School of Sustainable Development of Society and Technology Financial Accounting 2 EFO024 (7,5 hp) Project Assignment VT 2012 Vsters

s 2012-06-11

COMPARISON, INTERPRETATION AND ANALYSIS OF THE LATEST TWO YEARS FINANCIAL STATEMENTS OF RENAULT AND PSA PEUGEOT CITROEN

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GROUP 9 o OJEABULU OSEBHAHIEMHEN o IHEDIOHA EBERECHUKWU o YUN LI, YU o MOMODU JEMINU JAMIU o KAREEM SAYEEDs

Table of Contents

Page

1.0 Introduction ......3 1.1 Introduction: PSA Peugeot Citroen....3 1.2 Introduction: Renault..4 1.0 RATIO ANALYSIS..5 2.1 SHAREHOLDER.5 2.2 EFFICIENCY.....7 2.3 SOLVENCY................................................................................................................................8 2.4 CAPITAL STRUCTURE....9 2.5 PROFITABILITY....11 3.0 ANALYSIS OF CASH FLOW STATEMENT..12 4.1 PSA PEUGEOT CITROEN OUTLOOK FOR 201214 4.2 RENAULT OUTLOOK FOR 2012...14 5.0 CONCLUSION ..15 6. 0 REFERENCES...15

1.0 INTRODUCTION
Performance of a company is a very important factor to be considered by an investor. In this case we use the financial performances to evaluate the past and then advise any investor who considers investing in these companies. A good financial performance is also a good reason to make the shareholder to invest in any company; since investors seek to get better return on investments. In this project, we will analyze the financial performance in both Renault and PSA Peugeot Citron. In order to help the shareholder to know more about their company; be better equipped to make investment decisions. 1.1. PSA PEUGEOT CITRON PSA Peugeot Citroen Group (French: PSA Peugeot Citron) is a French car manufacturing company, owned by the Peugeot Motor Company, which owns the Peugeot and Citroen car brands. In Europe, PSA Peugeot Citron is the second largest car manufacturer after Germany's Volkswagen European . As the second largest car manufacturer in Europe, PSA Peugeot Citroen Group is continuing to increase sales outside of the European market (especially in Latin America and China), 1 069 000 were sold, accounting for 32% of total group sales. PSA Peugeot Citroen has stronger presence in Europe. In 2011, the worlds automotive markets expanded by an aggregate which was 3%. Growth was led by vibrant emerging markets, with Latin America up 8%, Russia up 39% and China (cars only) up around 3%.

According to this figure we can know the company increases their revenue from 26016 euro to 29912 in 2010 to 2011. It is a high increase. In the 2011, the worlds auto market expanded by 3 percent of the total. Dynamic emerging market is the reason for growth. It grew up 8% in Latin America, 39% in Russia and 3% in China (cars only). The environment and the austerity measures of the economic recession in the European market since last summer. The overall demand was shaping contraction in the European market since last summer. The overall demand shaping contraction of 0.5%.

Performances for countries are different. It grew by 9.4% in the Germany market, 1.3% in France, 2.4% in the UK, 16.9% in Spain, 10.5% Italy and 1.9% Central and Eastern Europe. With its strong presence in Europe- especially Spain, Italy and the UK-PSA Peugeot Citroen group experience a 1.5% decline in global sales. Unit sales in Europe decreased by 6.1%, but grew in other areas for 39% in the total group of 42% sales outside of Europe in 2010. In 2011, automotive revenues grew 3.2$ to reach 42,710 billion euros. Increasing revenue from new car sales amounted to 6.5% in 2010. Changes in product mix rose from $2167 to $ 70000. Unit sales of assembled vehicles decreased by 2.2%, excluding China.

1.2 RENAULT Renault is a French vehicle manufacturer, the types of vehicles produced small cars, mid-size cars, SUVs, large cars (including trucks and engineering vehicles and buses). The group is engaged in the full-line manufacture of three brands-Renault, Dacia and RSM. Renault is the largest industrial enterprise of France. It is one of the most important European car manufacturers. The total number of employees grew up to 122,615. In the world of 2011, Renault sold a total of 2,722,062 vehicles. This was an increase of 3.6 percent; a high record. The company is administered by a Board of Directors composed of 19 members (10 of them being independent. To achieve its objectives and maintain the highest standards of corporate governance, Renault pays close attention to the balance between its management, its supervisory bodies and its shareholders 1 In 2011, they met two objectives, namely an increase in sales volumes and operational free cash flow of over 500 million euro. Renault car sales growth was driven by international events. In 2011, they recorded a sales growth 0f 19% for the international sales. For the first time, they broke through the one million mark, 43% of the account of our total sales.

