Question

5) “Carrefour S.A. (Euronext: CA) is a French multinational retailer headquartered in Boulogne Billancourt, France, in the Hauts-de-Seine Department near Paris. Carrefour is one of the largest hypermarket chains in the world (with close to 1,600 hypermarkets at the end of 2015), the fourth largest retail group in the world in terms of revenue (after Wal-Mart, Tesco and Costco), and the second in profit (after Wal-Mart). Carrefour operates in more than 30 countries, in Europe, the Americas, Asia and Africa. Recently, the management of Carrefour reviewed its situation under conditions of stagnant growth and increasing competition from international rivals like Wal-Mart, Tesco, etc. A team of consultants has been hired to evaluate the retail giant’s performance. As one of case team members, what metrics would you use to evaluate Carrefour’s performance?”

Answer 1

Metrics that can be used to evaluate Carrefour’s performance

Following ratios can be analysed over the last 5 or 7 years to study their movement over those years as also to predict a trend--- whether growing or stagnating:

Profitability ratios

Gross profit margin= Gross profit/Total sales revenues

Net profit margin=Net profit after taxes/Total sales revenues

Returns on different metrics:

Return on equity=Net Income/Total equity

This ratio can be split as per DU-pont formula and analysed for its various components --- to pin-point area of performance or stagnation.

ie. ROE=Profit Margin*Total Asset Turnover*Financial Leverage

ie. ROE=(Net Profit/Sales)*(Sales/Total assets)*(Total Assets/Total Equity)

By analysing the ROE as above, trends &reasons thereof, for growth /stagnation can be identified exactly, if due to low profit or low sales generated by assets employed or type of financing (equity or outside debt)

Return on assets=Net income/Total assets---shows the percentage of net income generated per $ of assets employed--a higher ratio indicates growth & vice-versa.

Return on capital employed or total investment=Net income/(Total assets-Current liabilities)

this ratio shows income generated per dollar of total capital employed ,ie. owners' capital +long-term debts or total assets-current liabilities.A higher ratio is considered favorable as it connotes more dollars generated per dollar of capital employed.

Also an improving ratio means growth & a decreasing or steady ratio means stagnation.

Market ratios:

Performance in the market is a definitive metric to assess growth & following ratios ,over the desired number of years,can be analysed to give solid clues:

Earnings per share= Net Income to equity/No.of equity shares o/s--- increasing no. indicates growth

Market price per share--- an increasing no. indicates the confidence of the investors in the market

Price/Earnings ratio= Market Price per share/Earnings per share---- reflects the mood/attitude of the investors in reply to the earnings per share & other performance metrics as the investors perceive.

Dividend yield= $ dividend/Market price per share---- measures the return to the investor per $ of their investment in one share of stock of the company--- a growing no. indicates healthy performance by the company.

Thus , various financial ratios can be studied ,over a no.of years , singly or in combination with other ratios , and compared with other companies like Wal mart & Tesco & industry average , to come to a conclusion as to whether Carrefour is on the path to growth or stagnating & ways to improve on a sustained path.