Financial analysis of Carrefour

Financial Accounting and Reporting Case study: Carrefour

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Financial Accounting and Reporting

Case Study: Carrefour

Full Time 15, academic year 2012-2013

Date : 06/11/2012

Team No 4 : Mile Zivanic

Ilia – Konstantina Psimouli

Eglantina Leno

Giwrgos Panagopoulos

Professor : Mr. Apostolos Ballas

Financial Accounting and Reporting


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Table of Contents

1. The Company profile ...................................................................................................... 3

1.1 The activities of the company..................................................................................... 3

1.2 SWOT Analysis ........................................................................................................... 6

2. BALANCE SHEET ............................................................................................................. 7

2.1 Goodwill .................................................................................................................... 8

2.2 Tangible Fixed Assets ................................................................................................ 9

2.3 Provisions ................................................................................................................ 10

2.4 Shareholders’ Equity ............................................................................................... 11

2.5 Main liabilities ......................................................................................................... 11

3. INCOME STATEMENT ................................................................................................... 12

4. CASH FLOW STATEMENT ............................................................................................. 15

5. RATIO ANALYSIS .......................................................................................................... 18

5.1 Liquidity Ratios ........................................................................................................ 19

5.2 Activity Ratios .......................................................................................................... 21

5.3 Profitability ratios .................................................................................................... 23

5.4 Test of Solvency ....................................................................................................... 27

5.5 Market test .............................................................................................................. 28

Conclusion ........................................................................................................................... 32

Appendix: Financial Statements ........................................................................................... 33

References .......................................................................................................................... 34


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1. The Company profile

At the junction of groceries, merchandise, and services, you'll find Carrefour (which means

"crossroads"). The world's second-largest retailer, behind Wal-Mart, Carrefour operates

more than 9,700 stores under various banners, including hypermarkets (Carrefour),

supermarkets (Carrefour Market, formerly Champion), convenience stores (City, Express,

Proxi), and cash-and-carry outlets (Promocash) in more than 30 countries in Europe, Latin

America, and Asia. France, with more than 4,600 Carrefour stores, accounts for 43% of the

retailer's sales. Carrefour is struggling to reverse a decade-long sales slump at home, while

expanding in fast-growing emerging markets in Asia and Latin America.

Short History of the group

1959 - The Carrefour company is created by the Fournier and Defforey families

1963 - Carrefour opens its first supermarket in Annecy, Haute-Savoie

1970 - Beginning of the internationalization of Carrefour

1976 - Invention of the 1st private labels “Les Produits Libres"

1988 - Launch of the claim “Avec Carrefour, je positive!”

1992 - Creation of Carrefour Quality Lines

1999 - Merger between Carrefour and Promodès

2006 - Celebration of the 1,000th Carrefour hypermarket

2009 - Carrefour 50th anniversary

2010 - Opening of the reinvented hypermarkets Carrefour planet Opening of the 1st store in

India

1.1 The activities of the company

The stores of the company

Carrefour has more than 3,000 stores in 19 countries with headquarters in France. The Carrefour market banner is also being rolled out outside France in the rest of Europe, as well as in Asia and Latin America. In the future more supermarkets are going to open under this brand or others which have been repurchased by the firm.


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Convenience stores

Out of a total of 9,700 stores, Carrefour has more than 5,000 convenience stores, mainly held by franchisees. The franchisees benefit from everything the banner has to offer, including customer-targeted concepts, products providing the best value for the money, and services and operating staff dedicated to sharing their expertise. These franchisees include Carrefour city, Carrefour contact, Carrefour express and Carrefour montagne banners.

• Carrefour city is the leading urban store concept. With sales areas ranging from 200 to 900m2, customers can buy ready-to-eat products and everything they need for their daily shopping trips. Open from 8 am to 10 pm (sometimes even 11 pm), six days a week (sometimes even Sunday mornings in areas where legislation permits it), the concept is designed for customers on the move who are often in a hurry.

• Carrefour contact is designed for customers’ daily requirements, located at the entry to small towns and villages, or in their centers. Open from 8 am to 8 pm, they are structured around the concept of the meal and last-minute purchases with different retail areas–deli, butcher, bread, wine and beauty–over sales areas ranging from 350 to 900m2.

• Carrefour express is the most recently devised concept in France. Designed for additional and extra emergency purchases–in both towns and rural areas–these are Carrefour’s smallest convenience stores (between 90 and 300m2). Their offering is based around essential products (3,500 items) and their opening hours are convenient (8 am to 9 pm—even Sunday mornings in some cases).

• Carrefour Montagne stores have been operating in ski resorts since winter 2009. They feature all the advantages of Carrefour’s banners: good products, good value, the Carrefour loyalty card and a range of services to make life easier, such as home delivery and borrowed cooking equipment.


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Supply chain

This image depicts the supply chain management during the year 2007. The plan for 2016

was to modify the procedures so as to use fewer warehouses, add shipping capabilities and

diminish the time needed for the product delivery to 20 days. As a result, even if we do not

have an accurate image for today we can have a basic understanding of the concepts.

