An Analysis and Evaluation of the Business

and Financial Performance of PSA Group

01 January 2017 - 31 December 2019

BSc (Hons) in Applied Accounting

Oxford Brookes University

ACCA Registration No:

Submission Period: 41
Word count: 7500
Table of contents

Part 1: Project objectives and overall research approach..........................................................................2

1.1 Topic chosen and reason for selection........................................................................................2
1.2 Industry chosen and reason for selection:...................................................................................3
1.3 Company chosen and reason for selection:.................................................................................3
1.4 Industry overview........................................................................................................................4
1.5 Research questions......................................................................................................................4
1.6 Research objectives.....................................................................................................................4
1.7 Overall research approach...........................................................................................................5
Part 2: Information gathering and accounting / business techniques.......................................................5
2.1 Sources of information gathering and methods used..................................................................5
2.2 Limitation of the information gathered.......................................................................................6
2.3 Ethical conflicts and how they were resolved..............................................................................7
2.4 Accounting and business techniques used and their limitations.................................................7
2.4.1 Ratio analysis.......................................................................................................................7
2.4.2 SWOT analysis......................................................................................................................9
2.4.3 Porter’s Five Forces............................................................................................................10
Part 3: Results, analysis, conclusions and recommendations:.................................................................11
3.1 Analysis of business performance..............................................................................................11
3.1.1 SWOT Analysis...................................................................................................................12
3.1.2 Porters’ Five Forces............................................................................................................13
3.2 Analysis of financial performance..............................................................................................16
3.2.1 Profitability ratios..............................................................................................................17
3.2.2 Liquidity ratios...................................................................................................................22
3.2.3 Efficiency ratios..................................................................................................................23
3.2.4 Leverage ratios...................................................................................................................27
3.2.5 Market ratios.....................................................................................................................28
3.3 Conclusions and recommendation............................................................................................32
Part 1: Project objectives and overall research approach

1.1 Topic chosen and reason for selection

I selected topic 8: An analysis and evaluation of the business and financial performance of an
organization over a three year period, to conduct my research project.

Reason for selection:

Throughout my ACCA studies, I excelled in business and financial analysis. I believe this would
enable me to carryout comprehensive research work required for this project. The main
reasons why I paid attention towards this area is not only because it helps me to apply the
knowledge I gained through ACCA modules, but also because I have to go through a lot of
business and financial performance comparisons at work due to the nature of the job I am
involved in. This topic area enables me to apply and further enhance my knowledge and
strength on a real world company to test my analysis and interpretation skills in a more realistic
way.

1.2 Industry chosen and reason for selection:

Since I have selected Topic 8 for my research, the company selection has been restricted to
three industries. The approved industries are Automobiles and parts, Media and Industrial
Transportation. Media industry is more service based and requires technical knowledge. I am
also not too familiar with industrial transportation due to the lack of knowledge in this industry.

Hence, for this research and analysis project, I chose to go with automobiles as it is a
production based industry with lots of secondary data information available from different
sources.

1.3 Company chosen and reason for selection:

My research and analysis project is based on PSA Group. PSA (Peugeot Société Anonyme) was
founded in 1966. The merger of Citroën S.A and Peugeot S.A in 1976 gives rise to the PSA
Peugeot Citroën group. In 1978, they took over Chrysler Europe making it Europe’s number-one
group and world number-four. On 2016, PSA Peugeot Citroën became PSA Group outlining the
strategic plan “Push to Pass” for the 2016-2021 period. Their brands includes Peugeot, Citroën,
DS Automobiles, Opel and Vauxhall. (Groupe PSA, 2020)
On 17 December 2019, PSA Group and Fiat Chrysler Automobiles (FCA) announced that they
have agreed to the terms of a merger. However, the merger is yet to be approved by the
shareholders as at the year ended. (PSA Group, 2020)

For the purpose of performance comparison, Renault Group is taken as a competitor firm who
is also an automobile manufacturer producing cars and vans. The reason why I took Renault
Group as a competitor is due to the similarity in product portfolio and the similarity in their
global sales revenue in the recent years.

1.4 Industry overview

As per French Automobile Manufacturers Committee, a total sales of 2,214,279 units were sold
during 2019 which is an increase of 1.9% compared to 2018. Used car registration also
increased by 2.8% (5,790,611 total vehicles) in 2019 compared with 2018. In 2019, electric car
sales increased and diesel car sales decreased recording the highest car sales in France since
2010. A total of 1,257,843 cars were sold by the French groups (PSA and Renault) during 2019
for a market share of 56.8%. Sedans and hatchbacks remain to be the most popular body type
of cars in France in 2019. The PSA Group was the top-selling manufacturer in France and
Renault being the best selling brand in 2019 (Bekker, 2020) making these two companies wise
for business and financial comparison purpose.

1.5 Research questions

Following are the research questions which this research would be focused on:

1. What are the factors that have affected the business performance of PSA Group over
the past 3 years?
2. How well does PSA Group performed financially during the past 3 years?
3. How was the business and financial performance of PSA Group compared to Renault
Group?
4. What the company can do to improve its performance in the future?

