FINANCE DISSERTATION ONIMPORTANT FINANCIAL FACTORSAFFECTING THE PROFITABILITY OFLISTED REAL ESTATE COMPANIES INVIETNAM

Dissertation submitted in partial fulfillment of the
Requirement for the MSc in Finance

FINANCE DISSERTATION ON
IMPORTANT FINANCIAL FACTORS
AFFECTING THE PROFITABILITY OF
LISTED REAL ESTATE COMPANIES IN
VIETNAM
NAME OF STUDENT: DUONG TUAN MINH
ID No: 17047710
Intake 1

Supervisor: Prof. Dr. DO THI KIM HAO

September 2018


ACKNOWLEDGEMENT
I would like to express my grateful attitude to Dr. Do Thi Kim Hao, for her guidance and
supervision. She has provided many useful advices and suggestions for this dissertation.
Additionally, I would like to reveal my thankful to all the teachers participating in the Master
of Finance program, because they have always helped me in absorbing the knowledge in the
most effective way and building the logical thinking as well as the problem-solving skills.
Last but not least, I would like to express my sincere thankful to my family, especially my
wife, for their continuing encouragement.

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Chapter 1: Introduction...............................................................................................................1

1.1.
Rationale of dissertation.............................................................................................. 1
1.2.
Conceptual Basics..........................................................................................................8
1.3.
Research methods of the dissertation...........................................................................10
1.4.
Organization of the dissertation...................................................................................10
1.5.
Purposes of the dissertation..........................................................................................12
1.6.
Methods of collecting data...........................................................................................12
Chapter 2: Literature review....................................................................................................13
2.1 Review of related literature and researches..............................................................................13
2.2 Review for
related literature and researchesin Europe...............................................14
2.3 Review for
related literature and researchesin Asia................................................... 16
2.4 Review for
related literature and researchesin Africa................................................ 19
2.5 Review for
related literature and researchesin Vietnam.............................................20
Chapter 3: Methodology of research.......................................................................................22
Data collection methods...........................................................................................................22
Dependent variable and independent variables:.......................................................................22
2.1. Dependent variable:.................................................................................................22
2.2. Independent variables:.............................................................................................22
Data analyzes process...............................................................................................................26
3.1. Overview of panel data used for regression model................................................. 26
3.2 The formula of panel data.........................................................................................26

3.3 Techniques for estimatingpanel data:.......................................................................27
3.4. Testing for the significance of statistics:................................................................... 29
Chapter 4: Analyzing the researched data and presenting the findings.............................33
Testing for significant of statistics............................................................................................34
1.1 Testing for individual significance of statistics..........................................................34
1.2. Joint significant testing............................................................................................39
Testing for autocorrelation........................................................................................................43
Testing for multicollinearity..................................................................................................... 44
Chapter 5: Conclusion and recommendation.........................................................................47
Conclusion................................................................................................................................47
Recommendations.................................................................................................................... 49

iv


List of Figures
Figure 1: GDP, GDP Growth and inflation of Vietnam from 2009 to 2019...............................1
Figure 2: The Durbin-Watson value based on Bhargave (1983).............................................. 44
Figure 3: The result for testing of multicollinearity................................................................. 46
List of table
Table 1 The highest profitable real estate firms listed in Vietnam in 2017................................5
Table 2 Top ten listed real estate firms with fastest increasing in profit....................................5
Table 3 Top listed real estate firms with declined profit in 2017 comparing to 2016................7
Table 4 Top listed real estate firms with the highest inventory in 2017 comparing to 2016......7
Table 5: The regression model on independent variables.........................................................73
Table 6: The regression model after eliminating X2, Payable turnover................................. 73
Table 7: The regression model after eliminating X4, Short term debt overtotal debt.............74
Table 8: The regression model after eliminating X5, Current Ratio.......................................75
Table 9: The regression model after eliminating X6, Gross Domestic Products....................75
Table 10: Theregressionmodel after eliminating X9, Inventory Turnover...........................76

