Financial Accounting and Reporting Case study: Carrefour

Financial Accounting and Reporting

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

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Financial Accounting and Reporting Case study: Carrefour

Table of Contents
1. 1.1 1.2 2. 2.1 2.2 2.3 2.4 2.5 3. 4. 5. 5.1 5.2 5.3 5.4 5.5 The Company profile...................................................................................................... 3 The activities of the company..................................................................................... 3 SWOT Analysis ........................................................................................................... 6 BALANCE SHEET............................................................................................................. 7 Goodwill .................................................................................................................... 8 Tangible Fixed Assets ................................................................................................ 9 Provisions ................................................................................................................ 10 Shareholders Equity ............................................................................................... 11 Main liabilities ......................................................................................................... 11 INCOME STATEMENT ................................................................................................... 12 CASH FLOW STATEMENT ............................................................................................. 15 RATIO ANALYSIS .......................................................................................................... 18 Liquidity Ratios ........................................................................................................ 19 Activity Ratios .......................................................................................................... 21 Profitability ratios .................................................................................................... 23 Test of Solvency ....................................................................................................... 27 Market test .............................................................................................................. 28

Conclusion........................................................................................................................... 32 Appendix: Financial Statements........................................................................................... 33 References .......................................................................................................................... 34

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Financial Accounting and Reporting Case study: Carrefour

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 Promods 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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Financial Accounting and Reporting Case study: Carrefour

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 areasdeli, butcher, bread, wine and beautyover sales areas ranging from 350 to 900m2. Carrefour express is the most recently devised concept in France. Designed for additional and extra emergency purchasesin both towns and rural areasthese are Carrefours 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 pmeven Sunday mornings in some cases). Carrefour Montagne stores have been operating in ski resorts since winter 2009. They feature all the advantages of Carrefours 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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Financial Accounting and Reporting Case study: Carrefour

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 Carrefours 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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Financial Accounting and Reporting Case study: Carrefour 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 supermarketsall 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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Financial Accounting and Reporting Case study: Carrefour 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
Wal-Mart Carrefour Metro

Revenue (M $)
446,950.00 104,181.20 86,372.40

Revenue Growth
6.00% -14.10% -3.10%

Employees
2,200,000 412,464 290,747

Employee Growth
4.80% -12.60% 2.60%

2. BALANCE SHEET

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Financial Accounting and Reporting Case study: Carrefour 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 yea rs, reflecting the changes in the companys strategy are shown in the following chart:
Total Assets 55,000 54,000 53,000 52,000 51,000 50,000 49,000 48,000 47,000 46,000 45,000 2007 2008 2009 2010 2011

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 companys 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 entitys functional currency. Its recoverable amount is subsequently monitored at the level of the cashgenerating 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 CarrefourPromods 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.

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Financial Accounting and Reporting Case study: Carrefour 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:
Latin America 3,277 3,279 Harddiscount stores

Total Tangible fixed assets for 2011 Tangible fixed assets 2010 13,771 15,297

France 4,269 4,177

Rest of Europe 4,741 4,839

Asia 1,484 1,405

1,597

In the next graph, we can observe the fluctuation and correlation between the main noncurrent assets:
Tangible xed assets 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2007 2008 2009 2010 2011 Goodwill Other

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

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Financial Accounting and Reporting Case study: Carrefour

Inventories 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2007 2008 2009 2010 2011 Accounts recevible Cash and cash equivalents Other

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 companys 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.
Provisions 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2007 2008 2009 2010 2011

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Financial Accounting and Reporting Case study: Carrefour 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

Shareholders equity 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2007 2008 2009 2010 2011

We can see that the companys 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

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Financial Accounting and Reporting Case study: Carrefour

Borrowings long-term 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2007 2008 2009 2010 2011 Borrowings short-term Suppliers and other creditors

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 Groups 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 Net Income

2011 -29%

2010 +47%

2009 -75%

2008 -38%

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Financial Accounting and Reporting Case study: Carrefour

3.000

Net Income
2.479,2

Value in millions of

2.500 2.000 1.538,8 1.500

1.000 568
500 0 404 386

2011

2010

2009

2008

2007

Year
Net sales correspond exclusively to sales realized in the Groups 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.