Five basic characteristics of the procedure are:

On Shelf Availability

Increase of product rotation

Information sharing

Shelf Ready Packaging

Logistics costs vs logistics discounts

Business Intelligence

Keeping pace with socio-demographic changes and new ways of shopping, Carrefour has

improved services into its convenience stores, creating contemporary concepts that follow

customers’ needs and help them to shop quickly and control their budget.

Expanding to new markets

E-commerce

Carrefour’s food and non-food e-commerce solutions are becoming increasingly popular on the Internet and among its customers throughout the world. In 2011, Carrefour bolstered its food e-commerce solutions in a number of countries including Spain, Brazil, Taiwan and of


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course France, where households can now order food products online and have them delivered.

The drive-in by Carrefour

Carrefour drive has two key features. Customers have access to 11,000 items in hypermarkets and 8,500 items in supermarkets—all on sale at the same prices as they are in stores. They can pick their shopping up in less than five minutes. At end of 2011, France had 30 Carrefour drive-ins (17 in hypermarkets and 13 in supermarkets). This number is expected to increase to more than 150 in 2012. Carrefour Belgium had 67 hypermarket and supermarket pick-up points as of the end of 2011.

1.2 SWOT Analysis

In this analysis we will present the strengths, weaknesses, opportunities and threats which Carrefour deals with, based on recent data.

Strengths:

The organization has reduced the greenhouse gasses emitted during its function. As

a result of this policy its brand name is improved.

The number of products sold with private labels has increased by 3.2% in

comparison to 2009. Consequently, Carrefour is able to sell more products in lower

prices, without being dependent on their suppliers, when of course the production in

not outsourced.

In Latin America sales went 6.8% up and in Asia sales increased by 2.8%.

Carrefour has an expanded activity as, besides food and simple household products,

it also sells specialized products such as electronics.

The supermarket offers delivery service to customers in France, which is a service

that adds value to its products.

Except for supermarkets, Carrefour has launched a chain of smaller stores, private or

franchises, including “Carrefour Express”, “Carrefour City”, “Carrefour Contact” and

“Carrefour Montagne”. The organization also owns many other repurchased brands

and a Bank with the brand “Carrefour Banque”.

Weaknesses:

The training was reduced by 0.3% by last year.

The financial conditions of the countries in southern Europe are not suitable for the

enterprise to operate efficiently.

Carrefour has been forced to withdraw from Greece and other countries of Balkans.

During 2011 Carrefour has decreased the number of employees by 14.4%.

The operating income decrease in 2011 resulted from the lower-than-expected

performance of French hypermarkets and the economic crisis in Greece.

Opportunities:


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65 new hypermarkets have opened through the world, 23 of which are in China. As a

result, new opportunities for selling have been created.

The corporation has conducted a promotional action in Romania where it sold for

two weeks products without taxation. This campaign created an opportunity for

increased sales in the area and improved the brands’ name.

Carrefour has increased the customer services offered through cashiers. With this

action the organization manages to acquire a strategic advantage against its

competitors.

A wide range of new products launched in the market by the corporation has created

an opportunity for more sales. These include 2000 new items in France, Spain, Italy

and Belgium.

The corporation has expanded its selling channels by introducing e-commerce

services and launching through them 15000 non-food products. This act will give it

the opportunity to attract new categories of customers and lock-in the current ones.

The company has created a smart phone application in order to move into mobile

commerce which has been pretty successful until now. Only in France it has been

downloaded by 700.000 customers.

In order to increase customer loyalty Carrefour has launched frequent buyers cards.

Carrefour has plans for the opening of new stores in the next year.

Threats:

The taxation has increased in many European countries. Especially in France where

the headquarters of Carrefour are, the taxation grew from 13% to 24%.

The financial conditions in EU and USA are unstable because of the extended

economic crisis.

In Balkans Carrefours’ power is undermined by competitors such as Veropoulos

Group and respectively in Brazil the top competitor is Atacada.

In multinational level the top competitors are Metro, which is still smaller in size than

Carrefour and of course Wal-Mart Stores which is bigger than Europe's Carrefour,

Metro AG, and Tesco combined. In the following table we may see details about the

competition in 2012 :

Company Revenue

(M $) Revenue Growth

Employees Employee

Growth Wal-Mart 446,950.00 6.00% 2,200,000 4.80% Carrefour 104,181.20 -14.10% 412,464 -12.60%

Metro 86,372.40 -3.10% 290,747 2.60%

2. BALANCE SHEET


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In order to evaluate the size of a company the easiest way is by taking a look to its amount of

total assets. In our case, it is obvious from the data given that Carrefour is a huge company

whose assets at the end of 2011 were around 48 billion euros.

The change in total assets during the last five years, reflecting the changes in the company’s

strategy are shown in the following chart:

We may observe that assets were stable for the first three years, whereas we had an

increase of almost 2 billion in 2010, followed by sharp decrease of almost 5 billion in 2011,

which is consequence of the company’s efforts to generate cash and tighten their business.