Table 11: Theregressionmodel after eliminating X10, Interest CoverageRatio....................77
Table 12: Theregressionmodel for joint significant testing.................................................77
Table 13: Theregressionmodel for testing of autocorrelation..............................................78
Table 14: Theregressionmodel for testing of multicollinearity............................................79

iv


Chapter 1: Introduction
This chapter reveals the reasons for choosing the subject of the dissertation, the conceptual
basic of profit and profitability, objectives of the dissertation, methods of collecting data and
organization of the dissertation.
1.1. Rationale of dissertation
According to “Investing in Vietnam in 2018” of KPMG, since the financial crisis in 2008,
Vietnam macroeconomic has experienced a swift recovery leading to considerable growth in
real estate sector. Specifically, Vietnam’s real GDP reached the increasing rate of 7.3% in
average during the period from 2005 to 2008 before plummeted to 5.3% in 2009 due to the
financial crisis in 2008. The recovery of Vietnamese economy started in 2012, with GDP
growth steadily going up and achieving 6% in 2014. GDP per capita in 2017 was $2,385 and
rose by 10% comparing with the numbers in 2016, based on “Q42017 Quarterly Market
Briefing Viet Nam” of Savills Vietnam. The growth rate is predicted to increase at practically
6.5% from 2018 to 2019.

Figure 1: GDP, GDP Growth and inflation of Vietnam from 2009 to 2019

Page 1


The consumer price index (CPI) reached a new peak at 22.9% in 2008 due to the financial
crises before recovering in a slower pace at 7.4% in 2009 as the result of many solutions of

the government such as tightened monetary and credit policies. After that, the economy
experienced a wide fluctuation in inflation rate during 2011 to 2016 from 18.1% in 2011 to
2.7% in 2016 as various inflation control methods from the Government became effective.
However, the swiftly rising in demand for goods and services, reducing credit and growing
investment from the economic growth of the country resulting to an upsurge in inflation rate
to 4.1% in 2017, according to World Bank. The average rate of price rises during the period
from 2016 to 2020 is predicted to keep steady at 4%.
In 2017, the Foreign Direct Investment (FDI) capital from foreign investors in Vietnam set a
new record, 35.9 billion USD, including increased capital and newly-registered capital,
increasing by 44.4% comparing to 2016. The capital from foreign investors was invested in
19 different industries and the real estate industry ranked third with $3.05 billion, after
manufacturing, distribution and power generation.
The total trading value of merger and acquisition in real estate field was $8 billion in 2017
and the investors prefer to make investment to property companies in Ho Chi Minh City with
greater transparency in financial statements. The Vietnamese real estate market continues to
considerably fascinate to foreign investors, roughly by merger and acquisition. Joint ventures
are gaining the popular among foreign investors who have robust financial equity and they
will follow record then co-operate with local developers who own lands as well as have strong
integration with the local government and community. According to “Overview on Merger
and Acquisition activities in Vietnam in 2017” of JLL company, there are many sectors in real
estate industry will be invested million dollars such as office, residential, hospitality,
industrial and retail. Investors stay optimistic on real estate market in Vietnam with increasing
number of investors searching for transparency land. In 2017, Vietnam real estate market

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recorded the highest number of foreign equity investors, mainly private capital funds,
searching to reimburse their capital in swift and efficient manner.
The demand for hiring operating office buildings in core location continue to increase. The

considerable need to invest in Vietnam market is in accordance with growing requests for
property in Asia - Pacific in which the amount of investment in the area from January to
September in 2017 rose by 12%, $97 billion, comparing with the figures in 2016.
According to “1Q18 Vietnam Property Market Brief’ of JLL Company, there were
approximately 127,000 newly found enterprises during 2017 which was higher by 15.2%
comparing with 2016. The newly registered capital of these companies in 2017 was 45.4%
higher than the figure in 2016 and the average capital in 2017, at 10.5 billion VND. At the end
of 2017, the number of enterprises putting an end to their business activities declined by 0.2%
comparing with 2016.
Moreover, Vietnam was one of the top ten fastest developing tourist destination in the world
based on the numbers of visitors with many newly hospitality accommodation, according to
Colliers International. In 2017, there were more than 13 million international visitors and this
number is 30% higher than 2016. The hospitality accommodation continued to growth swiftly
with more than 25,000 accommodations with more than 100 five-star hotels, 250 four-star
hotels and nearly 500 three-star hotels.
In general, the country’s economic growth will be strengthened by increasing consumption,
rising direct investment from foreign investors, better export performance, stronger
integration with international economy and enhancing in the administration and regulation
system. With a stable political environment, low labor and operating costs, the continuous
support from the Government as well as promised development of economic, Vietnam is
considered as a dynamic country and an ideal investment for both foreign and domestic
private investors to contribute in the growth of economy.