1.6 Research objectives

The overall objective of this research and analysis project is to analyze and evaluate the
business and financial performance of PSA Group for the past 3 years (2017 to 2019), including
the factors that have affected the performance of the business and how well the business id
doing compared to its competitors, while exploring the ways what the company can do to
improve its performance in the future.

Hence, the specific objectives of this research includes the following:

1. To assess the factors that have influenced the business performance over the period
2017 to 2019.
2. To assess the factors that have affected the financial performance over the period 2017
to 2019.
3. To evaluate the business and financial performance against one of its competitor
Renault Group.
4. To identify what strategies the business can implement to improve its performance in
the future periods.

1.7 Overall research approach

I have selected topic 8, a suitable business organization and a suitable mentor to carry out my
research and analysis project. Based on the preliminary research, I found out that PSA Group is
a suitable business organization for my research project since they are one of the leading
company in the automobile industry in France and with accessible information required for my
research and analysis project.

Due to the nature of the industry and lack of internal information availability, obtaining primary
data was not possible. Hence, my research was solely based on secondary data. I obtained
secondary data from various sources of information including annual reports submitted,
websites, articles, industry reports, online news sites, etc. Information obtained from the data
has been properly referenced to avoid plagiarism.

The objective of this research analysis was to analyze how well PSA’s business and financial
analysis was throughout the past 3 years. To attend the research questions identified, I used the
SWOT analysis and Porters’ five forces to assess the business performance and ratio analysis to
compare financial performance of PSA Group against its competitor Renault Group.
Part 2: Information gathering and accounting / business techniques

2.1 Sources of information gathering and methods used

Main two sources of information are primary and secondary information. Primary source of
information is one that provides data from an original source document where a piece of
information appears for the first time. A secondary source of information is one that provides
information from a source other than the original and this information are the second-hand
version of the processed primary sources. (Johnstone High School, n.d.)

For this research and analysis project, I used only secondary sources of information. It is not
possible to gather primary information as the company and the competitor selected are both
foreign companies and due to the industry restrictions. However, the secondary information
gathered are reliable and sufficient enough to carry on with this research and analysis project.
The information sources which I have used are listed below:

 Annual reports: The latest three published annual reports of both companies were used
to obtain updated information covering both the business and financial performance.
Annual reports were used to calculate ratios for analysis and evaluation of the financial
performance of the business.
 Company website: Company website was used to get a good understanding of the
business. Information such as their corporate governance, ethics and other
responsibilities, brands owned, industrial performance and annual reports were
obtained from company website.
 Other websites: Other websites were accessed to gain more understanding throughout
the research topic and these information were used to support the analysis.
 Online news articles: Online news articles were used to identify opportunities and
threats PSA Group is facing from its competitors for SWOT analysis, and to understand
the market it operates to apply Porters’ five forces model effectively.

2.2 Limitation of the information gathered

Omission of primary sources of information itself is a huge limitation. Limitations of secondary
information includes:
  Information provided by a secondary source might sometimes be outdated, which could
have an impact on fast changing markets.
 Quality and reliability of the information cannot be easily guaranteed and might be
misleading.
 Sources written by a biased observer makes the source of information less reliable.

(eNotes Editorial, 2017)

There are certain limitations of relying solely on secondary sources of information alone:

 The users get a firsthand look into the research under primary information. Hence, there
is no risk of the information being biased or distorted. However, this research is solely
based on information gathered by other parties which might cause limitations on the
research finding.
 Information available of the business operations was limited mostly to the published
financial information. If management information has been available, a more clearer
picture of the business and financial information could have been obtained.

2.3 Ethical conflicts and how they were resolved

The main aim of ethics in research project is to make sure that no one is harmed or have to go
through any unfavorable consequences from the research activities.

Since I have used only secondary sources of information, I have used other people’s works
throughout the research and analysis project. Ethics is important when using secondary data as
copyrights are reserved in most cases. To avoid plagiarism, Harvard referencing system has
been followed properly to acknowledge other peoples works.

There is risk of collecting and presenting inaccurate data while relying solely on secondary
information. To overcome this ethical threat, proper care was given collecting information from
reliable sources. The annual reports of both the companies were extracted directly from their
website.

2.4 Accounting and business techniques used and their limitations

2.4.1 Ratio analysis

Ratio analysis helps to understand financial results and trends overtime, providing key
indicators of organizational performance. Users of information can use ratio analysis to
pinpoint strengths and weaknesses from which strategies and initiatives can be formed.
(Poznanski, et al., 2013)
The five major categories of financial ratio includes profitability, liquidity, efficiency/activity,
debt/leverage and market/investor ratios. (Wilkinson, 2010) These ratio will help to analyze the
financial performance of the business. Profitability ratios help analyze how well PSA Group
managed its assets and expenses to generate an acceptable rate of return. Liquidity ratios
measure PSA’s availability of cash to pay its debts. Efficiency ratios measure the efficiency in
management of its assets and liabilities. Debt ratio measures PSA’s long term financial viability
while market ratios measures how much the investors of PSA would earn from their
investment.

