Case 2 : Carrefour, S.A.
Working Capital Management
Course : Financial Management, MMUGM Sby AP 7Instructor: Dr. Erni Ekawati, MBA, MSA
Group member :
1.Yuli Rosiana2.Hidayat Akman3.I Ketut Widya N.4.Robby S. Irawan5.Yogik H. Wijayanto
KEY ISSUES :
Carrefour had been maintaining a negative net working capital that is considered as arisky financial strategy. A negative net working capital that a company currently isunable to meet its short-term liabilities with its current assets (cash, accounts receivableand 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 itwas relatively higher than other competitors. A higher debt-to-equity ratio means that themore debt that is used and the greater risk that the entity might be forced to liquidate andgo out of business. Carrefour financed its capital mostly by using a non-interest bearingtrade 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 wasdoing large investments. If these investments earn a high return, the strategy would be aworth for a company to provide a potential to pay off in the long run. Moreover,Carrefour’s current ratio (liquidity and risk ratio) seems to look awkward in which that itsnumber 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 itscustomers excitedly as a convenient and one-stop shopping center with its cheaper pricecompare to other available stores. This lead to a number of 40% of other small retailshops or approximately 80,000 stores had closed down in 1971. In order to solve thisissue, French government to some extend decided to make tighter regulations to slowdown the significant enlargement of hypermarket, such as Carrefour by limiting thenumber of new opening store each year (maximum of two stores per year). Another way