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Financial Accounting and Reporting Case study: Carrefour

100.000 80.000 60.000 Value in millions of 40.000 20.000 17.852 0 -20.000 -40.000 -60.000 -80.000 -64.912 -67.626 -68.709,4 -64.609,4 19.873 19.127 19.515,8 18.686,3 Gross Margin Cost of Sales Net Sales

90.099
81.271

85.366

86.967

82.149

-71.640

2011

2010

2009
Year

2008

2007

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.

4.000
Value in million of 3.000 2.000 1.000 0 1 -1.000

Operating Income

3 Year

2011

2010

2009

2008

2007

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Financial Accounting and Reporting Case study: Carrefour 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.

3.500 3.000 2.500 Value in million of 2.000 1.500 1.000 500 0

Recurring Operating Income

2011

2010

2009
Year

2008

2007

4. CASH FLOW STATEMENT

Carrefour, as 99% of the companys 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:

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Financial Accounting and Reporting Case study: Carrefour

Cash and cash equivalents

6.000 5.000 4.000 3.000 2.000 1.000 0 beginning end

2007

2008

2009

2010

2011

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:
6000

5000
4000 3000 2000 1000 0 -1000 -2000 -3000 -4000 2007 2008 2009 2010 2011 Net cash from operating activities Net cash used in investing activities Net cash used in financing activities

We can notice that both, operating and cash flow from investing activities has decreasing trends, which means that companys struggle in the last few years (constantly declining sales) made them choose conservative approach and cause reduction in investment and debt.

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Financial Accounting and Reporting Case study: Carrefour The cash flow from operating activities is:
6.000 5.000 4.000 3.000 2.000 1.000 0 2007 2008 2009 2010 2011 Net cash from operating activities (excluding financial services companies) Net cash from operating activities Cash flow from operations

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 CASH FLOWS FROM OPERATING ACTIVITIES Depreciation and amortization expense Cash flow from operations Percentage 1.795 2.576 69,68 2.033 3.393 59,92 1.965 3.381 58,12 1.946 4.012 48,50 1.790 3.918 45,69 2010 2009 2008 2007

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..

Inventories

2011 6.848

2010 6.994

2009 6.670

2008 6.891

2007 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.

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Financial Accounting and Reporting Case study: Carrefour From the balance sheet we have the following data:
Non-current assets Assets held for sale 2011 44 2010 472 2009 241 2008 150 2007 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:

12/31/2010 (in millions of euros) Public placements Private placements Fair value adjustments to hedged borrowings Total bonds and notes Maturity 9,296 368 (177) 9,488

Issues

Repayments

Other movements

12/31/2011

500

(1,400) (42) (1)

8,396 326 (178) 8,545

500

(1,442)

(1)

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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Financial Accounting and Reporting Case study: Carrefour 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 companys 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 years values of the ratios with current one, and examining the trend that exists throughout the years.
Current ratio Carrefour 0.76 0.74 0.72 0.70 0.68 0.66 0.64 0.62 0.60 2007 2008 2009 2010 2011 Current ratio

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Financial Accounting and Reporting Case study: Carrefour

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 isnt sati sfactory, 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 Carrefours Quick ratio 0.39 2008 0.43 2009 0.44 2010 0.43 2011 0.46

The quick ratio for 2011 is 0.46, which doesnt 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 companys 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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Financial Accounting and Reporting Case study: Carrefour

2007 Carrefours Cash ratio 0.15

2008 0.19

2009 0.12

2010 0.11

2011 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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Financial Accounting and Reporting Case study: Carrefour