The group is still into an alliance with Nissan. The Renault-Nissan Alliance as it is called, provides a unique platform where both parties can increase their economies of scale while they maintain their identity. The Alliance sold over eight million vehicles in 2011. With this alliance both partners are able to share research and development and investment

http://www.renault.com/en/groupe/management-et-gouvernance/pages/management-et-gouvernance.aspx

expenditure and vehicle platform costs. In 2011 the alliance generated more than 1.5 billion extra savings.

2.0 RATIO ANALYSIS

This part of the project seeks to give an informative view of the information contained in the financial statements of both companies. This is done using accounting ratios and information sourced from the internet.

2.1 SHAREHOLDER
2.1.1 DIVIDEND YIELD This gives the rate of return by comparing the dividend paid to the market price of a share i.e the percentage of earnings that is paid out to holders of shares. When higher ratios are paid out it therefore follows that higher dividend will be paid out. Using this ratio, an investor can better access the expected rate of return to be expected from any investment. Dividend Yield = YEAR 2011 2010 PSA PEUGEOT CITROEN 0.0% 4.1% RENAULT

A comparison of PSA Peugeot Citroen shows the company recorded a dividend yield of 16 4.1% in 2010. However the companys dividend yield for 2011 is unknown. No dividend was recommended for year 2011 at the Annual General Meeting held 25 th of April, 2012 This is as a result of the companys management allocating financial resources to the Groups development. 2 In the case of Renault it can be seen that the company recorded a 0.7% dividend yield in 2010 and further boosted this figure in 2011 with a dividend yield of 4.3% in 2011. This shows that the shareholders had better returns in 2011; as a result it can be deduced that the company fared better in its operations. 2.1.2 EARNINGS PER SHARE (EPS) This is the ratio used to measure the contributions of each ordinary share in the company to the companys profit. It gives the best view of performance and is most widely used. It is also calculated as:

http://www.psa-peugeot-citroen.com/en/finance/peugeot-sa-share/dividend

YEAR 2011

PSAPEUGEOT CITROEN 2.64

RENAULT 7.68

2010

5.00

12.70

From the results above it can be seen that PSA Peugeot Citroen had a decline in its Earnings per Share. This was also the case for Renault. The decline may be attributed to a reduction in the net profit attributed to ordinary shareholders. Earnings per share is a needed incentive to attract investors. It would however be wrong to base the decision to invest in these companies solely on this. As such we need to further consider other ratios that would give us divergent view on the accuracy of this analysis. 2.1.3 PRICE EARNINGS RATIO This ratio relates the earnings per share to the market price of the shares. This ratio can be seen as relevant because it is a useful indicator of how the stock market assesses the company. The ratio also comes handy when investors need to assess the expected future earnings of new shares being proposed by a company. The ratio is expressed The ratio is expressed: A higher P/E ratio gives the impression that investors are expecting higher earnings, and as companies have to guard against a fall in P/E ratio.

YEAR 2011 2010

PSA PEUGEOT CITROEN

RENAULT

From the results above it can be seen that PSA Peugeot Citroen had a higher P/E in 2011 of 4.5 compared to that of Renault in the same year, which was 3.5. This result of PSA Peugeot

Values can be found on pages 11 and 61 of Annual reports of both companies.

Citroen was below the P/E ratio of 2010 which was 6.2. Renault on the hand saw an improvement in its figure from 3.4 in 2010 to 3.5 in 2011. Since PSA Peugeot Citroen had the higher value it becomes wise to invest in the company.

2.2 EFFICIENCY
2.2.1 ASSET TURNOVER:

This gives a measure of how effectively assets of a company are being used to generate sales. When a company has a lower asset turnover than its competitors, the impression is that, there may have been over investment in assets. This can lead take over by other companies who seek to retain the company in its present form while selling off the surplus assets. Using the above formula we obtain the data below YEAR 2011 PSA PEUGEOT CITROEN 59912/68991-41944=2.2 RENAULT 42628/72934-38954=1.25

2010

56061/68491-41551=2.1

38971/70107-37152=1.18

From the data above it can be seen that PSA Peugeot Citroen has had a better asset turnover when compared to Renault. However the results cannot be fully relied on as several factors could have contributed to having PSA Peugeot Citroen having a better turnover than Renault, e.g PSA Peugeot Citroen using a lower depreciation rate than Renault. Other instances when this would have occurred would be in selling prices being suppressed in order to maximize volume.4 It therefore becomes necessary to utilize other ratios to get a better view of the companys asset turnover position before making an investment decision. 2.2.2 ACCOUNT RECEIVABLE DAYS This gives an indication of how efficient a company has been in controlling its accounts receivable. Accounts receivable days is also known as debtor days.