2.1 Goodwill

Whenever the Group acquires control of an entity or group of entities, the identifiable assets

acquired and liabilities assumed are recognized and measured at fair value. The difference

between the acquisition cost and the fair value of the identifiable assets acquired, net of the

liabilities and contingent liabilities assumed, is recognized as goodwill. Goodwill is recorded

directly in the statement of financial position of the acquired entity, in the entity’s functional

currency. Its recoverable amount is subsequently monitored at the level of the cash-

generating unit, to which the entity belongs, corresponding to the country. Intangible assets

are mainly composed of software valued at its acquisition and production cost, goodwill

valued at its contributed value and including those goodwill resulting from the Carrefour-

Promods merger in 2000, as well as the Carrefour-Hofidis II merger in 2010.

The impairment tests performed on the basis of the revised business plan led to the

recognition of impairment losses of 1,966 million euros on goodwill, with Italian goodwill

written down by 1,750 million euros, of which 481 million euros in the first half, and Greek

goodwill by 188 million euros.

45,000

46,000

47,000

48,000

49,000

50,000

51,000

52,000

53,000

54,000

55,000

2007 2008 2009 2010 2011

Total Assets


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2.2 Tangible Fixed Assets

Tangible fixed assets, or each significant part of an item of property and equipment, are

depreciated by the straight-line method over the following estimated useful lives:

• Buildings

Building 40 years

Site improvements 10 years

Car parks 6 years

• Equipment, fixtures and fittings 6 to 8 years.

• Other 4 to 10 years.

For the year 2011 we have:

Total France Rest of Europe Latin

America Asia

Hard-discount

stores

Tangible fixed assets for 2011 13,771 4,269 4,741 3,277 1,484

Tangible fixed assets 2010 15,297 4,177 4,839 3,279 1,405

1,597

In the next graph, we can observe the fluctuation and correlation between the main non-

current assets:

From the following graph we may have a more detailed analysis of the current assets:

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2007 2008 2009 2010 2011

Tangible fixed assets Goodwill Other


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As we may see that inventory remains stable. At the same time accounts receivable after a

small decrease during 2008 and 2009, are back to 2007 level, with a tendency to grow, which

is very concerning for the company’s future.

2.3 Provisions

“In accordance with IAS 37 – Provisions, Contingent Liabilities and Contingent Assets, a

provision is recorded when, at the period end, the Group has a present obligation (legal or

constructive) as a result of a past event, it is probable that an outflow of resources

embodying economic benefits will be required to settle the obligation, and a reliable

estimate can be made of the amount of the obligation. The amount of the provision is

estimated based on the nature of the obligation and the most probable assumptions.

Provisions are discounted when the effect of the time value of money is material.”

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2007 2008 2009 2010 2011

Inventories Accounts recevible Cash and cash equivalents Other

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2007 2008 2009 2010 2011

Provisions


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Due to economic crisis, the company was forced to close its operations in several countries.

This had as a consequence the increase in provisions, as closing operations usually imply to

future legal difficulties.

2.4 Shareholders’ Equity

We can see that the company’s shareholders’ equity has a tendency of decreasing during the

last five years. Especially last year, we had a dramatic decrease of around three billion euros.

This was mainly due to the distribution of Dia shares, which reduced shareholders’ equity by

2,230 million euros, and the payment of 813 million euros in cash dividend (Including

dividends paid to non-controlling interests).

2.5 Main liabilities

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2007 2008 2009 2010 2011

Shareholders’ equity


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From the graph above, we may observe that the majority of credits comes from suppliers

which is a good thing since this is the cheapest financing source. We can also notice that

long-term borrowings are much bigger than short –term ones which was useful during

sudden crisis period, which started in 2008. Moreover, we may see that as companies

activities decreased last year, borrowings followed the same pattern.

3. INCOME STATEMENT

The Group’s operating segments correspond to the countries in which it does business.

According to the table below we can observe how dramatically Net Income decreased from

2008 except for 2010.

Years 2011 2010 2009 2008

Net Income -29% +47% -75% -38%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2007 2008 2009 2010 2011

Borrowings – long-term Borrowings – short-term Suppliers and other creditors


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Net sales correspond exclusively to sales realized in the Group’s stores and cash and carry

outlets. In accordance with IFRIC 13, which describes the accounting treatment of loyalty

award credits granted to customers as part of a sales transaction, award credits are

considered as a separately identifiable component of the sales transaction and are deducted

from the amount of the sale at fair value.

404 568

386

1.538,8

2.479,2

0

500

1.000

1.500

2.000

2.500

3.000

Val

ue

in m

illio

ns

of €

Year

Net Income

2011 2010 2009 2008 2007


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As we can see from the table below, 2011 net sales amounted to 81,271 million euros versus

90,099 million euros the previous year, reduced dramatically by 10.8% compared to other

years. More specifically, Net Sales were increased by 5.2% from 2009 to 2010 driven my

emerging markets, decreased by 1.8% from 2008 to 2009 and increased by 5.5% from 2007

to 2008.

The Group reported an operating loss of 481 million euros in 2011, compared with income of

1,836 million euros in the previous year. The negative swing was mainly due to the

impairment losses booked in 2011. In 2010 current operating income rose by 9.7%, spurred

by purchasing gains and cost savings that exceeded targets. Also Operating income of 2010

amounted to 1,836 million euros, had an increase of 5.2% over 2009, and represented 2.0%

of sales compared with 1.9% in 2009.

