Global Financial Crisis: An Examination of One Company's Performance Indicators
The global financial crisis of the recent past has been the subject of much commentary, investigation, and debate from people around the globe and from all walks of life. Despite the fact that politicians and armchair policy makers have gone round after round in debates regarding the causes and the ultimate effects of this worldwide economic downturn, the real effects of the recession on individual organizations can be difficult to ascertain. Different companies are impacted in different ways and to varying degrees based on a variety of factors, of course, but it is still quite useful to examine some particular instances of the recession's impact in order to come to a more concrete understanding of what a financial crisis and tightening of capital means for business organizations around the globe, operating in various sectors.
An examination of The Hour Glass, Ltd. And the impact of the financial crisis on the company's performance is provided below. A publicly traded retail company specializing in the provision of high-end watches and other timepieces, The Hour Glass, Ltd. is based in Singapore and operates twenty-five boutique retail outlets in nine major cities throughout the Asia-Pacific region (The Hour Glass Ltd., 2012). This company was selected because it is somewhat more exposed to financial shocks compared to other retailers due to its luxury focus, while at the same time the company is far less exposed to current and recent volatilities found in financial firms and the long-term volatility of technology companies.
Even though The Hour Glass, Ltd. is not as affected by the financial crisis as certain other terms, certain trends are definitely observable when examining the company's financial records in the periods before, during, and after the worst years of the recession. Information was taken from the company's annual reports between 2005 and 2010, inclusive, and key ratios were calculated in order to more readily represent and observe changes in the company's performance during these different periods. Supporting information from scholarly articles and textbooks is also used in the interpretation and discussion of these figures and their implications regarding the company's performance and the global economic environment, though in many instances the numbers speak fairly clearly for themselves. Through this analysis, an understanding of the real consequences of the economic downturn can be seen, as can certain strategies in response to global recessions.
The Pre-Crisis Period
The years 2005 and 2006 were generally excellent for global business; though of course there were the usual industry and organizational variances, by and large companies were doing quite well in the period and the world economy was growing at a relatively fast pace (UN, 2006). These years had seen a "significant slowdown" in terms of the growth rate of the world economy beginning in late 2005, but even this slowdown did not really point to any signs of the impending trouble with growth still strongly positive (UN, 2006). It is also quite clear that The Hour Glass, Ltd. did not see any major changes in performance on the horizon.
2005 was a fantastic year for shareholders, with a 15.46 return on equity and a 41.98 return on the company's capital employed, which translated to after tax profits of $33,478,000 (The Hour Glass Ltd., 2005). With a current ratio of 4.6 and an acid test ratio of 1.5, the company was also quite solvent and on strong financial footing in terms of capital potential and as a credit risk (The Hour Glass Ltd., 2005; Gilman, 2011). The company also carried very little debt over the year relative to equity, with a debt-equity ratio of .0031, further strengthening the company's profile and the potential it had to achieve ongoing growth and higher earnings in the coming years (The Hour Glass Ltd., 2005; Gilman, 2011). All indicators, in short, paint the picture of a company with a high degree of profit, a decent dividend payout to shareholders along with a great deal of value created for these shareholders, and plenty of capital and borrowing capabilities available to drive continued growth over the coming years -- assuming things remain the same (Gilman, 2011).
Things didn't quite stay the same in 2006, however, and although this was before the actual recession the company did experience a drop in performance in keeping with the above-noted slowdown in global economic growth (The Hour Glass Ltd., 2006; UN, 2006). Sales dropped slightly in the year, and return on equity was reduced by more than half, to 7.35, and the return on capital employed also experienced a precipitous drop, to 27.57 (The Hour Glass Ltd., 2006). The current ratio and the acid test ratio also changed for the worse, though not nearly as significantly as the returns on the company; the current ratio fell to 4.45 and the acid test ratio fell to 1.30, driven by a decrease in current liabilities that was more substantial than the accompanying decrease in current assets (The Hour Glass Ltd., 2006). The long-term liabilities actually increased significantly in this period, however, and this suggests (along with the reduction in return and equity value) that the company might have been gearing up for growth, utilizing capital in areas other than providing shareholder profits (The Hour Glass Ltd., 2006; Gilman, 2011). The good years prior to the crisis, then, still appeared to be continuing in 2006 even if the year did show lower performance than 2005, and it is even possible that the company was experiencing even better economic times for the company and possibly the world in the following years.
2007, despite being the year in which the global recession is essentially determined to have begun, was actually a higher-performing year for The Hour Glass Ltd. than 2006 according to many measures (The Hour Glass Ltd., 2007; Gilman, 2011). This is potentially due to a variety of factors, including the fact that the luxury goods market was not initially hit by the economic crisis to the same degree (if at all) as were some other sectors, and in fact many businesses and individuals did not begin to feel the effects of the recession until 2008 at the earliest (Paiella, 2009). It is also possible that any investments or growth strategies the company pursued in 2006, which might have accounted for some of its weaker measurements and ratios, paid off in 2007 in the form of solid performance and a gain back to near-2005 levels for many indicators. Sales in 2007 were actually higher than in 2005, though the net profit margin was lower (.0810 compared to .0862) as were the absolute profits before taxes ($39,478,000 in 2007 compared to $41,685,000 in 2005) and profits after taxes ($31,481,000 in 2007 compared to $33,478,000 in 2005), and in this area especially the company showed a tremendous rebound form 2006 (The Hour Glass Ltd., 2007). The company's long-term liabilities also dropped significantly during 2007, and this discharging of debt could be a major contributor in the company's return to higher rates of profitability (The Hour Glass Ltd., 2007).
Interestingly, equity value in the company continued to shrink in 2007 while the number of equity shares in the company actually grew, and at the same time current assets shrank, return on equity skyrocketed up to 18.60, yet dividends remained flat (The Hour Glass Ltd., 2007). Some of these figures would seem oddly juxtaposed or even contradictory at first, but the high accounts payable and the reduction of assets might provide some clue as to how the global financial environment was already beginning to affect the company (Gilman, 2011; Paiella, 2009). With the paying off of substantial long-term liabilities and the increased business compared to the previous year, 2007 saw the company sell more equity shares and also limit inventory, and major interest payments further reduced the measured return (The Hour Glass ltd., 2007; Gilman, 2011). though some indicators took a downturn, then, overall 2007 appears to have been a good year for the company, and one that shored it up significantly.
This added shoring and security in 2007 was definitely a boon to The Hour Glass, Ltd. In 2008, when the economic crisis unequivocally made itself known to the company. Sales fell by almost a fifth compared to 2007, the net profit margin fell to .0593, and operating cash flow dropped by more than a third, all of which clearly signaled that the company simply was not meeting with success in its basic revenue-generating operations, leaving little hope for anything else in the company to run in an effective and efficient a manner as would be desired (The Hour Glass Ltd., 2008; Gilman, 2011). The return on capital employed was higher than during 2006, but at 30.79 still reflects a major drop from 2007 (when the return on capital employed was 41.14), and the return on equity also fell dramatically to 9.21 (The Hour Glass Ltd., 2008). There are some other interesting occurrences on the financial documents from this year that…