The ratios sed for this research and analysis project for the comparison of financial
performance are as follows:

Profitability Ratios:

 Gross profit margin

 Operating profit margin
 Return on capital employed

Liquidity Ratios:

 Current ratio
 Quick ratio

Efficiency Ratios:

 Asset turnover
 Inventory days
 Accounts receivable days
 Accounts payable days
 Working capital cycle

Debt/Leverage Ratios:

 Gearing ratio
 Interest cover

Market Ratios:

 Earnings per share (EPS)

 Price earnings ratio
 Dividend yield
 Dividend cover
Limitations of ratio analysis:
Some of the drawbacks of using ratio analysis are noted below:

 Information used in ratio analysis is derived from historical results, meaning the same
results might not carry forward into the future. (Bragg, 2019) Hence, it is not useful on
predicting future financial performance of the business.
 Numbers are not comparable across periods if the inflation rate changes. (Bragg, 2019)
Hence, the real prices are not reflected on the audited financials unless they are
adjusted for inflation.
 Different companies may have different policies for recording the same accounting
transactions. For example, one company might use reducing balance method
depreciation while the other company uses straight-line depreciation. (Bragg, 2019)
 Figures in financial statements are estimates. Ratio analysis is wholly based on these
information reported on the financial statement by the organization and these can
easily be manipulated. Hence, this might not reflect the true nature of the business.

2.4.2 SWOT analysis

SWOT analysis was created in the 1960s by Albert Humphrey. SWOT analysis is a compilation of
the company’s strengths, weaknesses, opportunities and threats, which helps the company to
overcome challenges and determine what new leads to pursue. Strengths and weaknesses refer
to internal factors, which are the resources and experience readily available. Opportunity and
threats are external forces influencing and affecting every company, organization and
individual, and they can’t be controlled by the company. (Schooley, 2019)

SWOT analysis can be used to identify areas where PSA Group is performing well and areas
which need improvements, especially the two external factors identifying the opportunities the
business can seize and threats they need to be aware of.

 Strengths: These are the attributes within an organization that are considered to be
necessary for the ultimate success of a project. Strengths are resources and capabilities
that can be used for competitive advantage.
  Weaknesses: They are the factors that could prevent successful results within a project.
Weak internal communication system and ineffective and high cost structure are
examples of weaknesses.
 Opportunities: These are the external elements that might be helpful in achieving the
goals set for the project. Arrival of new technology and market conditions that could
make the project desirable to the segment of the market are examples of opportunities.
 Threats: These external factors could massively affect the success of the project or
business venture. Possible threats include a negative public image, trend changes, new
regulations and new substitute products.

(University of Notre Dame, 2019)

Limitations of SWOT analysis:

Some of the limitations of SWOT analysis are listed below:

 Since SWOT analysis was created in the 1960s, it is not a valid technique in today’s
world based on change and competition. Dynamic and structural changes affect the
validity of entries in a SWOT Matrix.
 Sometimes, the same factor can be fitted in two categories. Hence, categorization of
variables into one of the four SWOT quadrants is challenging.
 SWOT analysis lacks comparison with competitors. Lack of a quantitative index to
provide an operational criterion for benchmarking obstructs the competitive analysis,
especially in a highly independent setting to evaluate the size of competitive gaps.

(Ege University, 2017)

2.4.3 Porter’s Five Forces

Porter’s Five Forces model was developed by Michael E. Porter in 1979. The five forces model
looks at five specific factors that determine whether or not a business can be profitable
compared to other businesses in the industry. Both Porter’s Five Forces model along with SWOT
analysis will help understand where the business fits in the industry. The five forces that shape
industry competition in Porter’s model are:

 Competitive rivalry: This force examines how intense the competition is in the
marketplace considering the number of existing competitors and what each can do.
 The bargaining power of suppliers: This force analyses how much power a business has
over its prices. The fewer the suppliers, the more bargaining power they have and vise
versa.
  The bargaining power of customers: This force examines the effectiveness of
consumers on pricing and quality in the market. The fewer the consumers and the more
suppliers, the more bargaining power they have and vise versa.
 The threat of new entrants: This force considers how easy or difficult it is for
competitors to join the market. The level of threat is determined by entry barriers like
economies of scale, strong brand identity, etc.
 The threat of substitute products or services: This force studies how easy it is for
consumers to switch to a competitor. It depends on the switching cost and consumers’
desire to change.

(Martin, 2019)

The above five forces can be used to identify how well PSA Group has performed in the
automobile industry and can be used to do an overall micro analysis on the industry.