The above formula when applied to the companies under analysis provides us with the following data YEAR PSA PEUGEOT CITROEN RENAULT

Frank Woods Business Accounting 2- Frank Wood & Alan Sangster 11 Edition

th

2011 2010
5From

the results above it can be seen that PSA Peugeot Citroen had a higher debtor days of

13, compared to that of Renault which was 11days. In the case of PSA Peugeot Citroen there was a rise in the number of days it took debtors to offset their debts to the company. Renault on the other saw an improvement; as it had a reduction in its debtor days. Compared to 12days in 2010, the amount of accounts receivable days dropped to 11days. This shows that Renault was more efficient in this regard. This change could have been as a result of having strict credit policies compared to PSA Peugeot Citroen, which saw a decline in its values. PSA Peugeot Citroen should at this stage ensure they embark on reassessing their credit management policies since this decline can still be redeemable in its early stage.

2.3 SOLVENCY
2.3.1 CURRENT RATIO This ratio gives the liquidity position of company i.e. it indicates whether there are sufficient short-term assets to pay short term liabilities. The current ratio is expressed as a ratio of currents assets to current liabilities and it expressed belowCurrent ratio = YEAR 2011 2010
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PSA PEUGEOT CITROEN

RENAULT

From the results above it can be seen that both PSA Peugeot Citroen and Renault have enough liquidity top pay its short term liabilities. Though PSA Peugeot Citroen had a drop in this ability to meet such payments by 5.5% in 2011, compared to the ratio result of 1.09 it had in 2010. Renault on the other hand maintained the same results as it had in 2010.

Refer to page 22, Trade receivables of PSA Peugeot Citroen AR and page 62, Automotive receivables of Renault AR
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Figures obtained from pages 62, 23 and 24 of Annual Reports.

Our opinion here is that both management should tread with caution, so as not to experience any further decline in this ratio i.e. have a result less than 1. As such a situation shows that the company is unable to meet its short term liabilities.

2.3.2 ACID TEST RATIO This is similar to the Current ratio, but just that in this case inventory is not included in the current assets to be used in calculating the ratio. The reason for this is that inventory might be difficult to convert to cash in some cases, this helps us to look at the solvency of the company in an even shorter-term. Acid Test ratio = YEAR 2011 2010 PSA PEUGEOT CITROEN RENAULT

Going by the results above it can be seen that PSA Peugeot Citroen would not have been able to meet its obligations to pay for its current liabilities without having to convert other assets (e.g. inventory) into cash. This would not be immediately possible without offering a discount for the goods. If this is done then the company would be paying a premium for its liabilities. The situation in 2011 is different from 2010, where the company could pay its short term liabilities without having to convert its inventory. Renault on the other hand saw an improvement in its acid test ratio as it improved by 10% from 0.9 in 2010 to 1 in 2011. This means the company could have easily paid its short-term liabilities without any need to convert other assets into cash, as is the case with PSA Peugeot Citroen. It can be concluded in this case that Renault figures for 2011 are better than that of PSA Peugeot Citroen in the same year.

2.4 CAPITAL STRUCTURE

2.4.1 INTEREST COVER According to the formulae in the Frank Wood and Alan Sangster this ratio shows if enough profit are being earn to meet interest payment when due and this is calculated as follows:

YEAR 2011

RENAULT 3548/412=8.6117

PSA 1315/331=3.97

2010

2647/500=5.294

1796/455=3.95

The result above implies that RENAULT performs better currently and in the previous financial year than their counterpart. That is they perform more better in 2011 and 2010 compare to PSA Peugeot Citroen and this result implies a better management and performances that yielded more profit for the company. Therefore, I assume that future ratio will still be higher in Renault than that of PSA Peugeot Citroen. However, since both companies 2011 ratios are positive it is still a better performance which is a sign of good management for investors. 2.4.2 DEBT RATIO According to Frank Wood (Financial accounting 2, page 401), this ratio (compares the total assets) and is concerned with whether the company has sufficient assets to meet all its liabilities when due. Debt ratio = YEAR 2011 2010 RENAULT PSA

Since the debt ratio indicate the percentage of debts in total assets, so far the figures calculated in the above table indicate that PSA has a higher debt rate than RENAULT. In both fiscal year 2010 and 2011, PSA held around 79% of debt in their total assets. This figure in RENAULT is approximately 66% in average in 2010 and 2011. In both companies, the debt ratio is higher in 2010 than the current year; this could be a sign of a reduction in production and assets. However, since PSA has a higher debt ratio than RENAULT in both 2010 and 2011, it could be understood that PSA is taking more risks than RENAULT since they have been relying too much on debt to finance their assets. Despite its sometime encouraging to borrow to run business in order to reduce high tax. It can be concluded that they have the burden of a heavy interest and principle repayment than RENAULT. 2.4.3 DEBT: EQUITY RATIO This ratio measures the financial leverage of the company and indicates what proportions of liabilities and equity the company uses to finance its assets.