Page 3


This rapid recovery in economy has enabled an uptrend for the real estate industry where the
demand, supply and price are continued to rise since 2012. The real estate field has increased
by 4.07% which was the highest rate since 2011 and accounts for 0.21% of total GDP growth.
1 Theof

highest
profitable
real Association,
estate firms the
listed
in Vietnam
in 2017
Based onTable
the report
Vietnam
Real estate
proportion
of credit
for trading
and construction of real estate companies in 2017 was approximately 15% which was lower
than the number in 2016, 17.1%. The consumption credit of the consumers continued to grow
in 2017 as the credit outstanding balance for purchasing houses for living, hiring houses,
building and repairing houses for living or buying land to build houses was 52.9% in 2017,
which was increased by 3.4% comparing with 2016. This indicates the growing demands from
the customers in the market.
The real estate market has enjoyed the high liquidity from many suppliers and giant projects
along with the support from City Governments. There are consistency robust demand from
investors in the real estate markets due to the improved income and demographic shift from
countryside to modern and developed cities. The number of transactions of apartments has
increased dramatically along with the drop in real estate inventory. The growing trend in real
estate market allows real estate developers to have promising development and profitable
business.
According to the report of Vietnam Real Estate Association, the number of real estate
companies increased considerably by 62% comparing with 2016. Additionally, according to
Vietnam Investment Review, in 2017, 59 large listed companies in Vietnam stock exchange

had considerable profit in their financial statements, around 155.093 trillion VND (6.8 billion
USD) which was higher by 39% than the numbers in 2016. Specifically, the consolidated
sales revenue of Vingroup rose significantly to 3,97 billion USD and increased by 57% in
comparison with 2016. The sales revenue of Vingroup accounted for 58% of the total sales
revenue earned by all listed real estate companies. Therefore, the consolidated net profit of
Vingroup reached a new peak at 186.6 million USD and grew by 74% comparing to 2016.

Company name

Sales revenue (million USD)

After-tax
USD)

profit

(million

Page 4


Vingroup

Joint
Stock

3,970

186.6

Company
Novaland
511.2
90.58
Vincom Retail
242.5
88.61
^33
Dat Xanh Group
126.5
Kinh Bac Group
55.33
25.7
Nam Long Group
138.9
23.51
Khang Dien Housing
144.3
22.28
Phat Dien Real Estate
22.8
19.68
Quoc Cuong Gia Lai Group 35.8
18.63
Van Phu Invest
38.4
18.54
Table 2 Top ten listed real estate firms with fastest increasing in profit
Company name

After-tax profit (billion VND)
2017
2016
Increase/
(decrease) (%)
78.62
2.35
3,246.91

VRC Real Estate and Investment Joint
stock company
Van Phat Invest
421.75
17.9
2,256.69
Source: Financial statements of listed companies and Vietnam Investment Review
NovaLand Group came second in the top most profitable real estate companies with sales
revenue of $511.2 million and after tax profit of $90.58 million which increased by 58% and
22.5% comparing with 2016, respectively. Vincom Retail Joint Stock Company, one
subsidiary of VinGroup, is listed on Ho Chi Minh Stock Exchange and ranked third in the top
firms by earning around $240 million of revenue and $88 million of net profit.
Among these 59 companies, there were 13 companies had increased their profit in 2017 more
than 100%. VRC Real Estate and Investment Joint Stock Company ranked first in these 13
companies with their profit up by 33 times comparing with 2016. Van Phu Invest Company
came second in the top fastest development real estate companies in Vietnam, as their profit
increased by 22 times in comparison with 2016. De Tam Company ranked third in the list

with the net profit was 3.6 billion VND in 2017.