Limitations of Porter’s Five Force model:

Some of the limitations of this model are listed below:

 It is impossible to apply this model to organizations with large portfolio of products or

those operating in multiple industries and markets as this model is more suitable for
firms operating in the same line of business in an industry. (Konsyse, 2019)
 This model also disregards collusion among suppliers, competitors and consumers.
These limitations of this model shows that it is a simple and one-dimensional framework
that disregards complexities. (Konsyse, 2019)
 Another drawback is that this model takes into account static forces and disregard
dynamic competition. As a result of globalization, some firms have continuously
neutralized the competitive advantage over other firms through innovation. (Samson,
2017)
Part 3: Results, analysis, conclusions and recommendations:

3.1 Analysis of business performance

3.1.1 SWOT Analysis

Strengths:
 Strong brand name: PSA Group operated three brands as of 2016 and later acquired
Opel and Vauxhall from General Motors during 2017. They have built up a remarkably
strong brand name, which enabled them to have a significant market share in European
Automobile market. The European car sales statistics shows PSA Group as the second
largest car manufacturer in Europe. (Demandt, 2020)
 Strategic plan: Under the “Push to Pass” strategic plan of PSA Group, they are to launch
one new car per year per brand (Peugeot, Citroen and DS Automobiles) per region
which pivot around consistent performance and strong geographic expansion. This
enables the company to expand its production and increase their sales revenue.
(Pathak, 2019)
 New market segment: PSA Group re-entered the American market after almost 30 year
gap using their Free2Move mobility services as a strategic launch pad. PSA Group’s
Free2Move mobility services generated nearly 4 billion pounds in North America during
2018. Lately, the automobile market shows a strong trend towards new forms of
mobility such as car-sharing, car-pooling and connected services. The Free2Move
mobility brand has addressed this by participating in a strong and visible manner in the
mobility market. (Pathak, 2019)

Weaknesses:
 Increase in cost: After acquisition of Opel and Vauxhall in 2017, PSA Chairman stated
that Opel will remain German and Vauxhall will remain British. PSA promised to honour
existing job guarantees at Opel and Vauxhall, securing jobs at least until 2021. This
resulted in PSA facing labour issues as the workforce of these two brands are based on
high-cost German and British market, which in turn increased cost for the business.
(Sigal, 2017)
  Global presence: Even though PSA Group is the second largest automobile
manufacturer in Europe, automobile production outside Europe by PSA Group is low.
80% of sales in 2018 and 87% of sales in 2019 are from European region. In order to
achieve its Push to Pass strategic plan, there presence outside Europe to achieve a
global carmaker with cutting-edge efficiency is vital. (Business Wire, 2020)
 Cars recalled: Due to a potential window failure, PSA Group has recalled 10,368 Peugeot
and Citroen cars in Russia on 23 April 2019. (Reuters, 2019) On the same year, Peugeot
Citroen Australia recalled some vehicles over concerns the middle seatbelt could be
faulty. This, in turn, dissatisfied their customers. (Wong, 2019)

Opportunities:
 Expand to new markets: PSA Group has launched its Free2Move application, which is a
mobility and car sharing services, in North America in 2018. However, this car sharing
service is only live in Washington DC. Hence, PSA Group have an opportunity to expand
this service to other states, which in turn will improve their presence in North America
and help expand the business further. (Auto Remarketing, 2019)
 Increasing demand for electric cars: Demand for electric cars, which include battery
electrics and plug-in hybrids, has increased vastly over the past years as per the auto
industry federation ACEA. Since 2019, all new models launched by PSA Group come with
either an all-electric or a plug-in hybrid powertrain, which gives them an opportunity to
build-up a niche market producing electric vehicles. (Bannon, 2020)
 Increase in consumer spending: For the past three years, consumer spending has been
increasing every quarter in European Union. This increase is the result of higher income
and higher standard of living resulting an increase in demand for luxury products like
cars. This gives an opportunity for PSA to increase their production to cater the increase
in demand. (Trading Economics, 2020)

Threats:
 Ceased operations in Iran: PSA withdrew its operations from Iran during 2018 to comply
with American law to avoid US sanctions due to the withdrawal from the Iranian nuclear
deal. PSA Group sold 444,600 during 2017 in Iran making it one of the biggest markets
of PSA outside France. Their investment of €700 million on joint ventures with two
Iranian automakers resulted a high sunk cost for PSA. (Verhelle, 2018)
 CO2 emissions regulation: European car makers face a huge challenge to reduce carbon
emissions to an average 95 grams per kilometer by the 2021 deadline. A fine of €95 per
vehicle, per excess gram of CO2, would add up to hundreds of millions of euros annually
 if they miss the target. The CEO of PSA Group stated that failure to comply can threaten
the company’s existence. (Frost & Guillaume, 2017)
 Threat of Brexit: PSA Group’s Vauxhall production is under threat from Brexit. PSA had
halted investments at its UK factories while the outcome of Brexit remains unclear.
Brexit disrupted supply chains in Europe and Britain and the jobs and investments are at
stake. (BBC News, 2019)

3.1.2 Porters’ Five Forces

Competitive rivalry:
Few, but influential brands (18 major automobile groups), dominate the automobile industry in
Europe. Volkswagen Group tops the European automobile industry with a market share of
24.5% while their nearest rivals PSA Group and Renault-Nissan saw a market share of 15.7%
and 14% during the year 2019. The market share shows the intense rivalry on this industry.
Auto firms in Europe are investing highly on research and development in the field of electric
and autonomous cars, marketing and providing good customer care services making the
industry highly competitive. These automobile brands highly compete on price, quality,
customer safety, assistive technology and several other factors. (Demandt, 2020)
 2019 European automobile market share

