Gunting Ltd, an investment holding company operates in the furniture industry with two profit-generating vehicles involving in the

manufacture of furniture. The company saves cost by vertical integration in the past five years and gains access to the kiln-drying and wood treatment businesses. Large part of the business is custom-made furniture for clients located mainly outside Malaysia which may lower the operation risk and the sales cost of the company as those risks and costs are bore by clients. A company owned brand Home Beauty gives Gunting the access to both wholesale and retail in both local and overseas markets. Since around two-thirds of Gunting Ltds revenue comes from export markets and mostly to developed countries, the company had suffered in 2007 and 2008 because of the Global Financial Crisis (GFC). However, the management had make some moves to allow the company stay profitable by conducting sales promotions and reducing selling price of its Home Beauty items. As a result, the volume of sales during those years had been expanded and the management has upgrade the earnings forecast from 2009 because of the increasing export demand and the easing of the GFC in the States. Given the fact that Gunting Ltd has a profitable business model in place and a experienced team of management, the company had performed well during the GFC and although not as good as it did before the GFC, the performance was good enough to be recommended to investors. During the GFC, Gunting had demonstrated its ability to generate profit even in the worst time in the history since the great depression and the assets had been used in an efficient manner. In addition, the company had also a sound capital management during the hard time by taking debts to offset the impact from the unpleased trading environment to keep the business grow or at least operate. Meanwhile, despite the higher level of gearing, Gunting had maintained a reasonable level of liquidity to prevent the company went insolvent. As all firms exist for profit and Gunting Ltd is a not exception, over the three years the company had demonstrated its profitability despite the hit of the GFC. In the year just before the GFC, Gunting Ltd had a net profit margin of 12.71% meaning that for each dollar of sales, there is 12.71 cents are contributed to the net profit after tax. It might seems low for a manufacturers but by taking the fact that Gunting Ltd also owns and promotes its products through the company-owned brand name, it is reasonable for the company to have a lower net profit margin as still considered to be well performed. As the GFC starts to ferment in 2007, the companys net profit margin declined to 7.45%, more than a third. Compare this result to the decrease of the EBITDA margin from 18.67% to 12.79%, around a third, it is clear that the sales promotion and reducing selling price strategies impact on cost started to reflect on the income statement. When it comes to the worst time of the GFC, 2008, the net profit margin decreased from 7.45% to 1.45% with a 80% drop compare with the EBITDA margin declined from 12.79% to 6.53% which dropped nearly half, it is more clearly that because of the high gearing policy

adopted by the management, the interest expense became a burden for the company. Other than the interest expense, lower selling price contributed to a lower margin directly. Although the selling prices are reduced and directly affect the net profit margin, it was necessary for the company to do so during the GFC as demands of the companys products are decrease and the willingness for consumers to spend is weak, by cutting down the price and carrying out sales promotion, Gunting Ltd can maintain market share and had a increased sales volume during the crisis. Therefore, despite there were dramatic drop on both net profit and EBITDA margin over the three years, Gunting Ltd still maintained its profitability and higher profit margin from 2009 is highly likely to happen. In terms of the efficiency of assets usage, the asset turnover can be used as a measurement; the asset turnover measure how efficient had the assets been used by calculating how much sales revenue is generated by each dollar of asset used. Over the year of 2007 and 2008, the asset turnover ratios decreased from 1.08 in 2007 to 0.85 in 2008 mainly because of the assets grew faster than the sales volume. Since the Gunting Ltd wholly owns two manufacturing subsidiaries, it is not unusually that the asset turnover ratio to be low at around 1 as the asset base for manufacturers is large. As the Gunting Ltds financial statement extracts show that the total assets are increased 55% from 2006 but the sales revenue had just increased 22% at 2008 from 2007 which can explain why the asset turnover ratio was decreased as the increase of sales revenue cannot catch up with the one of total assets. Does it mean the assets are not used efficiently? The fact may be most of the newly acquired assets are still in their way to be ready to use or yet to be tuned to work at the best performance, therefore, the assets turnover ratio was low in 2007 and 2008, and Gunting Ltd had already performed quite well in using the assets and the asset turnover will hopefully increase once the economy recovered. Meanwhile, although it may not seem to be wise to expand the business during the GFC, I would argue that the company was doing a good job about that. By taking the advantage of the lower cost to expand during the GFC, Gunting Ltd was in a good position and ready for the future growth from 2009 or when the economy recovered. Because of the company financed a large amount of fund by debt during 2007 and 2008, some may concern about may be the level of leverage is too high and may not be good for the company at large, it may not be that case of Gunting Ltd. Although the company had took up more than $40 millions of debt in 2007, by looking at the balance sheet, Gunting Ltd was using those debt to fund expansion, therefore, the debt-to-assets ratio had not increase too much. Debt-to-assets ratio increased from 0.32 in 2006 to 0.51 in 2007 and quickly down to 0.34 in 2008 which may indicates that most of the debt funding was used for acquiring or producing assets. When using another ratio to measure leverage, the times interest earned ratio shows that the ability of Gunting Ltd to pay the interest may be weakened by the decline of earnings. The ratio measuring how many times the interest expense

can be covered by the EBIT which shows a declining trend from 10.76 times in 2006 to 1.7 times in 2008. Although it seems the company is performing badly, it could be because of the fact that the debt had increase and the expense to left the sales volume had been increase and lead to a sharply decrease in earnings, and not because of the company was doing worse each year. In addition, I would argue that Gunting Ltd had done pretty good in such a bad trading environment and high leverage level and still be able to pay the interest and increase the sales volume.