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Debt to equity ratio =

YEAR 2011 2010

RENAULT

PSA

The higher figures from PSA group shows a bigger risk in investing in the company compared to RENAULT group. PSA group had a 3.78 debt to equity ratio in 2010 meaning that for each euro in equity RENAULT has a debt of 3.78 euros. By looking at the numbers in the equation from 2011 for PSA we can see an increase in both equity and liabilities and reduction in the ratio of the figures that tells us the financial leverage is higher. When borrowing more money the need of equity becomes less and profits and losses are shared among a smaller base. RENAULT group has much lower debt to equity ratio than PSA that tells that there is a bigger risk investing in PSA than RENAULT. RENAULT in all indication has a low ratio which makes it a reasonable enough in the industry. PSA has a debt to equity ratio much higher than the industry usually has and can therefore have difficulties to attract new investors which may rather choose to support RENAULT because of its seemingly smaller risk.
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2.5 PROFITABILITY
2.5.1 GROSS PROFIT: SALES This is a commonly used ratio for evaluating profitability of a company. It shows proportion of the sales that is converted to gross profit after Cost of goods sold has be removed from the revenues. 8 Gross Profit: Sales = YEAR 2011 2010 Considering the figure (result) above, there seem to be slight decrease in the both company which implies a lower return on their sales.
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RENAULT

PSA

Figures obtained from PSA Peugeot _ Citron and Renault 2010 and 2011 Annual Reports. Cf Woods and Sangster Business accounting 2

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In the case of Renault, there is a decrease of 1% between 2010 and 2011 from 21% to 20%. Whereas PSA had 2% decrease of return on its sales from 19% to 17%. However, this decrease that occurred in both company shows that the industry itself may have experience some economic problem. In both years, Renault shows to be more profitable in terms of gross profit on revenues considering its proportion of revenue and the profit made to that of PSA. Perhaps from a bigger demand and higher price of cars, automobile seems cheaper to produce by Renault. In order to get the cost of goods sold we deduct the gross profit from the sales we can get the figure for cost of goods sold. N: B-For Renault Gross Profit was determined by subtracting COGS from revenue. Actually this was done to determine the COGS for both companies for the years under review. 2.5.2 RETURN ON CAPITAL EMPLOYED An adequate return on capital employed is what many investor seek or look for and is therefore one of the main reason they invest their money. In other words it gives investors an outlook and main reasons why they invest their money in a business in the first place. 9 Return on capital employed = YEAR 2011 2010 RENAULT PSA

From the figure calculated above, it is obvious that in both fiscal year 2010 and 2011, Renault could give their shareholders (investors) a good ROCE. The figures above show that Renault is an effective business earning 1.93% in 2010 and 3.36% in 2011 on the investment funds that their shareholders have invested in. However, there seems to be a decrease on ROCE in PSA considering their preceding years return, this implies that the efficiency in the past period was better.

3.0 ANALYSIS OF CASHFLOW STATEMENTS

A cash flow statement reveals the inflow and outflow of cash with regards to the companys activities. We will be analysing Renaults cash flow statement based on its operating, Investing and financing activities.
9

Woods and Sangster Business accounting 2, page 393.