De Tam Joint Stock Company
Quoc Cuong Gia Lai Joint Stock
Company
Long Giang Investment & Urban
Development Joint Stock Company
Khang Phuc House Trading Investment
Company Limited

3.67
423.72

0.2
44.84

1,771.94
845.05

104.06

15.03

592.38

124.31

30.73

304.54

Hoang

Quan
Consulting-Trading- 75.12
Services Real Estate Corporation
Sai
Gon
Telecommunication
& 146.65

19.62

282.90

^^51

187.57

79.51

28.69

177.18

190.63
10.46

80.85
4.56

135.79
129.13

130.18

58.45

101.77

Technologies Corporation
Investment and Trading Of Real Estate
Joint Stock Company
Van Phat Hung Corporation
Cuu Long Petro Urban Development &
Investment Corporation
Development Investment Construction
JSC _____________________________

Page 5


Company name

After-tax profit (billion VND)
2017
2016
Increase/
(decrease) (%)
Table 3 Top listed real estate firms with declined profit in 2017 comparing to 2016

Source: Financial statements of listed real estate companies and Vietstock
According to the report of Ministry of Planning and Investment, during 2017, the newly

registered capital, 388.376 billion VND, rose by 66.5% in comparison with 2016 and
accounted for 30% of the total newly registered capital. The average registered capital of 1
company in real estate sector is highest comparing with other sectors, around 76.7 billion
VND. The listed companies went up from 11 in 2016 to 66 in 2017.
However, there were 12 real estate companies witness a remarkable reduction in revenue in
2017 comparing to the numbers in 2016 and 6 companies experienced losses in 2017. To be
more specific, Viet Property Investment Joint Stock Company had the highest net loss, 146
billion VND because their cost of goods sold was too high, 633 billion VND comparing with
their sales revenue, 549 billion VND. Additionally, there were 12 real estate enterprises
witnessed the tremendous drops in their revenue in 2017. For instance, Song Hong
Construction Joint Stock Company had the highest decline in revenue by 93% in 2017 or
Vietnam Mechanization Electrification & Construction JSC experienced their profit reduce
gradually year by year since 2014.

Page 6


VRC Real Estate and Investment Joint
stock company
Van Phat Invest
De Tam Joint Stock Company
Quoc Cuong Gia Lai Joint Stock
Company
LGL
Khang Phuc House Trading Investment
Company Limited
Hoang
Quan
Consulting-TradingServices Real Estate Corporation

0.39

5.87

(93.45)

1.67
381.88
146.84

8.98
1,014.34
273.14

(81.41)
(62.35)
(46.24)

43.59
32.00

75.3
44.71

(42.12)
(28.43)

133.41

178.99

(25.46)

2,436.56
(17.24)
Sai
Gon
Telecommunication
& 2,016.44
Technologies Corporation
197.93
235.57
(15.98)
Investment and Trading Of Real Estate
Joint Stock Company
Van Phat Hung Corporation
89.04
102.90
(13.47)
55.57
62.56
(11.16)
Cuu Long Petro Urban Development &
Investment Corporation
163.52
165.48
(1.19)
Development Investment Construction
JSC _____________________________
Table 4 Top listed real estate firms with the highest inventory in 2017 comparing to

2016
Company name

Inventory (billion VND)
2017
2016

Increase/
(decrease) (%)
(2.35)
~
Vingroup Joint Stock Company
48,615.07
49,782.78
No Va Land Investment
26,886.3
15,789.64
70.28
Source: Financial statements of listed real estate companies and Vietstock
Group
Corporation
Kinh Bac CityMore
Development
Share
8,322.63
0.96
importantly,
total liabilities
of listed8,243.70
real estate companies

in Vietnam in 2017 was
more than 105,500 billion VND which increased by 12% comparing with 2016. Especially,
Short-term borrowings and finance lease liabilities of these companies was around 41,000
billion VND which rose by 72% in comparison to 2016. Moreover, total inventory of the

industry was 155,600 billion VND which grew up by 13% comparing with 2016.