Comparison of Carrefours ratios of accounts payable and accounts receivables:

Accounts Payable Turnover Ratio Accounts Receivable turnover ratio

18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 2008 2009 2010 2011

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 didnt slow down in payments during last four yea rs, 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 companys operation. However, increases in the ratio do not mean that it is always good for the company. It might mean that inventory is
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Financial Accounting and Reporting Case study: Carrefour 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 Carrefours Inventory turnover ratio Average Days Supply in Inventory 9.99 36.54 2009 9.97 36.60 2010 10.49 34.81 2011 9.38 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 companys profitability and view the amounts o f 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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Financial Accounting and Reporting Case study: Carrefour 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, thats 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 companys 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 thats 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.
Gros Profit margin= Gros profit/net sales 22.00% 21.50% 21.00% 20.50% 20.00% 19.50% 19.00% 18.50% 18.00% 2007 2008 2009 2010 2011

Net Profit Margin = Net Profit/Net Sales The net profit margin shows how much net profit is derived out of every dollar of the companys 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 Net Profit margin 3.02% 2008 1.77% 2009 0.45% 2010 0.63% 2011 0.50%

ROE = Net Income/Average Stockholders Equity

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Financial Accounting and Reporting Case study: Carrefour 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 companys 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.

Comparasion Carrefour's ROE vs ROA

16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2008 2009 2010 2011 ROE ROA

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 4year 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 companys return on equity differs from its return on assets (ROE ROA). Leverage is positive when the rate of return on a companys ass ets exceeds the average after-tax interest rate on its borrowed funds. Basically, the company borrows at one rate and invests at a higher rate
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Financial Accounting and Reporting Case study: Carrefour 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 shares 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.

EPS Carrefour 2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 2008 2009 2010 2011 EPS

Quality of income=Cash Flows from Operating Activities/Net Income Most financial analysts are concerned about the quality of a companys earnings because some accounting procedures can be used to report higher income. One method of evaluating the quality of a companys 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 Carrefours ratio is well above 1, which is logical because they usually sell for cash.

Numbers for this ratio are taken directly from final financial statements of Carrefour, so we didnt make any additional calculation, just interpretation.
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Financial Accounting and Reporting Case study: Carrefour

2007 Carrefours Quality of income 1.58 2008 2.61 2009 8.76 2010 5.97 2011 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 companys investment in fixed assets. The fixed asset turnover ratio is used widely to analyze capitalintensive 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 Carrefours Fixed asset turnover ratio 5.88 2009 5.72 2010 5.94 2011 5.59

5.4

Test of Solvency

Solvency refers to a companys ability to meet its long -term obligations. Tests of solvency, which are measures of a companys 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 Carrefours Times interest earned rat io 7.25 2008 5.34 2009 2.68 2010 2.93 2011 2.86

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Financial Accounting and Reporting Case study: Carrefour

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.
Cash coverage ratio 10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 2007 2008 2009 2010 2011 Debt-to-equity ratio

Debt-to-equity ratio = Total Liabilities / Stockholders Equity The debt-to-equity ratio expresses a companys 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.
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Financial Accounting and Reporting Case study: Carrefour 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 companys 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 Price/earnings (P/E) ratio 15.04 2009 83.90 2010 48.20 2011 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.

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Financial Accounting and Reporting Case study: Carrefour

Dividend yield ratio 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 2007 2008 2009 2010 2011

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Financial Accounting and Reporting Case study: Carrefour

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 companys 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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Financial Accounting and Reporting Case study: Carrefour

Appendix: Financial Statements

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Financial Accounting and Reporting Case study: Carrefour

References
[1]Carrefour, 2011 Financial Report, www.carrefour.com [2] Carrefour, 2010 Financial Report, www.carrefour.com [3] Carrefour, 2009 Financial Report, www.carrefour.com [4] Carrefour, 2008 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_Car refour_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_e ng.pdf , 3/11/2012

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