Hey Chegg, I need your assistance in analyzing a company's balance sheet. I want to make sure that I am on the right track.

The company is California Pizza Kitchen.

I focused on liquidity and leverage or solvency.

For liquidity, I used Net Working Capital = Current Assets - Current Liabilities & Current Ratio = Current Assets / Current Liabilities, specifically for 7/1/07.

Net Working Capital = $49,530 - $72,793 = -$23,263, which indicates that CPK is struggling to make ends meet and have to rely on borrowing or stock issuance to finance their net working capital

Current Ratio = $49,530 / $72,793 = .6804, which indicates that CPK does not have enough liquid assets to cover its short-term debt

For solvency, I used D/E Ratio = Total Liabilities / Total Shareholders' Equity, specifically for 7/1/07

D/E ratio = $113,891 / $225,888 = .5042, which means that CPKs assets are primarily financed through equity instead of debt

Please let me know if I am correct thus far. However, here is my question:

It seems that CPK, being a restaurant, is struggling to pay its short-term debt, but not long-term debt. Sometimes, negative net working capital or a current ratio less than 1 can be a good thing for a company. I don't know if that is the case for California Pizza Kitchen.

The textbook does point out that CPK used the proceeds from its 2000 IPO (initial public offering) to pay off its outstanding debt, the company completely avoided debt financing (CPK's managment had avoided putting any debt on the balance sheet). CPK maintained borrowing capacity available under an existing $75 million line of credit. Does that, by any chance, play a role in net working capital or current ratio. Please provide any input that you can. It would help me a lot.

Case 33 California Piza Kitchen 457 EXHIBIT 2 I l Consolidated Balance Sheets (in thousands of dollars) As of 1/1/06 12/31/06 7/1/07 Current assets Cash and cash equivalents Investments in marketable securities Other receivables $ 11,272 11,408 4,109 $ 8,187 $ 7,178 7,876 4,745 11,721 10,709 4,596 Current deferred tax asset, net Prepaid income tax Other prepaid expenses & other current assets Total current assets 8,437 1,428 5,492 45,922 11,834 8,769 6.444 49,530 5,388 37,917 Property and equipment, net Noncurrent delerred tax asset, net Goodwill and other intangibles Other assets 271,867 213,408 4,513 5.967 255,382 5,867 5,825 5,522 $310,513 6,328 5,754 6,300 Total assets $274,254 $339,779 Liabilities and Shareholders Equity Current labilities Accounts payable Accrued compensation and benefits s 7,054 13,068 13.253 4,056 9,294 $ 15,044 15,042 14,532 4,494 13,275 3,614 66,001 s 14,115 15,572 14,979 5,135 13,980 9.012 72.793 Accrued rent Delerred rent credits Other accrued labilities Accrued income tax Total current liabilities Other liablities 48,725 5,383 24,810 8,683 27.486 8,662 32,436 Delerred rent credits, net of current portion Shareholders equity Common stock Additional paid-in-capital Accumulated deficit 197 231,159 (34,013) 291 228,647 221,163 (13,013) Total shareholders' equity Totail liabilities & Shareholders Equity 197.336 $274,254 225,888 $339.779 $310,513 of data: Company annual and quarterdy roports