Holding Corporation
Quoc Cuong Gia Lai Joint Stock 6,906.49
Company
Phat Dat Real Estate Development Joint 6,089.23
Stock Company
5,326.77
Becamex Infrastructure Development
JSC__________________________
Khang Dien House Trading and 4,620.86
Investment Joint Stock Company
Sai Gon Thuong Tin Real Estate Joint 4,031.10
Stock Company
Nam Long Investment Corporation
3,884.01
Song Da Urban & Industrial Zone 3,603.05
Investment & Development Joint Stock
Company

6,019.93

14.73

7,356.02

(17.22)

5,020.6

^64

4,617.79

0.07

3,606.25

11.78

3,689.43
2,659.75

5.02
35.47

Page 7


Source: Financial statements of listed real estate companies and Vietstock
The profitability as well as the chances of suffering losses of these companies is impacted by
many factors. Therefore, the study analyzing the influence of the financial factors on the
profitability of Vietnamese real estate companies is an urgent demand and crucial for
investors who are intend to make successful investment to listed Vietnamese real estate

companies as well as for the management of the companies to utilize the companies’
resources to gain more profit. Moreover, the dissertation would also provide theoretical and
practical contribution for regulators and government of Vietnam to develop the real estate
market in Vietnam. From all the reasons mentioned above, the chosen topic of the dissertation
is “Important financial factors affecting the profitability of listed real estate companies in
Vietnam”.

1.2. Conceptual Basics
According to Adamu Yahaya in 2016, Profit is the surplus of revenues over related expenses
of an activity during a period of time. Profitability means ability of the companies to generate
profit from their business activities. In other words, profitability is an ability of the company
to generate profit as an outcome from the initial investment based on the resources of the
company. It illustrates the efficiency the management to generate profit by using all the
Page 8


resources available in the companies. Although a company is able to produce profit, this
cannot guarantee that the company can be profitable and owners as well as financial managers
cannot only rely on the profit. Therefore, the financial managers need to analyze the
profitability in order to evaluate the ability of the company to utilize its capital investment and
resources. Specifically, profitability ratios can be used to evaluate an ability of a company to
earn profit against its related expenses. In majority of these ratios, higher ratios mean higher
ability to generate profit and this indicates the how well is financial performance of the
companies.
The ratio of profitability is normally express by Return on Asset and Return on Equity. Return
on Assets (ROA) is evaluated by the costs and expenses relating to profit, and the profit is
analyzed against assets to assess the effectiveness of a company in utilizing assets to generate
sales revenue, gross profit and finally net profits. When companies use more assets, they
should generate more sales revenue and more net profits. The cost of the company would be
lower and the profit margins would increase, therefore the profit might grow at a faster pace

than assets leading to increasing in return on assets or profitability. Return on Equity (ROE) is
assessed by the ability to earn returned profit based on the initial equity investment. Return on
Equity could grow enormously without making additional equity investment because the
company just needs to utilize the invested equity to gain higher profit.
Profitability of listed real estate companies in Vietnam could be depended on many nonfinancial and financial factors, such as organizational culture, corporate social responsibility,
innovation and financial management. The financial management of real estate companies is
represented by financial ratio of the companies such as account receivable cycle ratio,
inventory ratio, account payable ratio, debt ratio or current ratio. Therefore analyzing these
financial ratios would help to identify which factors are significantly correlated with
profitability.

Page 9


1.3. Research methods of the dissertation
The profitability, the dependent variable would be measured by Return on Assets (ROA) and
the independent variables are receivable turnover (RT), payable turnover (PT), Short term
debt over total debt (TOTAL_DEBT), company size (SIZES), current ratio(CR),
macroeconomic factor measured by Growth rate of Gross Domestic Products (GDP), Firm
Growth (FGR), Sales to capital employed ratio (SCE), inventory turnover
(INVENTORY_TURNOVER) and interest cover (INTEREST_COVER). The correlation
between these dependent and independent variables would be tested by using Ordinary Lease
Squares model.
The null hypotheses are:
- H0: Independent variables cannot explain the profitability of Vietnamese real estate
companies
- H1: Independent variables can explain the profitability of Vietnamese real estate companies
The hypotheses would use the multiple regressions and the econometric model for the
estimation of the regression is as follows:
ROAi,t =α +β1X1,t+ β2X2,t+ β3X3,t+ β4X4,t+ β5X5,t + β6X6,t + β7X7,t + β8X8,t + β9X9,t + β10X10,t +

+Uit
The results from the regression would show the negative or positive correlation between the
dependent variable and independent variables as well as which independent variables have
more influence on dependent variable.
1.4. Organization of the dissertation
To resolve the proposed objectives of the dissertation, the dissertation would be organized as
5 chapters and the specific content of each chapter are as following:
Chapter 1: Introduction