1.7% 1.6% 1.4% 0.8% 0.7% 0.2% 0.1% 0.1%

2.2%

5.0%
24.5%

5.9%

6.3%

6.5%
15.7%

6.6%

6.7%
14.0%

Volkswagen Group PSA Renault-Nissan BMW AG

Hyundai-Kia Daimler AG Ford Motor Comp. Fiat-Chrysler Automobiles
Toyota Motor Geely Group Suzuki Mazda
Tata Motors Honda Tesla Motors Subaru Corp.
Mahindra & Mahindra SAIC

(Demandt, 2020)

In France, the plug-in electric car registration have been increasing year after year reaching
sales as high as 69,466 cars in 2019, which is 29% more than 2018. While Renault ZOE remains
the top choice in France for the Battery Electric Vehicles (BEVs), Tesla Model 3 and Nissan LEAF
stands right behind making the electric car market fierce. (Kane, 2020)

Hence, it is believed that the competitive rivalry in automobile industry is high.

The bargaining power of suppliers:

The buyer power in the European automotive parts and components sector is strong and the
supplier competition is high. There are few automobile manufacturers in Europe and they have
many suppliers to choose. Manufacturers of automotive parts needs to adjust the quality of
their products to the buyer’s demands. If the supplier fail to provide the automotive parts as
the buyers demand or below the automobile company’s standard, the buyer can always opt for
another supplier. Furthermore, the automobile manufacturers’ demands have increased due to
the regulations set by the regulatory bodies. (CBI, 2017)

All European Original Equipment Manufacturers (OEMs) demand quality and competitive price,
which leaves the suppliers with high level of competition. OEMs Tier 1 and Tier 2 buyers usually
have contracts with their suppliers who puts pressure on the price of the components. This
increase in price pressure provides an opportunity for suppliers abroad, mostly for the
developing countries, who enjoy lower labour cost resulting economies of scale, to export their
automotive parts to Europe and market at lower prices, increasing the competitiveness. (CBI,
2017)

Looking at the factors above, the bargaining power of suppliers tend to be low in the European
automobile industry.

The bargaining power of customers:

Majority of the customers who buy from automobile manufacturers are individuals who buys a
single vehicle at a time and are price sensitive. They are well informed of the quality and pricing
of the vehicles. Due to the strong competition between the automobile manufacturers and due
to the nature of the automobile industry, prices of the vehicles are highly competitive and their
customers have a vast range of manufacturers and models to choose from the market. They
can always switch to the brand who offers a better quality vehicle with lower price. Hence, they
can bargain for lower prices. (Demandt, 2020)

Few players dominate the European luxury car market. Advanced technology, more comfort,
high investment in research and development (R&D) projects and expanding market of electric
and autonomous vehicles are the factors which have driven the market. The fewer
manufacturers of luxury cars, the more threat of one supplier being a monopoly making the
price highly competitive. This gives customers the power to buy from the supplier who provides
the better value for money product. (Mordor Intelligence, 2020)

Hence, the bargaining power of customers tend to be strong.

The threat of new entrants:

The automobile industry has significant entry and exit barriers, which makes it difficult for new
players to enter the market. One of the most significant entry barrier to the market is the
existence of economies of scale. High capital investment and changes in technology are very
crucial to be a successful player in the market, which itself is a huge barrier to enter the market.
In order to enter the market, huge investment to set up the manufacturing plant, set up
distribution networks and higher qualified labour is required. (Kallstrom, 2019)

Auto firms in European automobile industry are investing highly on research and development
producing plug-in hybrids and electric powertrains due to the regulatory requirement on
reducing CO2 emissions from passenger cars to 95g CO2 per kilometer. Such regulations makes
it difficult for new firms to enter the European market. Well known major automobile
manufacturers such as Volkswagen, PSA, Renault and few other companies rule the automobile
industry in Europe who have already made a brand image and reputation in the market which
makes it difficult for new companies to compete in the market. (European Commission, 2020)

Hence, the threat of new entrants is low.

The threat of substitute products or services:

Car sharing, leasing and renting services are increasing on the later years in Europe and
expected to grow significantly in the coming years. Consumers who use these mobility services
will benefit an affordable, improved experience with better assistance and an increased overall
transportation performance. Even though the car mobility services are low cost, the European
car sales increased by 1.3% in 2019 which is evident that customers still prefer to have their
own car rather than sharing, leasing or renting a car. (CarE-Service, 2018)

Public transport systems are easily accessible and affordable in urban areas which would
increase the risk of substitute. However, a research done by the European Court of Auditors
(ECA) shows that commuters in Europe still choose their cars over public transport stating that
persuading citizens to leave the comfort of their cars for other forms of transport is challenging,
even after investing €16.3 billion on public transportation by EU since 2014. (Boffey, 2020)

Hence, the threat of substitutes tend to be moderate.

3.2 Analysis of financial performance

Group consolidated financial statements have been used for both companies in calculation of
the ratios.