17.852 19.873 19.127 19.515,8 18.686,3

-64.912 -71.640

-67.626 -68.709,4 -64.609,4

81.271

90.099 85.366 86.967

82.149

-80.000

-60.000

-40.000

-20.000

0

20.000

40.000

60.000

80.000

100.000

Val

ue

in m

illio

ns

of €

Year

Gross Margin

Cost of Sales

Net Sales

2011 2010 2009 2008 2007

-1.000

0

1.000

2.000

3.000

4.000

1 2 3 4 5

Val

ue

in m

illio

n o

f €

Year

Operating Income

2011 2010 2009 2008 2007


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Recurring operating income contracted by 26.6%, to represent 2.6% of net sales versus 3.3%

in 2010 and 3.2% in 2009, due to a decline in gross margin linked to higher raw material

prices and a more competitive business environment and to an increase in sales expenses,

mainly for hypermarkets. In 2010, Net income from recurring operations increased 8.5%,

despite exceptional charges that generated a negative non-operating result of 1,137 million

euros.

4. CASH FLOW STATEMENT

Carrefour, as 99% of the company’s use the indirect method of presenting the operating

activities section of the cash flow statement.

If we try to present graphically net cash-flow concerning the last 5 years we have the

following:

0

500

1.000

1.500

2.000

2.500

3.000

3.500

Val

ue

in m

illio

n o

f €

Year

Recurring Operating Income

2011 2010 2009 2008 2007


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We observe that there is a dramatic decrease of 2.016 million € in 2009, as a consequence of

huge negative net cash-flow from financing activities of 3,1 billion euros (predominantly by

repaying bond for one billion, and reduction in other borrowings for around 1,8 billions

euros) and a smaller decrease of 29 million € in 2010. For all the other years the net change

in cash is positive.

The changes in cash flow from operating activities, cash flow from investing activities and

cash flow from financing activities from year 2007 to 2011 are as follows:

We can notice that both, operating and cash flow from investing activities has decreasing

trends, which means that company’s struggle in the last few years (constantly declining

sales) made them choose conservative approach and cause reduction in investment and

debt.

0

1.000

2.000

3.000

4.000

5.000

6.000

2007 2008 2009 2010 2011

Cash and cash equivalents

beginning

end

-4000

-3000

-2000

-1000

0

1000

2000

3000

4000

5000

6000

2007 2008 2009 2010 2011

Net cash fromoperating activities

Net cash used ininvesting activities

Net cash used infinancing activities


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The cash flow from operating activities is:

The depreciation expense is added to net income in cash flow from operating activities,

because it is subtracted when computing net income but it does not affect cash. In our case,

we have the following data:

2011 2010 2009 2008 2007

CASH FLOWS FROM OPERATING ACTIVITIES

Depreciation and amortization expense 1.795 2.033 1.965 1.946 1.790

Cash flow from operations 2.576 3.393 3.381 4.012 3.918

Percentage 69,68 59,92 58,12 48,50 45,69

It is obvious that depreciation and amortization expense has a great influence on the cash

flow from operating activities section.

As far inventory is concerned, a decrease in inventory is considered as an increase in the cash

flow from operations section. As we can see, Carrefour have pretty stable inventory levels,

with exceptions of 2009 and 2010, when they made a lot of reshuffling and slightly reducing

their operations as a consequence of reduced sales..

2011 2010 2009 2008 2007

Inventories 6.848 6.994 6.670 6.891 6.867

During the last five years the acquisitions of property, plant and equipment are negative,

which means that company sell more than bought equipment, which is completely logical

looking at their exit strategy from some markets, and reduction in sales in their primary,

France market.

0

1.000

2.000

3.000

4.000

5.000

6.000

2007 2008 2009 2010 2011

Cash flow fromoperations

Net cash from operatingactivities (excludingfinancial servicescompanies)

Net cash from operatingactivities


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From the balance sheet we have the following data:

Non-current assets 2011 2010 2009 2008 2007

Assets held for sale 44 472 241 150 669

The company has been selling non-current assets over the last years.

As we may see from the balance sheet, the amount of accounts payable decreased by 1.434

€ from 2010 to 2011. This decrease affects cash flow from operations in year 2011 in a

positive way, since it is added to net income. However, cash flow from operations decreases

from 2010 to 2011, because there are other accounts which also define the result.

During 2011, the company received 500 millions of euro because of issuance of bonds and

paid 1.442 millions of euro. Based on the notes of the financial statement we have the

following information:

(in millions of euros) 12/31/2010 Issues Repayments Other

movements 12/31/2011

Public placements Maturity 9,296 500 (1,400) 8,396

Private placements 368 (42) 326

Fair value adjustments

to hedged borrowings (177) (1) (178)

Total bonds and notes 9,488 500 (1,442) (1) 8,545

We also know that the company received 37million € in cash from proceeds from share

issues during 2011, whereas it paid 811 million € in dividends, 87.3% of which concerned

dividends paid by the parent company. Cash flow from operations for the same year was

2.576 million € so dividends paid for that year represented almost 31,48%.

5. RATIO ANALYSIS

Carrefour is pretty much unique company (because of their size and presence in number of

different countries) so we decided not to compare it to their direct opposition, but just to

compare their accomplishments during last five years and get it connect to global economic

movement in the world in the last five years.