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3.1 RENAULT CASH FLOW STATEMENT ANALYSIS Renault cash flow statement reveals a positive cash and cash equivalent closing balance for the year 2010 and 2011. Despite the fact that they were profitable in both years, they experienced a decrease in profit in the year 2011 in compares with 2010 of 15.6% (1353 M EURO). Profit for the year 2010 was at 10025 M EURO while in 2011 it dropped to 8672 M EURO. This shows inefficiency in the management of the companys revenue and expenses with its operating, Investing and financing activities in the year 2011. Renault Operating Activities: It reflects the companys net income from her activities like sales of goods and services, sales financing revenues. This tells the ability of the firm to service its debt and pay dividends. In 2010, revenue from sales of goods and services and sales financing revenues was 38,971 M EURO and 42,628 M EURO in 2011. They were able to yield more revenue in 2011 with an increase of 3,657 M EURO (8.6%). Operating margin shows a fall in margin in 2011 from 1,099 M EURO in 2010 to 1,091 M EURO giving a drop in margin of 8 M EURO (0.73%). But due to high other operating income and expenses in 2010 than in 2011, the company was able to get a higher operating income in 2011 of 1,244 M EURO. This shows an increase in operating income by 609 M EURO (48.95%). In both years, Renault had negative financial income. But in 2011, they performed better than in 2010. Despite these poor values, they were able to realize income from share in net income of associates. This leads to a positive net income in both years with a lower value in 2010. They realized a better cash flow from operating activities in 2011 of 3,353 M EURO than 1970 M EURO in 2011. This gives an increase in operating activities cash flow of 41.2% (1,383 M EURO). Cash flow from investing activities: In 2011, Renaults cash flow from investment activities was lower than in 2010. They had a loss standing at 2,334 M EURO due to capital expenditure of 2,455 M EURO against 1,867 M EURO in 2010 and other acquisitions of other investment. Also, in 2010, they obtained 3,114 M EURO from the disposals of other investment and nothing in 2011. Cash flow from financing activities: This gives changes in debt, dividends or loan and other financing activities related to the company. There has been a negative in both years 2010 and 2011 of 1,467 M EURO and 2,350 M EURO respectively in capital contribution. Indicating that more funds has been raised to finance the company. This results from Automotive Bond redemption and net decrease in other financial liabilities.

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Conclusively, despite positive results in both years, Renault has dropped in profit in 2011 due to their involvement in investment and financial activities.

3.2 PEUGEOT CITROEN CASH FLOW STATEMENT ANALYSIS

From Peugeots cash flow statement we can see a positive cash and cash equivalent closing balance for the year 2010 and 2011 of 10,442 M EURO and 5,694 M EURO respectively. This shows a decrease in profit in the year 2011 comparing with 2010 of 45.5% (4,748 M EURO). Peugeot Operating Activities: In 2011, revenue from consolidated profit for the year and funds from operations stood at 784 M EURO and 2,935 M EURO respectively. This gives a net cash from operating activities of 1, 752 M EURO. This is lower than 4,045 M EURO obtained in the year 2010. They yielded a decrease of 2,293 M EURO (56.7%). Cash flow from investing activities: In 2011, Peugeots negative cash flow from investment activities was lower than in 2010. They had an outstanding loss of 3,732 M EURO as a result of more investments in property, plant and equipment and intangible assets. Cash flow from financing activities: There exist a negative in 2011 of 2,771 M EURO and a net positive value of 106 M EURO in 2010. Thus Indicates that Peugeot in 2010 was able to make money financial activities especially from changes in other financial assets and liabilities. In 2010 they spent much on financing activities especially in changes in other financial assets and liabilities. This results from Automotive Bond redemption and net decrease in other financial liabilities.

4.1 PSA PEUGEOT CITROEN OUTLOOK FOR 2012

Outside Europe the group estimates a growth of 7% in china, 6% in Latin America and 5% in Russia. However the market outlook suggests that the automotive market is set to contract by around 5% in 30-country Europe and 10% in France. The main objective of the group this year is to significantly pay down debt by taking advantage of the contribution of its cash management plan and also focus on new model lunches into the market.

4.2 RENAULT OUTLOOK FOR 2012

Renault currently has a 2016 plan that seeks to capitalize on three priority markets- Russia, Brazil and India. In Russia, Renault plans to launch a new model; the Duster in the first half of 2012. This launch is further expected to boost sales. In March, 2012 the group will also launch a new production line that will produce Renault, Lada and Nissan brand vehicles.

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5.0 CONCLUSION
From our analysis so far we can see that there exist so many ways for an investor to take an analytical in-depth look into the activities of a company. Such analysis of annual reports would be needed; as we cannot just make investment decisions based solely on the figures contained in these reports. We also need to know why those figures exist. From the above review of the annual report of both companies, we have been able to look at the capital structure, shareholders contribution to profit, the companys liquidity position and the cash flow statements. We hope that with this analysis the investor shareholder can make sound economic decisions on future investments with any of the companies.

6.0 REFERENCE

Frank Wood, Alan Sangster (2008); Business Accounting 2. Pearson Education Limited http://www.wikinvest.com/stock/PSA_Peugeot_Citroen_(UG-FR)
http://www.renault.com/en/groupe/management-et-gouvernance/pages/management-etgouvernance.aspx

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