 and 70. Breaking down this formula to its roots, Krispy Kreme’s market value of equity was inflated when compared to other firms. The large amount of debt taken on within the past year should have led to an increased number for this ratio consistent with comparable firms. Yet, the low value of 11.26 means the market value for this stock was so high that even with the new debt taken on this ratio was