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5.1 Liquidity Ratios

Liquidity ratios refer to the amount and the relations between short term obligations and

current assets. These ratios demonstrate the economic situation of the company. If the

company is able to come along its daily claims of its short term creditors and be in position to

pay its maturing obligations, if can continue its operations and take advantages of any

opportunity and if is able to pay its taxes and dividends to the shareholders, then we can

define the economic situation of this company as good.

The liquidity ratios that are going to be analyzed are:

current ratio

quick ratio

cash ratio

Current ratio

The current ratio is ratio of total current assets to total current liabilities.

The formula is:

Current ratio = (current assets) / current liabilities

It can be concluded ‘the bigger the fraction - the better the liquidity for the company”, but

this is not enough as the value of the ratio depends on various factors such as: the kind of the

company, the quality and diversity of the current assets, the directness of current obligations

and the flexibility of company’s needs in operational capital. Moreover, the ratio is also

influenced by the seasonality and duration of the business cycle and by the stage of the

financial cycle time where the business lies. There is not a certain degree of liquidity to be

considered as the optimal for every company, not even for companies of the same sector. In

evaluation of the liquidity of a company helps comparison of previous year’s values of the

ratios with current one, and examining the trend that exists throughout the years.

Current ratio Carrefour

0.60

0.62

0.64

0.66

0.68

0.70

0.72

0.74

0.76

2007 2008 2009 2010 2011

Current ratio


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The current ratio for 2011 is 0.74 which means that every euro of current liabilities is covered

by 74 eurocents of current assets. According to the “rule of thumb”, which requires a

measurement of more then 2, or at least 1, we should say that this ratio isn’t satisfactory,

but, when we know that Carrefour generates a lot of cash in their daily business, and when

we see that this ration is improving constantly, we could say that this ratio is satisfactory. In

addition to that is fact that current liabilities during last year decreasing almost 2,4 billion

euros (from 28,48 to 26,10) and current assets decreased just for around 1 billion (from 20,2

to 19,2 billions).

Quick ratio (Acid test ratio)

The quick or acid test ratio measures the ability of a company to use its "near cash" or quick

assets to immediately extinguish its current liabilities. Quick assets include those current

assets that presumably can be quickly converted to cash at close to their book values. This

ratio implies a liquidation approach and does not recognize the revolving nature of current

assets and liabilities. The Quick Ratio therefore adjusts the Current Ratio to eliminate all

assets that are not already in cash (or "near-cash") form. Quick ratio is a better tool than

current ratio to identify whether the company is able to pay back its short term obligations.

The formula is:

Quick ratio = Cash, marketable securities and receivables (net) / Current liabilities

Ideally the acid test ratio will be 1:1. And any ratio less than one would show potential

liquidity problems in the company.

2007 2008 2009 2010 2011

Carrefour’s Quick ratio 0.39 0.43 0.44 0.43 0.46

The quick ratio for 2011 is 0.46, which doesn’t bode well for company, but as we can see,

ratio is pretty stable during years, with a small increase tendency, and as we sad before,

company receives a lot of cash in their business, so this number is ok.

Cash ratio

This ratio of cash of the company to short term liabilities is a cash basis measure of liquidity.

The formula is:

Cash ratio = (Cash + Cash Equivalents) / Current Liabilities

This ratio indicates a company’s ability to repay its current liabilities from cash generated

from operating activities without having to liquidate the assets used in operations.

The higher the ratio the less likely the company will face a liquidity problem.


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2007 2008 2009 2010 2011

Carrefour’s Cash ratio 0.15 0.19 0.12 0.11 0.15

The Current cash debt coverage ratio for 2011 is 0.15 and as other two liquidity ratios has

tendency to increase, but unlike them, this is not five year high, that was year 2008, and then

as consequence of a global crises had a big slump in a following year., and now company

finally rebounding.

5.2 Activity Ratios

Receivable Turnover Ratio vs Payable Turnover Ratio

This ratio shows the number of times accounts receivable are collected and reestablished

during the accounting period and the number of times accounts payable are paid and

reestablished during the accounting period, respectably. Generally, the higher the receivable

turnover, the faster the business is collecting its receivables and the more cash the client

generally has on hand. The receivable turnover ratio equals sales revenue divided by average

trade receivable during the period.

The formula is:

Receivable turnover ratio= Net Sales/ Average Trade Receivable

On the contrary, the accounts payable turnover ratio measures how quickly management is

paying trade accounts. A high accounts payable ratio normally suggests that a company is

paying its suppliers in a timely manner, but when this ratio is low, that can imply that

company has lot of power over suppliers, and actually get almost free credit of them. The

payable turnover ratio equals sales revenue divided by average accounts payable during the

period.

Payable turnover ratio= Net Sales/ Average Accounts Payable


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Comparison of Carrefour’s ratios of accounts payable and accounts receivables:

As we can see, company on average collect their receivables 3.5 times before pay suppliers. If

we express this numbers in days, we can see that company paying their suppliers

approximately every 90 days, and collect receivables in less then 30 days. Good thing this

ratios show is that the company didn’t slow down in payments during last four years, despite

global crises, but bad thing is that collection of receivables slowed down from approximately

23 days in 2009 and 2010 to over 27 days in 2011. This big difference in this to ratios is

characteristic for big retailers, because they have power over their suppliers, so they can get

long credit period, and on other hand, majority of their sales is for cash, so accounts

receivable never to big.

