Financial Ratio for Krispy Kreme and BCG Matrix for McDonald's - Assignment Example

Financial Ratio for Krispy Kreme and BCG Matrix for McDonald Name of ratio Ratio measurement Ratio evaluation Total assets turnover 1.9 Strength Debt to equity 1.05 Neutral Return on equity 3.5% Weakness Net profit margin 0 Weakness Revenue per share 5.52 Strength Net income growth 0 Weakness Source for all above ratios: ADVFN, PLC website at www.advfn.com http://www.advfn.com/p.php?pid=financials&symbol=NYSE%3AKKD = Krispy Kreme specific Ratio Data This paper examines 6 different financial ratios of Krispy Kreme Doughnuts, Inc. along with a brief analysis of each ratio measured. Also examined are industry competitor ratios. Finally, discussion is made if Krispy Kreme Corporation would be a good investment decision based on the financial data. The first ratio examined is total assets turnover. Krispy Kreme’s total asset ratio currently is 1.9 times. The ratio is calculated by: Net sales / Total assets = number of times turned. The number is an indicator of the ability of a company to use or turnover its assets to generate sales. The measurement considers all assets including inventory, accounts receivable, and fixed assets. The lower the ratio, the more slowly the firm’s sales are. Comparing the number to past years company data is important in order to see trends that have developed. In addition, comparing it to the industry standard is useful in order to see how the company compares to its prime competitors. If a problem exists with a low ratio, it could be possible that one or more of the firm’s asset categories have problems that need addressed. (Peavler, pp 1-2). Krispy Kreme’s total assets turnover ratio of 1.9 times is better than its prime competitors of McDonalds and Starbucks. McDonalds has a current total assets turnover of .80 times, while Starbucks Corporation has a current total assets turnover of 1.7 times. (ADVFN, PLC) Hence, this is listed as an overall strength or competitive advantage for Krispy Kreme. The second ratio examined is Krispy Kreme’s debt to equity ratio. The ratio is calculated as: Total liabilities / Stockholder’s Equity. A high debt to equity ratio would indicate that the company has financed its growth through debt. The main issues would be if the company overextended itself and took on too much debt, or if it has to shoulder a large amount of interest due to the existing debt. High or increasing debt ratios in relation to equity can be dangerous, since it would indicate that the company is being financed by creditors instead of internal cash flows. (www.enterpernuer.com website). Krispy Kreme’s debt to equity ratio of 1.05 is higher than its prime competitors. McDonalds Corporation has a .81 ratio, while Starbucks has a low .18 ratio. (ADVFN, PLC). Overall, 1.05 of Krispy Kreme is not an evident weakness, since using some leverage is not considered a clear weakness. The third ratio examined is the return on equity ratio. It is calculated as follows: Net income / Common Equity. This ratio is especially useful to shareholders who are interested in knowing what profits earned by the company can be made available to pay dividends. Generally, the higher the ratio, the better news it is for the company. (www.stock-market-investors.com website). Krispy Kreme’s return on equity ratio of 3.5 is considered weak. This is especially in comparison to its prime competitor McDonalds has a 36.5% return on equity, while Starbucks shows a 20.2% return on equity (ADVFN, PLC). The fourth ratio examined is the net profit margin ratio. It is calculated as follows: Net profit before tax / Net sales. This is an income statement ratio that measures profitability. In basic terms, it is the percentage of sales dollars left after subtracting cost of goods sold and all other expenses, except for tax expense. It gives a good chance for a company to compare its “return on sales” with other similar companies in the same industry. (Liraz, pp.1-2). Krispy Kreme has a net profit margin ratio of 0. This is an obvious weakness for them. Industry competitor McDonalds had a net profit margin ratio of 20.0, while Starbucks had a similar ratio of 4.0 (ADVFN, PLC). The fifth ratio examined is the Revenue per share. The interpretation of revenue per share is straightforward. The higher revenue per share a company has, the better the company’s financial health is. Revenue per share helps compare different company’s ability to make money for shareholders. The higher the revenue per share, the higher each share will be worth. (Spireframe, p.1) Krispy Kreme has revenue per share of 5.52. This is strength, especially compared to competitors. McDonalds Corporation stands at 1.62, while Starbucks is currently at 3.21 (ADVFN, PLC). The final ratio examined is the Net Revenue Growth Rate ratio. It is calculated as: Revenue in ‘Year X’ – Revenue in Year 1 / Revenue in ‘Year X’. This is simply the percent rate at which revenue is growing each year. Firms try to establish a rate at which earnings should grow over time. Companies with a 15% or higher growth rat are considered fast growing companies. The higher rate is, the better it would be in regards revenue. (Business Glossary.com p.1) Krispy Kreme has a Net Revenue Growth Rate of 0. This is a definite weakness. Competitor McDonalds has a growth rate of 7.7%, while Starbucks has a growth rate of 7.4% (ADVFN, PLC). Our team would not invest in Krispy Kreme at this time. The company is struggling with too many key profitability ratios at this time, and has no current income growth. In fact, five year revenue growth for the company is at -11.6% (ADVFN, PLC). As seen from the above chart, the return on equity ratio is weak at just 3.5%. McDonalds Corporation has a return to equity at 36.5% and Starbucks stands at 20.2% (ADVFN, PLC). From an investor’s point of view, the competition provides a better investment at this time. Works Cited ADVFN, PLC. Krispy Kreme Doughnuts, Inc. < http://www.advfn.com/p.php?pid=financials&symbol=NYSE%3AKKD> accessed on 19 August 2010. ADVFN, PLC. McDonalds Corporation, Inc. http://www.advfn.com/p.php?pid=financials&symbol=NYSE%3AMCD accessed on 19 August 2010. ADVFN, PLC. Starbucks Corporation, Inc. http://www.advfn.com/p.php?pid=financials&symbol=NASDAQ%3ASBUX accessed on 19 August 2010. Business Glossary. < http://www.allbusiness.com/glossaries/growth-rate/4942323-1.html> Accessed on 19 August 2010. Enterpenuer.com website http://www.entrepreneur.com/encyclopedia/term/82208.html Accessed on 19 August 2010. Lirax, Meir. Financial Ratio Analysis. http://www.bizmove.com/finance/m3b3.htm accessed On 19 August 2010. Peavler, Rosemary. What is the total asset turnover ratio and How is it Calculated? < http://bizfinance.about.com/od/financialratios/f/Total_Asset_Turnover.htm> accessed on 19 August 2010. Spireframe. Earnings Per Share. http://www.spireframe.com/docs/financial_ratio_earnings_per_share.aspx accessed on 19 August 2010. Stock Market Investors. Understanding Return on Equity and Return on Assets. http://www.stock-market-investors.com/stock-investing-basics/understanding-return-on-equity- and-return-on-assets.html accessed on 19 August 2010. Read More