Financial Analysis Plays a Critical Role in Evaluating Company’s Performance

Topics: Generally Accepted Accounting Principles, Financial ratios, Financial ratio Pages: 4 (1231 words) Published: March 18, 2013
Financial analysis plays a critical role in evaluating company’s performance. When we analyse the financial statement, there are two ways, ratio analysis and cash flow analysis. With the financial statement of company Gunting Ltd, I will use the ratio analysis to discuess the poor side of Profitability, Liquidity, Efficiency of the asset useage and Leverage of Gunting Ltd from 2006 to 2008. Profitability

ROE is comprehensive indicator of an organisation’s performance since it provides an indication of how well managers are employing the funds invested by the organisation’s sharehoulders to generate funds. From the ratios in the previous table, Gunting Ltd’ s Reture on equity ratios slumped from 11.2% to 1.89% from 2007 to 2008. The company experience a dramatic decline during the GFC period and the managers didn’t generate efficient funds to its shareholders. In addition, compare with other companies, Gunting Ltd’s ROE ratio is suitable in the bottom, all the two year ratio is quite low, especially in 2008. Furthermore, there are three drivers for the Return on equity of an organisation, the net profit margain, asset turnover and financial leverage will be discuessed later. Net profit margin is the first driver of an organisation’s Return on equity and it shows the profitability of the company’s operating activities. From the table, net profit margin declined from 9.73% to 3.6% in 2008(only about one third of that in 2007), it seems that the company has operaing problems from 2007 to 2008 and only able to ratain 3.6 cents in net operating profits for each dollar of sales. Compare to EBIT margin, the Gunting Ltd’s EBITDA margain which excludes depreciation and amortisation expense is larger which indicates that the depreciation and amortisation expense plays a important role of the operating process of Gunting Ltd. The EBITDA margin also experience decline from 18.67% to 6.53%. Profit slump is maybe result of the cut price strategy to boost the sales during...
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