Inventory turnover ratio

This ratio shows how many times in one accounting period the company turns over (sells) its

inventory. Faster turnovers are generally viewed as a positive trend; they increase cash flow

and reduce warehousing and other related costs.

The formula is:

Inventory turnover ratio = Cost of Goods Sold/Average Inventory

The numerator presents us the total cost of goods sold in the period we care about. The

denominator stands for the average inventory that the company held during the period.

Because of the importance of this ratio we have to assume that the inventory taken is correct

and has taken into account any condescended inventory.

The highest the inventory turnover ratio is, the most easily liquidated is supposed the

inventory to be, and the most unimpeded the company’s operation. However, increases in

the ratio do not mean that it is always good for the company. It might mean that inventory is

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

2008 2009 2010 2011

Accounts Payable Turnover Ratio Accounts Receivable turnover ratio


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not enough, thus the company will not be able to cover demand and this could be a signal of

loss of customers, thereby offsetting any advantage gained by decreased investment in

inventory. Although firms prefer to sell as many goods as possible with a minimum of capital

tied up in inventories, they must balance these considerations in setting the optimum level of

inventory and, thus, the accompanying rate of inventory turnover.

The optimum level of this ratio depends on:

the type of inventory (raw material, products ready to use)

the terms of purchases and sales in the market

the geographical spot of the company and the distances of its suppliers

the general financial conditions that occurred during the period

2008 2009 2010 2011

Carrefour’s Inventory turnover ratio 9.99 9.97 10.49 9.38

Average Days’ Supply in Inventory 36.54 36.60 34.81 38.92

As we can see Carrefour turned their inventory 9.38 times during last year or every 39 days.

This is obviously very good turnover ratio, especially if combined it with two previous ratios,

because it shows us that company much faster turn their inventory then it pay their suppliers,

so suppliers actually financing all inventory in this company. Last year this turnover slowed a

bit, but still it is respectable number.

5.3 Profitability ratios

The profitability of a company or an industry indicates their efficiency at generating earnings.

It is expressed in terms of several ratios that measure its performance and how well they are

using their assets and everything they produce and sell in making profits.

Profit margins

ROE

ROA

Financial leverage

EPS

Quality of income

Fixed asset turnover ratio

In order to judge the company’s profitability and view the amounts of income that are

generated through sales and the use of their assets, we have first analyzed the profit margin

ratios.

Gross profit margin = Net sales-Cost of goods sold/Net sales


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The gross profit margin indicates how revenues exceed costs associated with sales. The size

of the gross profit margin indicates how efficient a company is in its production or sales and

how much profit it is generating from each sale or product. Carrefour is retailer, they make

profit by maximizing volume, not gross profit, that’s why it is low in comparison to many

other industries. The sales volume can fluctuate, while gross profit margins are quite stable

and they are an indicator of the pricing policy of the company and also give insight into the

company’s competitive strategy. On the next graph we can see that gross profit margin is

shrinking from year to year, by about half percentage point and that is very bad thing that’s

is going to reflect negatively to net profit margin, and then throw chain reaction to ROE,

ROA, EPS and finally market value of a company.

Net Profit Margin = Net Profit/Net Sales

The net profit margin shows how much net profit is derived out of every dollar of the

company’s sales and how well the company manages its operating expenses. This ratio

indicates whether the company can support itself and generate enough profit to cover their

expenses and also pay interest, taxes, dividends, making enough profit to also invest and

grow. As we can see, last three years net profit margin is under 1%, which is pretty low, and

in 2011 was just half a percent. With constantly shrinking gross profit margin, and even

bigger decreasing trend in net income during last five years, profitability of his company is

seriously question for future periods.

2007 2008 2009 2010 2011

Net Profit margin 3.02% 1.77% 0.45% 0.63% 0.50%

ROE = Net Income/Average Stockholders’ Equity

18.00%

18.50%

19.00%

19.50%

20.00%

20.50%

21.00%

21.50%

22.00%

2007 2008 2009 2010 2011

Gros Profit margin= Gros profit/net sales


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ROE is a measure of a corporation's profitability that reveals how much profit a company

generates with the money shareholders have invested. The ROE is useful for comparing the

profitability of a company to that of other firms in the same industry and investors can use it

to evaluate how well the company they are investing in is operating. Because ROE should be

greater than ROA, we decided to show them on the same graph for easer comparison.

ROA = Net Income/Average Total Assets

The Return on assets ratio is an indicator of how profitable a company is relative to its total

assets. ROA gives an idea as to how efficient management is at using its assets to generate

earnings. Sometimes this is referred to as return on investment. ROA shows what earnings

were generated from invested capital (assets). ROA can vary substantially and will be highly

dependent on the industry. This is why when using ROA as a comparative measure, it is best

to compare it against a company's previous ROA numbers or the ROA of a similar

company. The ratio shows how much money is made through the company’s investments

and the higher the ratio, this means that more money is raised by investing less and that the

resources are being well allocated so as to give the highest returns.