Page 10


This chapter illustrates the reason choosing the subject of the dissertation, the necessity of the
dissertation, reveal the general economic condition of Vietnam as well as the overall
condition of Vietnam real estate market and financial condition of Vietnam real estate
companies, conceptual basics for the definition of profit and profitability, objectives of the
dissertation, methods of collecting data and research methods of dissertation as well as the
structure of the dissertation.
Chapter 2: Literature review
This chapter shows the prior literatures related to financial performance of international and
domestic listed real estate companies by summarizing and analyzing the initial researches to
point out the reasons why these financial indicators are chosen in explaining the profitability
of the companies.
Chapter 3: Research Methods of the dissertation
This chapter reveals the definition and measurement of dependent and independent variables
and shows the econometric model with hypotheses. After being measured, the principle and
method of analyzing the data resources would be presented.
Chapter 4: Analyze the researched data and present findings
This chapter shows the results of research and gives explanation for the results. The results of
the research would include descriptive statistics, analysis for correlation between the

dependent and independent variables, verify whether the hypotheses of the research model are
correct or not and identify to what extend the independent variables can explain the dependent
variable.
Chapter 5: Conclusion, limitations and recommendation of the study
This chapter conclude what financial factors impacting the profitability of real estate
companies based on the collected results of the study, deliver several recommendation for the
government to improve the effectiveness of real estate market in Vietnam as well as the

Page 11


financial condition of real estate industry and for the real estate companies to improve the
financial performance, the limitations of the study and orientation for next researches.
1.5. Purposes of the dissertation
The specific purposes of the dissertation are:
- To examine the correlation between profitability and related financial indicators
- To identify which financial factors have stronger impacts on profitability based on the
outcome of coefficients from the tests.
- To verify the suitable strategies to improve the profitability of the real estate companies in
Vietnam
1.6. Methods of collecting data
The financial statements of 53 listed real estate companies with different sizes as small,
medium and large sizes from 2013 to 2017 would be collected from Vietnam stock exchange
or their official website. Then the financial ratio, financial indicators would be calculated
based on the numbers from these financial statements. After that, these financial ratios would
be used as independent variables and dependent variable for running multiple regressions by
applying Ordinary Least Square method and fixed effects of Cross Section.

Page 12

Chapter 2: Literature review
2.1 Review of related literature and researches
The most vital objective of managing the companies technically is generating net profit and
the efficiency in operation of the companies is measured by net profit. Moreover, profit is
determinant for the survival of the companies as well as the potential to development and
expansion of the companies. According to Gabriela Loagă (2010), in order to be able to gain
much profit, the companies must have the balance and combine the following crucial factors:
the effective process in production, the satisfaction of the owners as well as the clients, the
research and innovation and the growth or expansion of the companies. Therefore, the
companies must develop thorough understanding about the business environment, the factors
determining the profitability by performing the measurement carefully.
Profitability is the capability of the companies in generating profit from the operating of
companies. This can be evaluated by many methods and criteria and based on result of
financial performance. According to Costea Valentin (2012), the research had distributed the
determinants of profitability of the companies into two categories: modern determinants and
classic determinants. Modern indicators are concerned to the value added to the companies as
the results of the production process such as added economic value and market value of the
companies, investment ratio such as dividend payout ratio, price-earnings ratio, market to
book ratio, dividend per share, and earnings per share. For classic indicators, this is related to
other ratio such as gearing ratio including debt ratio, borrowing ratio, interest cover and
profitability ratios including gross profit margin, operating profit margin, net profit margin,
return to capital employed, return on Equity. Among these ratios, researching based on the
profitability ratio is the most popular method used to identify the profitability of the
companies. Based on Eubica Lesáková (2007), profitability ratios demonstrate the capability
of the companies in creating profit, return on initial investing as well as delivering the signal
for good financial health and managing the assets in an effective way.