3.2.1 Profitability ratios

Revenue
PSA Group’s revenue increased by 15.22% during 2017, 18.91% in 2018 and 0.95% in 2019. PSA
launched its products to more than 70 regions in 2017 and 2018 resulting the vast increase in
sales. (Business Wire, 2019) However, due to currency challenges and withdrawal from Iran,
PSA suffered declining volumes in China, Middle East and Africa in 2019 resulting a fall in units
sold by around 10%. (Reuters, 2020)

Renault Group’s revenue increased by 14.69% in 2017, but declined by 2.30% in 2018 and a
further 3.28% in 2019. Iranian market closure and decline in European demand for diesel led to
declined 2018 sales. (Globe Newswire, 2019) Declined sales in Argentina, Turkey and Algeria,
decline in demand for diesel engines in Europe and lower vehicle production for Nissan and
Daimler resulted in the fall in 2019 sales. (International Leather Maker, 2020)

PSA performed better generating revenue than that of Renault over the past three years.

Gross profit margin

PSA’s gross profit margin increased by 0.09% in 2018 compared to 2017. Despite the exchange
rate headwinds of €466 million and higher raw material cost amounting €279 million, PSA
managed to reduce its production cost of €588 million with a positive product mix of €536
million along with a positive price effect of €328 million. (PSA Group, 2019)

For the year 2019, PSA’s gross profit margin increased by 0.96% compared to 2018. PSA
managed to reduce its production and fixed costs by €540 million along with a positive product
mix of €818 million and a positive price effect of €102 million despite the higher raw material
cost and exchange rate headwings. (PSA Group, 2020)

As for Renault, gross profit margin fell by 1.34% in 2019 compared to 2017. During 2018, they
suffered an unfavorable currency effect of €526 million. Raw material cost had a negative
impact of €356 million in 2018 and €324 million in 2019. Their price effect suffered a negative
€587 million in 2019 due to fierce competition and decrease in diesel sales. (Renault Group,
2020)

Hence, PSA’s gross profit margin is favorable compared to that of Renault’s.

Operating profit margin

PSA’s operating profit margin increased by 1% in 2018 compared to 2017. Staff cost and R&D
cost increased by 15%, while restructuring cost increased by 11% during 2018. However, since
revenue increased by 19% in 2018, operating cost over revenue fell by 0.91% in 2018. (PSA
Group, 2019)

As for 2019, their operating profit margin increased by only 0.31% compared to 2018. Even
though their revenue increased and managed to reduce staff cost during 2019, restructuring
costs increased by 46% while depreciation increased by 20% and R&D costs increased by 15%
which explains this slight increase in operating profit margin. (PSA Group, 2020)

Renault’s operating profit margin saw a decreasing trend in past three years by 2.69% in 2019
compared to 2017. Even though Renault’s revenue decreased in 2018 and 2019, their personnel
expenses increased along with restructuring costs and impairment of assets on both these
years. (Renault Group, 2020) This is further evident from the graph below showing increasing
operational cost over revenue in past 3 years.
Overall, PSA’s operating profit margin was better compared to Renault’s past 3 years.

Return on capital employed (ROCE)

PSA’s ROCE increased by 2.89% in 2018 but fell by 1.51% in 2019. In accordance with their Push
to Pass plan, their heavy investment in research and development (R&D) expenditure and
property, plant and equipment (PPE) in electrifying their vehicles has contributed for the vast
improvement in capital employed the past 3 years. Even though PSA managed record sales in
2018, their sales volume fell by 0.8% due to currency challenges and withdrawal from Iran
market. (Reuters, 2020)

As for Renault, ROCE declined by 4.53% in 2019 compared to 2017. The main reason for this
decline in ROCE is fall in sales past 3 years due to the Iran market closure, fall in demand for
diesel engines leading to lower vehicle production for Nissan and Daimler, which led to a huge
fall in profit. (International Leather Maker, 2020)

Overall, PSA managed to maintain a better ROCE compared to that of Renault.

3.2.2 Liquidity ratios

When looking at the current ratio, both companies are below the threshold of 2:1. PSA
managed to improve their current ratio from 0.90 in 2017 to 0.99 in 2019. This is mainly due to
the issue of treasury bonds in the past three years. Current bonds issued decreased by €604
million. (PSA Group, 2020)

Renault managed to keep the current ratio stable the past three years as their financing
receivables and debts increased at the similar rate in both years. (Renault Group, 2020)

As for quick ratio, PSA has performed below the threshold. However, they have improved their
quick ratio from 0.65 in 2017 to 0.79 in 2019. By reducing manufacturing lead time, PSA
managed to decrease the year-end inventory the past 3 years. Their cash and cash equivalents
increased with the issue in treasury bonds. (PSA Group, 2020)

Renault managed to maintain their quick ratio throughout the past three years, with no
material movement. By reducing supplier lead time, their inventory decreased by €548 million
during the past 3 years. (Renault Group, 2020)

In terms of liquidity, Renault performed better during the past 3 years.