As expected, these ratios also have negative trend. In last year ROE was at 4.44% which is

lower than in previous year (5.24%), but higher than in 2009 (3.50%), while ROA is on its 4-

year low of 1.55%. Industry average for ROE is 12-15% which means that our company is well

below these figures, and similar is for ROA, because industry average is around 6%, which

means that Carrefour is approximately 3 times ineffectively with their assets comparing to

retail sector.

Financial leverage percentage= (ROE-ROA)

Financial leverage percentage measures the advantage or disadvantage that occurs when a

company’s return on equity differs from its return on assets (ROE − ROA). Leverage is positive

when the rate of return on a company’s assets exceeds the average after-tax interest rate on

its borrowed funds. Basically, the company borrows at one rate and invests at a higher rate

Comparasion Carrefour's ROE vs ROA

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

2008 2009 2010 2011

ROE

ROA


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of return. Most companies have positive leverage. From the graph above is visually easy to

see that Carrefour has a positive leverage, but it drastically shrunk in 2009 and for last year it

is 2.89%, which means that company still rationally uses debt and with it make additional

2.89% return on equity to the owners.

Earnings per Share1 = Net Profit – Preferred Stock Dividends/Weighted-Average Number of

Common Shares Outstanding

Earnings per share are the portion of a company's profit allocated to each outstanding share

of common stock. EPS serves as an indicator of a company's profitability. This is used for

determining a share’s price. As we can notice, line on this graph is identical to the ROE. Last

year EPS for Carrefour was 0.56 which means that company earned 56 eurocents for every

outstanding common share, which we can say it is low, comparing to previous years.

Quality of income=Cash Flows from Operating Activities/Net Income

Most financial analysts are concerned about the quality of a company’s earnings because

some accounting procedures can be used to report higher income. One method of evaluating

the quality of a company’s earnings is to compare its reported earnings to its cash flows from

operating activities. A quality of income ratio that is higher than 1 is considered to indicate

high-quality earnings, because each dollar of income is supported by one dollar or more of

cash flow. A ratio that is below 1 represents lower-quality earnings. As we can notice

Carrefour’s ratio is well above 1, which is logical because they usually sell for cash.

1 Numbers for this ratio are taken directly from final financial statements of Carrefour, so we didn’t

make any additional calculation, just interpretation.

EPS Carrefour

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

2008 2009 2010 2011

EPS


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2007 2008 2009 2010 2011

Carrefour’s Quality of income 1.58 2.61 8.76 5.97 6.38

Fixed asset turnover ratio=Net sales/Average net fixed assets

This ratio is measure of operating efficiency, which compares sales volume with a company’s

investment in fixed assets. The fixed asset turnover ratio is used widely to analyze capital-

intensive companies. In case of Carrefour we can see that on every euro of fixed asset

company generate 5.59 euros of sales. Low side of this number is that is lowest comparing to

the values in previous four year.

2008 2009 2010 2011

Carrefour’s Fixed asset turnover ratio 5.88 5.72 5.94 5.59

5.4 Test of Solvency

Solvency refers to a company’s ability to meet its long-term obligations. Tests of solvency,

which are measures of a company’s ability to meet these obligations, include:

the times interest earned

cash coverage and

debt-to-equity ratios.

Times interest earned ratio = (Net Income + Interest Expense + Income Tax Expense)/

Interest Expense

The times interest earned ratio compares the income a company generated in a period to its

interest obligation for the same period. It represents a margin of protection for creditors so it

is bigger its better. As we can see this ratio rapidly decreasing, mainly as convenience of

lower net income, but also as a result of constant increase in interest expense. Value of 2.86

can be called satisfactory, but at the same time it is big warning factor because of negative

tendency.

2007 2008 2009 2010 2011

Carrefour’s Times interest earned ratio 7.25 5.34 2.68 2.93 2.86


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Cash coverage ratio= Cash Flows from Operating Activities (before interest and taxes paid)

/ Interest Paid

Given the importance of cash flows and required interest payments, it is easy to understand

why many analysts use the cash coverage ratio. The cash coverage ratio compares the cash

generated by a company to its cash obligations for the period. This ratio is on its five year

low, and for the first time is under 3, just 2.80.

Debt-to-equity ratio = Total Liabilities / Stockholders’ Equity

The debt-to-equity ratio expresses a company’s debt as a proportion of its stockholders’

equity. Debt is risky for a company because specific interest payments must be made even if

the company has not earned sufficient income to pay them. Despite the risk associated with

debt, however, most companies obtain significant amounts of resources from creditors

because of the advantages of financial leverage. In addition, interest expense is a deductible

expense on the corporate income tax return. In selecting a capital structure, a company must

balance the higher returns available through leverage against the higher risk associated with

debt. Because of the importance of the risk-return relationship, most analysts consider the

debt-to-equity ratio a key part of any company evaluation. Bad thing is that ratio is on its five

year high, 5.28, and this increase in liabilities over equity led to decrease in cash coverage

ratio, because the bigger liabilities are, the bigger interest expense is.

5.5 Market test

Several ratios, often called market tests, relate the current price per share of stock to the

return that accrues to investors. Value of this test is questionable, regarding companies

future performance, because markets do not always reflect actual situation companies

potential to earn money in short and middle long periods.