Page 13

To measure profitability of the companies, according to Vijaykumar (2011), net profit margin
was used as dependent variable to evaluate the profitability of the companies. Net profit
margin is measured by net profit divided by sales revenue. The research used regression
model with panel data from 18 automobile companies to point out that sizes of the companies,
financial leverage, inventory day ratio and tangibility are significant determinants of
profitability. Moreover, based on Basha and Islam (2014), the gross profit margin was used as
the dependent variable to verify the profitability of the companies. However, the limitation of
the study has been pointed out as the profitability ratio including gross profit margin or net
profit margin is only used for short period of time and the profitability ratio is affected by
many objective factors such as seasonal, inflation, leaders of the industry, different in
operating and accounting practices causing different ways to recognize profit. Therefore,
other factors must be used to measure profitability of the companies. The following part will
present besides profitability ratio, which financial indicators could be the most helpful and
accurate in measuring the profitability of the companies.
2.2 Review for related literature and researches in Europe
According to Valentine Cosmin Saracin (2012), the most important financial factors
impacting the profitability of the real estate firms in Romania have been pointed out such as
financial leverage, proportion of fixed assets in total assets, gross margins, receivable turnover
and payable turnover, inflation and gross margin. The paper has indicated the strong
correlation between these independent variables and the dependent variable, Return on
Equity. Moreover, the financial conditions are impacted by financial risks. If companies have
the obligation to pay the regular debt, they have to decrease their available financial resources
for business hence leaving impacts on profitability. The profitability is also affected by gross
margin as if this factor is rather low, the market competition will be very high therefore the
profitability is also quite low. Financial performance of the companies are positively

correlated with the number of rotation days for receivable and payable as the companies
Page 14

rapidly collect debts and make payment to the suppliers punctuality, the financial health of the
companies would enjoy the upward trend. There is also negative correlation between the
profitability and inflation.
As Klaus Hammes and Yinghong Chen (2005) stated, the profitability measured by profit
before tax was heavily correlated with debt ratio, tangibility, companies sizes and companies
ages. For the majority of the countries in Europe apart from Sweden, profitability has negative
relationship with the debt ratio because larger debt would be related to negative profit before
tax. Sizes of the companies leave positive impacts on profitability in almost all countries
excluding Sweden because larger companies could have higher borrowing comparing to
smaller companies and their fixed costs are low comparing to the cost of smaller companies.
Meanwhile tangible assets have negative influence in general profit level and earning ability
in many European countries. The effect of age of the firm is fluctuated among countries such
as positive in Finland and negative in France.
In addition, based on Klaus Hammes and Chen (2005), we can conclude that the pace of
assets’ rotation, interest rate, firms’ ages and companies’ size are strongly correlated with the
financial performance of real estate firms. Specifically, Companies sizes are positively
correlated with profitability and the debt ratio, tangibility and firms’ ages are negatively
correlated to financial condition of companies, as older firms don’t have many chances to
compete for profitable investment. Moreover, according to Kim Hiang Liow and Ho Kim Hin
David (2009), the stock returns of the companies are strongly related to market to book ratio,
companies sizes, return on equity, debt ratio, cost of equity, spread, fixed tangibility and
earnings retention ratio. Specifically, in many countries in Asia and Europe, the impacts of
company sizes and sustainable growth rate on profitability are considerably positive revealing
that larger and higher developing real estate companies are related with higher rate of return
(Return on Assets). However, these variables are also positively and insignificantly correlated
with profitability for North American real estate companies. Tangibility of Asian and North

Page 15

American enterprises is positively correlated with profitability but the correlation is not strong
as the European real estate companies. Last but not least, the profitability of every real estate
companies in all regions demonstrated the negatively relationship with capital structure
because higher debt ratio could have negative contribution on financial performance of
companies and interest of borrowing is the first factors impacting the profit of companies.
Moreover, as Goddard, Molyneux, and Wilson (2005) stated, by applying the positive
correlation between Gross Domestic Products and Profitability of around 600 European
Commercial Banks. Or as Doma Rema Marak and Sirion Chaipoopirutana (2014) researched,
the profitability of the companies is positively related to the economic growth of the country.
Additionally, the negative relationship between inflation rate and profitability of the
companies are also revealed in this study. Meanwhile, based on Houssem (2013), the
negative correlation between Consumer Price Index and profitability of the firms are indicated
by using panel model.
2.3 Review for related literature and researches in Asia
Furthermore, based on Farah Margaretha and Nina Supartika (2016), the indicators impacting
profitability are examined such as size of the firm, firm age, sales growth rate, past
profitability, labor productivity measure by value added comparing with number of
employees, and industry affiliation which is the ratio of sales minus cost of goods sold of
Small and Medium Companies listed in Indonesia Stock Exchange. The results reveal that
firm size, sales growth rate, past profitability, labor productivity and value added by ratio of
sales minus cost of goods sold enormously impact on profitability. On the other hand, the
variable namely age of the firms does not statistically considerably impact profitability. The
outcomes of the regression model in the paper also illustrate that the independent variable size
of the firm, sales growth rate, past profitability are negatively correlated on profitability,
meanwhile the independent variable namely labor productivity and industry affiliation are

