Question 7.17: The Evaluation of Segment Ratios The information contained i......
The Evaluation of Segment Ratios The information contained in Exhibit 22 relates to the business segments of Groupe Danone (EuronextParis: BN) for 2008 and 2009 in millions of euro. According to the company’s 2009 annual report:
Over the course of the past 10 years, the Group has refocused its activities on the health food industry. On October 31, 2007, the acquisition of Royal Numico N.V. and its subsidiaries (“Numico”), a group specialized in baby nutrition and medical nutrition, marked a new phase in the Group’s development by adding these lines of business to Danone’s portfolio. The Group has since operated in four markets corresponding to its four business lines: (i) Fresh Dairy Products, (ii) Waters, (iii) Baby Nutrition, and (iv) Medical Nutrition.
Evaluate the performance of the segments using the segment margin, segment ROA,
and segment turnover.
| EXHIBIT 22 | ||||||
| 2009 | 2008 | |||||
| (In € millions) | Revenue (3rd party) | Operating Income | Assets | Revenue (3rd party) | Operating Income | Assets |
| Fresh Dairy Products | 8,555 | 1,240 | 7,843 | 8,697 | 1,187 | 7,145 |
| Waters | 2,578 | 646 | 2,773 | 2,874 | 323 | 3,426 |
| Baby Nutrition | 2,924 | 547 | 10,203 | 2,795 | 462 | 9,999 |
| Medical Nutrition | 925 | 190 | 4,781 | 854 | 217 | 4,450 |
| Business Line Total | 14,982 | 2,623 | 25,600 | 15,220 | 2,189 | 25,020 |
| Segment Ratios | ||||||||
| 2009 | 2008 | |||||||
| Segment Revenue as Percent of Total | Segment Margin | Segment ROA^\text{a} | Segment Turnover | Segment Revenue as Percent of Total | Segment Margin | Segment ROA^\text{a} | Segment Turnover | |
| Fresh Dairy Products | 57.1% | 14.5% | 15.8% | 1.1 | 57.1% | 13.6% | 16.6% | 1.2 |
| Waters | 17.2% | 25.1% | 23.3% | 0.9 | 18.9% | 11.2% | 9.4% | 0.8 |
| Baby Nutrition | 19.5% | 18.7% | 5.4% | 0.3 | 18.4% | 16.5% | 4.6% | 0.3 |
| Medical Nutrition | 6.2% | 20.5% | 4.0% | 0.2 | 5.6% | 25.4% | 4.9% | 0.2 |
^\text{a}As used in this table, ROA refers to operating income divided by ending assets.
The waters segment (Evian and Volvic) was the most profitable in 2009 as measured by margin and ROA; however, in 2009 the segment did not grow as fast as the company’s other segments. In 2008, the segment represented 18.9 percent of total segment revenues, but in 2009 the percentage was only 17.2 percent.
The company’s largest segment by revenue, fresh dairy products, had the lowest margin in 2009 but a much higher segment ROA than the baby and medical nutrition segments. Medical nutrition is the second highest segment in terms of segment margin but lowest in turnover (an indicator of efficiency, i.e., the ability to generate revenue from assets). As a result, medical nutrition had the lowest segment ROA (Segment ROA = Segment operating income/Segment assets = (Segment operating income/Segment revenue) × (Segment revenue × Segment Assets) = Segment margin × Segment turnover. Reported percentages may diff er due to rounding). Part of the explanation for segment differences in ROA may be that the medical and baby nutrition businesses were acquired in 2007. In an acquisition, the acquiring company reports the acquired assets at fair value at the time of the acquisition. Most of a company’s other assets are reported at historical costs, and over time, most long-term assets are depreciated. Thus, compared to assets in other segments, it is likely that the assets of the nutrition segments are reported at amounts more reflective of current prices.