3.2.3 Efficiency ratios

Asset turnover

PSA’s asset turnover increased from 1.07 in 2017 to 1.19 in 2018, but decreased back to 1.07 in
2019. To electrify their vehicles, PSA heavily invested in R&D investing in new assets. Issue of
treasury bonds during the past 3 years also highly contributed on the increase in net assets the
past 3 years. (PSA Group, 2020) As discussed under profitability ratios, PSA launched its
products to more than 70 regions in 2017 and 2018 which resulted in their vast increase in
revenue during those two periods. (Business Wire, 2019) However, sales volumes fell during
2019 due to currency challenges and withdrawal from Iran resulting a fall in asset turnover in
2019. (Reuters, 2020)

For Renault, asset turnover declined from 0.53 in 2017 to 0.45 in 2019. Renault invested highly
on R&D which resulted in the increase in net assets the past 3 years. However, their revenue
was hit hard due to a fall in demand for diesel engines in Europe which resulted in lower vehicle
production for Nissan and Daimler during the past three years. (International Leather Maker,
2020)
Hence, PSA has better asset turnover compared to Renault.

Working capital cycle

Having a negative working capital indicates that the business is able to bargain very well with
their suppliers. (Saravanan, 2018) As discussed over SWOT analysis, bargaining power of
suppliers are low in European automobile industry. Hence, both PSA and Renault managed to
have a negative working capital cycle the past 3 years. To analyze the reasons for this, it is
important to analyze the individual elements that make up the ratio, which are discussed
below.

Inventory days, receivable days and payable days

PSA’s inventory days improved from 53 days in 2017, to 41 days in 2018 and 39 days in 2019.
Even though cost of sales increased during the past 3 years, PSA managed to decrease its
closing inventory by 8% in 2018 and by a further 7% in 2019. This huge decline in inventory is
led by a decline in manufacturing lead time in 2019 compared to 2017. (PSA Group, 2020)

Renault’s inventory days improved from 50 days in 2017 to 47 days in 2018 and 2019. Renault
managed to reduce their closing inventory by 7% in 2018 and a further 2% in 2019. This was
achieved by by reconfiguring their supply chain, which in turn reduced the supplier lead time.
(Renault Group, 2020)

PSA’s receivable days decreased from 14 days to 9 days in 2018. Customers can manage their
finance agreement online which makes the payment methods flexible. (PSA Group, 2019)
However, receivable days increased to 12 days in 2019. This increase in receivables is due to an
increase in receivables to their corporate dealers during 2019. (PSA Group, 2020)

Renault’s receivable days have decreased from 11 days in 2017 to 8 days in 2019. This is
because majority of the receivables have been assigned to Group sales financing companies
and non-Group entities where the risks and benefits are transferred to them. (Renault Group,
2020)

PSA’s payable days have decreased from 98 days in 2017 to 90 days in 2019. As mentioned in
the SWOT analysis, bargaining power of suppliers are low in the European automobile industry.
Due to their market power, PSA was able to negotiate good terms with their creditors. (PSA
Group, 2020)

Renault’s payables days remained constant throughout the past three years as both cost of
sales and trade payables declined in line with each other. Just like PSA, Renault was able to
negotiate good terms with their creditors which explains the 78 payables days over the period.
(Renault Group, 2020)

In terms of inventory management and payables days, PSA performed better than Renault.
However, for receivable days, Renault performed better by a small margin.
3.2.4 Leverage ratios

Gearing ratio of PSA has decreased from 43.75% in 2017 to 37.97% in 2018. Even though
Peugeot S.A. issued bonds for €650 million, their subsidiaries reserves and retained earnings
increased by €2,517 which led to this fall. (PSA Group, 2019)

In context of Merger with FCA, PSA bought 30.7 million shares from Donfeng Group which is the
reason for the vast increase in borrowing during 2019. Hence, highly geared at 52.46% at 2019.
(PSA Group, 2020)

The increase in reserves of €3,943 out weighted the increase in bonds issued of €542 million,
which explains the fall in gearing ratio of Renault in 2018. (Renault Group, 2019) Renault’s
gearing ratio increased to 32.76% in 2019 due to an increase in bonds issue of €1,038 and lease
liability of €723 in application of IFRS 16 while equity fell by 2%. (Renault Group, 2020)

Renault had a better gearing ratio over the past 3 years.

PSA’s interest cover fell from 12.92 times in 2017 to 9.87 time in 2018, mainly because the
foreign exchange gain turned to a foreign exchange loss of €72 million during 2018. (PSA Group,
2019) Interest cover increased to 13.57 times in 2019 due to an increase in interest income of
€62 million and a fall in fair value of financial instruments and other financial expenses of €109
million. (PSA Group, 2020)
Renault saw a huge decline in interest cover from as high as 173 times in 2017 to 16.07 times in
2019. Even though their operating income declined the past 3 years, their bank commissions,
changes in fair value of investments and late payment interest suffered a negative impact over
€100 million the past three years. (Renault Group, 2020)

With an increased interest coverage, PSA performed better the past three years.

