Case Study
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KEY ISSUES :
-Carrefour had been maintaining a negative net working capital that is considered as a
risky financial strategy. A negative net working capital that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory). In case of temporary recession occur during payment of short term debt, the firm may unable to pay the debt.
-Its Debt-to-Equity (D/E) ratio showed an increasing number over a period of time and it
was relatively higher than other competitors. A higher debt-to-equity ratio means that the more debt that is used and the greater risk that the entity might be forced to liquidate and go out of business. Carrefour financed its capital mostly by using a non-interest bearing trade note. Consequently, Carrefour indeed should find a way to make a slightly higher net working capital and reduce its debt-to-equity ratio.
-Maintaining a short Cash Conversion Cycle (CCC) was a good thing for Carrefour;
however, having a negative Free Cash Flow (FCF) might not be good. Some investors
believe that FCF gives a much clearer view of the ability of the company to generate cash
(and thus profits). On the other hand, a negative FCF also shows that this company was
doing large investments. If these investments earn a high return, the strategy would be a
worth for a company to provide a potential to pay off in the long run. Moreover,
Carrefours current ratio (liquidity and risk ratio) seems to look awkward in which that its
number is less than 1.0 while other competitors maintained a number greater ratio.
-As a rapidly growing company, Carrefour had great opportunities to be accepted by its
customers excitedly as a convenient and one-stop shopping center with its cheaper price compare to other available stores. This lead to a number of 40% of other small retail shops or approximately 80,000 stores had closed down in 1971. In order to solve this issue, French government to some extend decided to make tighter regulations to slow down the significant enlargement of hypermarket, such as Carrefour by limiting the number of new opening store each year (maximum of two stores per year). Another way to approach the issue broadly was increasing the tax to hypermarket and subsidized the
tax income for small shopkeepers that could not maintain their sustainability.
-While Carrefour was trying to manage its capital management, Carrefour created two
type of businesses