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