3.2.5 Market ratios

Earnings per share (EPS)

PSA’s EPS has increased throughout the past 3 years. Weighted average number of shares
increased from 886 million in 2017 to 894 million in 2019 after taking into account the shares
issued and cancelled and changes in shares held in treasury stock as the market value of shares
increased during the period. Their profit attributable to share holders have a positive growth in
past three years. (PSA Group, 2020)

Renault’s EPS has fallen from €19.23 in 2017 to -€0.52 in 2019. Number of shares used to
calculate their basic earnings per shares increased from 271 million in 2017 to 272 million in
2019 due to neutralization of treasury shares and shares held by Nissan. Profit attributable to
shareholders decreased and ended up in a loss in 2019 as a result of the negative contribution
from associates and tax expense. (Renault Group, 2020)
Overall, PSA had a better EPS during the past three years.

Price earnings (P/E) ratio

P/E ratio has deteriorated the past three years for both PSA and Renault indicating a fall in
investors’ confidence.

PSA’s market value per share increased just by €0.28 in 2019 compared to 2017. This increase is
the result of purchase and sales of shares and shares delivered under 2015 and 2016 free share
plan during 2019. However, EPS increased by €1.41 resulting a decrease in P/E ratio. (PSA
Group, 2020)

As a result of their poor performance and profits turning into a loss in 2019, Renault’s market
value per share fell by €29.69 in 2019 compared to 2017. EPS also decreased by €19.75 during
that period which explains the negative P/E ratio in 2019. (Renault Group, 2020)

PSA had a better P/E ratio on the past three years.

Dividend cover

PSA’s dividend cover decreased from 4.1 times in 2017 to 4.05 in 2018 only as the movement in
EPS and dividend per share (DPS) is in line with each other. However, management of PSA
decided to increase the DPS to €1.23 in 2019 as a reward for the improved profitability during
the year. EPS only increased by 13% during 2019. (PSA Group, 2020)

Even though dividend paid remained at €3.55 in 2017 and 2018, due to the huge fall in their net
income, a board resolution was passed to give a DPS of €1.10 in 2019. As discussed under EPS,
their EPS fell by €6.99 in 2018 and a further €12.76 in 2019. Hence, the huge fall in dividend
coverage. (Renault Group, 2020)

PSA managed to have a better dividend coverage over Renault.

Dividend yield

PSA’s dividend yield shows a huge increase during the past 3 years. As discussed under P/E
ratio, PSA’s market value per share increased just by €0.28 in 2019 compared to 2017 while
shareholders were granted with an increased DPS during the past 3 years as discussed under
dividend cover above. Hence, the huge increase in dividend yield. (PSA Group, 2020)

As for Renault, their dividend yield increased in 2018. This is because even though their share
value decreased, no change was brought to DPS. However, their dividend yield decreased in
2019 due to the huge fall in both DPS and share price. (Renault Group, 2020)

PSA have a better dividend yield compared to Renault.

3.3 Conclusions and recommendation

Factors which affected business performance

Strengths such as strong brand and PSA re-entering the American market with their Free2Move
mobility services has helped them for their global dominance with their Push to Pass strategic
plan the past three years. PSA also exploited opportunities such as expanding their products
and services to new markets and gained advantage with increased sales volume by
manufacturing hybrid and electric vehicles with the increased demand for electric vehicles.

With few suppliers, competitive rivalry in the European automobile industry is very high having
an adverse impact on PSA. However, lower bargaining power of suppliers of vehicle parts due
to few automobile manufacturers, and high entry and exit barriers along with high capital
investment makes threat of new entrant’s low outweighing the competitive rivalry.

With the above factors considered, it is evident that PSA has done favorably over the past three
years.

Financial performance
Overall, PSA Group performed quite well in terms of profitability, efficiency and market ratios
over the past 3 years as their profitability improved as they managed to cut cost while sales
increased. Even though PSA’s liquidity seems problematic, they have improved their liquidity
position during past three years. Purchase of shares with regard to FCA merger increased PSA’s
borrowing resulting highly geared in 2019 which seems worrying.

Business and financial performance compared to Renault Group

PSA’s Push to Pass strategic plan enabled the company to expand its production and increase
their sales revenue the past 3 years. With PSA’s Push to Pass plan, all their vehicles now
produced are either fully electric or hybrid. Lower demand for diesel vehicles resulted in lower
vehicle production for Nissan and Daimler for Renault

As for financial performance, PSA performed better in profitability, efficiency, interest cover
and market ratios as PSA’s profitability performance in the past three years are much better
compared to Renault. Renault performed better in liquidity position of the business and gearing
level since Renault managed their assets and liabilities better compared to PSA Group.

Hence, PSA has performed better both in terms of business and financial performance
compared with Renault Group.
Recommendation
To improve PSA’s performance in the future, PSA Group:

 Need to put more focus outside Europe to achieve global dominance under its Push to
Pass plan. PSA made a major move towards global dominance with FCA merger in
December 2019.
 Need to expand their Free2Move mobility services to rest of the states of US since their
car sharing service is only live in Washington DC. With the autonomous vehicle
technologies, global car mobility services are set to grow exponentially over the next
decade. (Accenture, 2020)
 Need to implement strategies to improve their gearing for the future periods as their
gearing ratio exceeded 50% in 2019. For example, reduce their borrowings and go for
options like further issue of shares.