positively correlated with profitability. Therefore, to continue to improve the company’s
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financial performance, the manager could identify a suitable strategy to maximize the
profitability by focusing on productivity of labor forces and industry affiliation which is the
ratio between sales and cost of goods sold.
Additionally, according to John Francis T. Diaz and Martha Christianie Tjokro Hindro
(2017), the research analyzes the correlation between financial factors and the profitability of
47 listed real estate Indonesian companies from 2010 to 2014 with different sizes from small,
medium to large companies. The multiple linear regression estimation was used in the
research in order to verify the influences of these following factors on the profitability:
receivables days ratio, inventory days ratio, payables day ratio, company sizes, tangibility,
debt ratio, current ratio and sales growth ratio. The results of the research indicate that the
receivables day ratio and inventories day ratio are negatively correlated with profitability of
companies except for real estate firms with medium and small sizes in Indonesia. However
the correlation between this ratio and profitability of large real estate companies is positive,
due to the liquid assets of larger firms as well as their ability to offset the expenses for
maintenance of inventories of real estate firms. Both size of the companies and increasing rate
of sales are positively correlated to profitability except for medium real estate companies in
Indonesia. Moreover, current ratio is positively correlated with profitability in real estate
companies with large sizes whereas the correlation is negative for small real estate companies,
because smaller real estate companies normally have the lower current asset. Additionally,
tangibility is negative correlated to profitability of large real estate firms, meanwhile the
correlation is positive for medium real estate firms.
In Dr. Anupam Mehta (2014), the key findings of this study are that there exists a significant
negative relationship between the profitability, measured through Return on Assets and the
length of the firm’s cash conversion cycle. Longer the cash conversion cycle, lesser is the
profitability. The paper further explores that amongst cash conversion cycle, which
component (Days in sales outstanding, days in inventory outstanding and Day’s payables

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outstanding) is having the most significant influence on the profitability. The study brings out
that the day’s payables outstanding is inversely related to profitability, this means the sooner
the companies make payment to creditors, the better it will be for the overall profitability .
This could also indicate that the less profitable concerns take more time to make the payment.
Consistent with previous studies, the firms can improve profitability by reducing the number
of days the required to convert the inventory into sales. The Liquidity also has inverse
relationship with profitability. Higher the funds are tied up in current assets lesser will be the
profitability. The study also brings out that the Size of the concern is immaterial for
enhancing the profitability. Thus the study concludes that the UAE’s real estate and
construction companies can significantly increase their profitability by giving focus on
management of the working capital and shortening the length of the cash conversion cycle by
effectively managing the working capital components especially the payables and Inventories.
Furthermore, in the research of Mahmood and Rozimah (2007), this paper analyzes the
profitability and capital structure among real estate firms and construction companies in
Malaysia from 1996 through 2003. The results indicated that real estate companies in
Malaysia can have larger size and are able to gain more profit due to their capital gearing and
debt equity ratio were reducing. The results also revealed that the debt of construction
companies is considerably high and the demand to follow the obligation of this debt is very
high leading to quite low profit margin. The results are similar to the outcomes on the
industrial market in Hong Kong showing that capital gearing have shown the negative
correlation with price earnings ratio and profit after tax margin for real estate and construction
industry because the companies with significant capital gearing have to fulfill their debt
obligations in which would make their profit margin and price earnings ratio decline,
irrespective of their business sizes. Generally, the study illustrates that the amount of debt
over equity is negatively correlated with the ratio of net profit to total profit and price
earnings ratios for property developers.

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