Question

4. Preview Exhibits 7 & 8, and comment on how these tables might look had Krispy Kreme originally followed the SEC recommendation as the "right thing to do" and amortized the reacquired franchises?

Answer 1

Quick ratio is ascertained by comparing liquid assets that is current assets excluding stock and prepaid expenses to current liabilities. The ideal ratio is 1. The ratio is an indicator of short term solvency of the company. A comparison of current ratio to quick ratio also indicate the inventory holdups.

Current ratio is the indicator of firm's commitment to meet it's short term liabilities. The ideal ratio is 2. However a ratio of 1.5 is also acceptable if firm has adequate arrangements with its bankers to meet it's short term requirements of funds.

Debt to equity ratio is determined to ascertain the proportion between outsider funds and share holder funds in the capital structure of an enterprise. The ratio is considered to be ideal if shareholder's funds are equal to long term debt. The ratio is an indication of soundness of long term financial policies pursued by the business enterprise. Excessive dependence on outsider funds may cause insolvency of business. The ratio provides margin of safety to creditors.

Debt to capital ratio gives analysts and investors a better idea of company financial structure and whether or not a company is suitable investment. The higher the debt to capital ratio, the riskier is the company.

Times interest earned ratio is the ability of the company to meet it's debt obligations with its current income and covers it's interest charges with its pretax earnings.

Assets to shareholder's equity shows ratio between total assets of the company to amount on which equity holder's have claim. The ratio above 2 means that the company funds more assets by issuing debt than equity, which could be more risky investment.

Receivables turnover indicates the speed with which money is collected from the debtor. Receivables turnover ratio measures the quality of debtors. Shorter collection period implies prompt payment by debtors. Longer collection period implies liberal and inefficienct credit collection performance which results in more blockage of funds and bad debts

Inventory turnover ratio signifies liquidity of inventory. High inventory turnover ratio indicates brisk sales. The ratio is a measure to discover possible trouble in the form of over stocking or over valuation of inventory.

Assets turnover ratio measures value of company sales or revenues related to value of its assets. The higher the ratio, the more efficient a company is generating revenue from its assets.

Cash turnover ratio indicates number of times a company went through its cash balance during the accounting period.

Return on assets measures how efficiently a company can earn a return on its investment in assets. The higher the ratio, the more favourable to investors.

Return on equity is the profitability ratio that measures the ability of the company to generate profits from its shareholder's investments in the company.

Operating profit margin indicates how much profit a company makes after paying for variable costs of production. It is expressed as percentage of sales that shows efficiency of the company in controlling costs and expenses associated with business operations.

Net profit margin indicates how much net income a company makes with its total sales.