Krispy Kreme 2004 - Questions Raised on Peer Comparison
QUESTIONS RAISED – PEER COMPARISON Question 1: High Liquidity Ratios Exhibit 8 shows that Krispy Kreme has the highest liquidity ratio as compared to others competitors. Having high liquidity ratios has its opportunity cost as redundant current assets may be used for further profit generation. Krispy Kreme has a quick ratio of 2. 72x as compared to the rest of competitors, who are mostly having quick ratio of lower than one. Does that mean Krispy Kreme is holding too much current assets? Comment: Exhibit 2, which shows the balance sheet of Krispy Kreme, indicates that it has an increasing amount of cash reserves, account receivables, and inventories in the recent years – which contribute to the high level of current assets, thus, liquidity ratios. Krispy Kreme would need to think if holding such huge amount of current assets is necessary, otherwise, unnecessary opportunity cost would be doing harm to the company in the longer-term. Question 2: Poor Receivable Turnover Analytical Financial Ratio in Exhibit 8 reveals that Krispy Kreme has a significantly lower receivable ratio than all of its competitors. Why is that so? Comment: A low receivable turnover ratio implies that Krispy Kreme should reassess its credit policies to ensure timely collection of imparted credit that is not earning interest for the firm.