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

2007 2008 2009 2010 2011

Cash coverage ratio Debt-to-equity ratio


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Price/earnings (P/E) ratio=Current Market Price per Share/Earnings per Share

The price/earnings (P/E) ratio measures the relationship between the current market price of

a stock and its earnings per share. In economic terms, the value of a stock is related to the

present value of the company’s future earnings. Thus, a company that expects to increase its

earnings in the future is worth more than one that cannot grow its earnings (assuming other

factors are the same). However, while a high P/E ratio and good growth prospects are

considered favorable, there are risks.

When a company with a high P/E ratio does not meet the level of earnings expected by the

market, the negative impact on its stock can be dramatic.

2008 2009 2010 2011

Price/earnings (P/E) ratio 15.04 83.90 48.20 25.48

As we can see this ratio has a huge fluctuations during years, so it is not very useful for

analyze.

Dividend yield ratio=Dividends per Share/Market Price per Share

When investors buy stock, they expect two kinds of return: dividend income and price

appreciation.

The dividend yield ratio measures the relationship between the dividends per share paid to

stockholders and the current market price of the stock. Obviously this ratio increases if

market price goes down if at the same time dividends per share stay the same and vice verse.

The dividend yield for most stocks is not high compared to alternative investments. Investors

are willing to accept low dividend yields if they expect that the price of a stock will increase

while they own it. In contrast, stocks with low growth potential tend to offer much higher

dividend yields than do stocks with high growth potential. These stocks often appeal to

retired investors who need current income rather than future growth potential.

Dividends per share are very constant during last five years and it was around 1.08 euros per

share except for the last year when it dropped slightly to 1.03, but despite that ratio jumped

to over 7% as a result of dramatic fall of market value of their shares which worth 53.52

euros at end of 2007, 30.85 euros at end of 2010 and just 14.27 at the end of last year.


Page 30 of 34

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

2007 2008 2009 2010 2011

Dividend yield ratio


Page 31 of 34


Page 32 of 34

Conclusion

Large companies tend to be less affected by short- term crisis due to their size. However, it is

that same size that can make survival of the company harder during long-term crisis, since it

is more difficult for big systems to adapt to changing environments.

Taking all the above data into account, we may observe that Carrefour was greatly impacted

by the global economic crisis which started in 2008 and they are still trying to recover. Last

years’ sales were below the sales level of 2007 and dropped down from previous year almost

10 percent.

Gross profit margin also decreased, based on the company’s attempt to remain competitive

under shrinking market conditions, which impacted profit in all levels. The above lead to a

decrease in operational cash flow. In order to manage this, the company stopped making

further investments and started reducing their overall debt, in an attempt to reduce

financing cost. Furthermore, in order to generate cash, they started selling parts of the

group, reducing equity.

Assuming that this analysis is used for solvency purposes, we may conclude that although the

company is facing difficulties that are reflected to its financial statements, its size, its brand

name, the nature of its business which allows it to generate cash and its increasing liquidity

ratios despite the crisis, it may be characterized as liquid and solvent.


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Appendix: Financial Statements


Page 34 of 34

References

[1]Carrefour, 2011 Financial Report, www.carrefour.com

[2] Carrefour, 2010 Financial Report, www.carrefour.com



[5] Official Carrefour sustainability report - http://www.carrefour.com/docroot/groupe/C4com/Pieces_jointes/RA/2011/84657_RADD_Couv_GB_BD%20WEB.pdf , 3/11/2012

[6] Article about the position of Carrefour in Balkans - http://www.emarketdeals.gr/?p=15711 , 3/11/12

[7] Information about stock exchange, http://uk.finance.yahoo.com

[8] Information about multinational companies per industry, http://biz.yahoo.com/ic/40/40719.html , 3/11/2012

[9] Carrefour group presentation - http://www.carrefour.com/docroot/groupe/C4com/Pieces_jointes/Autres/Presentation_Carrefour_2011_VENG_2.pdf , 3/11/2012

[10] Carrefour Group Supply Chain Strategy - http://www.carrefour.net/elements/22296/pj/en/strategie_supplychain_groupe_06_2007_eng.pdf , 3/11/2012

http://www.carrefour.com/docroot/groupe/C4com/Pieces_jointes/RA/2011/84657_RADD_Couv_GB_BD%20WEB.pdf

http://www.carrefour.com/docroot/groupe/C4com/Pieces_jointes/RA/2011/84657_RADD_Couv_GB_BD%20WEB.pdf

http://www.emarketdeals.gr/?p=15711

http://uk.finance.yahoo.com/

http://biz.yahoo.com/ic/40/40719.html

http://www.carrefour.com/docroot/groupe/C4com/Pieces_jointes/Autres/Presentation_Carrefour_2011_VENG_2.pdf

http://www.carrefour.com/docroot/groupe/C4com/Pieces_jointes/Autres/Presentation_Carrefour_2011_VENG_2.pdf

http://www.carrefour.net/elements/22296/pj/en/strategie_supplychain_groupe_06_2007_eng.pdf

http://www.carrefour.net/elements/22296/pj/en/strategie_supplychain_groupe_06_2007_eng.pdf

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Financial analysis of Carrefour