The answer is yes. There were so far two companies that got a lower ROE (Return on Equity) during their fifth year, compared to the same value they got during their first year. Those two companies were Yahoo (from 12% to 4%) and Proctor and Gamble (38% to 17%). The reason behind this, that is also evident on the data presented in the Financial Cockpit case study, would be the fact that both companies came up with a lower ROA (Return on Assets). ROA, just like what ROS (Return on Sales) is, is also an important component of ROE. Basically, the higher the ROA is, the better because that would mean that the company is getting more for what it is spending on capital expenditures . Factors that may affect ROS and ROA may be external in nature such as poor customer sales, an increase in the performance of the company’s competitors, an industry wide slowdown in the turnover and sales of products, and even macroeconomic factors.
Having understood the dilemma of Craftsman Furniture Inc. (CFI), it would be safe to say that the best way for its management team to manage its business more successfully and mange to obtain higher ROE, among other metrics, in order to woo its owners (i.e. investors) would be to focus on doing well with the business and its operations. Reviewing other companies is not entirely a good idea because it only compares the company to other businesses that may not really be identical to CFI. Each business is unique and copying the management strategy of one firm just because they were successful may be a fatal mistake. This was the management principle that famous investor Warren Buffet. He suggested that the focus of the management team should be to do well with the business and everything else shall follow . This may well be applicable to CFI’s case.
Works Cited
Anderson, C. and S. Garcia. "Empirical Evidence on Capital Investment, Growth Options, and Security Returns." The Journal of Finance (2006): 171-194. Print.
Crippen, A. "Warren Buffet's 9 Rules for Running a Business." CNBC (2014): http://www.cnbc.com/2014/11/11/etts-nine-rules-for-running-a-business.html. 01. Web.
