APK09 – MANAGE FINANCE

OPERATION
 Ratio Analysis –
Profitability Ratio
Pertemuan ke 9 dan 10
 Diadopsi dari sumber :

No Judul Pengarang Penerbit Edisi Kota Tahun Jenis

Accounting Essentials for Taylor and
1 Hospitality Manager Guilding, Chris Francis Ltd 3 London 2014 Utama
Jagels, Martin G.
Hospitality Management Dan Coltman, New
2 Accounting Michael M Wiley 9 Jersey 2006 Utama
 Sub-CPMK
• Mahasiswa mampu mengidentifikasi status sebuah bisnis
perusahaan dari nilai rasio profitabiliti (C3,A3)

Materi
1. Gross Return on Assets
2. Net Return on Assets
3. Net income to Sales Revenue Ratio
4. Return on Owners Equity
5. Other Profitability Ratio
Profitability Ratio
 Introduction
• The main objective of most hospitality operations is to
generate a profit. In a partnership or propietorship, the
owners cna withdraw profit from the business entity to
increase their personeal net worth or can be left in the
business to expand it.
• Creditors of a company also like to see increases in the
business profit, because the higher the profits, the less
the risk is to them as lenders.
• Therefore, one of the main task of management to
ensure continued profitability of the enterprise.
Profitability ratio are most often used to measure
management’s effectiveness in achieving profitability.
 Example of Balance Sheet & Income Statement to use
in this Ratio
Please use below information to calculate each Formula in Profitability Ratio
Asset = Liabilities+Equity 2018 2019
Total Assets $ 1.098.000 $ 1.296.000
Total Liabilities $ 756.000 $ 608.000
Total Equity $ 342.000 $ 688.000
Income Statement 2019
Revenue $ 2.000.000
Total Operating Expenses $ 1.387.000
Operating Income $613.000
Undistributed Operating Expense $308.000
Fixed Expense $210.000
Income Before Interest and Income $95.000
Tax
Interest Expense $25.000
Income before income tax $70.000
Income tax $15.000
Net Income $55.000
1.Gross Return on Assets
 1.1. Gross Return on Assets

• The gross return on assets ratio measures the effectiveness of

management’s use of the organization’s assets:
• The formula using below calculation:
– Total Average Assets: (Total Asset year 1+ TA year 2)
2
: (1.098.000+1.296.000)/2 = $1.197.000
• Gross Return on Assets =
(Income before interest and income tax / Total Average Assets
($ 95.000/ $ 1.197.000 ) x 100% = 7,94%
 1.2. How to Read the Result
• Interest and income tax is added back to net income in the
equation to compare the resulting percentage
• For instance, if in our example, an expansion of the building
were contemplated and the money could be borrowed at a 5
percent interest rate, one could assume that the new asset
would earn a rate of return of 7,94 % ad it would be better than
the 5 percent interest. Although small, this would leave 2,94%
to increase the business income before income tax.
• For management, owner and creditors perspective, as higher
the profit is show as good the company earn the profitability
2. Net Return on Assets
 2.1. Net Return on Assets

• The net return on assets, on the other hand

evaluates the advisability of seeking equity, as
opposed to debt financing.
• The formula using below equation:
Net income after income tax / Total Average Assets
$ 55.000 / $ 1.197.000 = 4,59%
 2.2. How to read the results

• Since cash dividen or cash withdrawals are payable from earnings after tax,
financing a building with stockholders equity or captal would not lead to a
very good dividend yield for stockholders.
• Based on currents results, assets are only yielding a net return 4,59%, and
stockholders would most likely assume that the new assets would earn the
same net rate return as the old assets.
• This might be a poor assumption, since the old assets are at book
(depreciated) value. If the calculation were made on assets at their
replacement value, the rate could well drop below 4,59%.
• Under these circumtances, management would have to improve its
performance considerably to convince stockholders to invest more money for
an expansion. Based on Kasmir (2008), ROA for industry called good in
average 30%
3. Net income to Sales Revenue
Ratio
 3.1. Net income to Sales Revenue Ratio

• The net income to revenue ratio (also known

as the profit margin ratio) measures
managements overall effectiveness in
generating sales and controlling expenses
• The formula using below equation:
Net income after income tax / Sales Revenue
$ 55.000 / $2.000.000 = 2,75%
 3.2. How to read the results

• This means that, out of each $1,00 of sales revenue,

we had 2,75 cents net income.
• In absolute terms, this might not be very meaningful,
because it does not truly reflect the profitability of
the firm. How to determine the real profitability of
company, we can use Return on Owners Equity to
show how much profit will get by the owners
4. Return on Owners Equity
 4.1. Return on Owners Equity
• This ratio shows the effectiveness of management’s use of equity funds.
• Return on Equity is a two-part ratio in its derivation because it brings
together the income statement and the balance sheet, where net income
or profit is compared to the shareholders’ equity. The number represents
the total return on equity capital and shows the firm’s ability to turn
equity investments into profits. To put it another way, it measures the
profits made for each dollar from shareholders’ equity.
• The following is the ROE equation:

Average Shareholder Equity = (Tot.Equity Year 1 + Tot. Equity Year 2)/2

($ 342.000 + $ 688.000) / 2 = $ 515.000
ROE = Net Income /Average Shareholders’ Equity
$ 55.000 / $ 515.000 = 10,68%
 4.2. How to read the results

• This percentage shows the firm’s ability to turn equity investments into
profits as much 10,68 per cents for each $ 1,00 invested by the owner.
• ROE provides a simple metric for evaluating investment returns. By
comparing a company’s ROE to the industry’s average, something may be
pinpointed about the company’s competitive advantage. ROE may also
provide insight into how the company management is using financing from
equity to grow the business.
• A sustainable and increasing ROE over time can mean a company is good
at generating shareholder value because it knows how to reinvest its
earnings wisely, so as to increase productivity and profits. In contrast, a
declining ROE can mean that management is making poor decisions on
reinvesting capital in unproductive assets.
• Based on Kasmir (2008), ROE for industry called good in average 40%
5. Other Profitability Ratio
 5.1. Earning Per Share Ratio
• Other measures of profitability include annual earning per share, dividen rate
per share and book value per share.
• Such as ratio are of most concern to those buying and selling publicly traded
stock on the open market, rather than concern to internal management.
• However management is held accountable by stockholders for producing a
net income satisfactory to them, and earning per share are frequently used to
measure net income.
• The earning per share ratio is also important because it tends to dictate the
value of the shares in the market and indicates the desireability of purchasing
the stock of the company to a potential purchaser.
• Assume there are 40.000 shares outstanding at both the beginning and end of
the year. The formula using below equation:
Earning Pershare Ratio =
Net Income After Income Tax / Average number of common shares outstanding
$ 55.000 / $ 40.000 = $ 1,38
 5.2.How to read the results

• Earning per share is the same as any profitability

or market prospect ratio. Higher earnings per
share is always better than a lower ratio because
this means the company is more profitable and
the company has more profits to distribute to its
shareholders.
• Based on the result, company will get $1,38 of
each $ 1,00 share. This is the amount of money
each share of stock would receive if all of the
profits were distributed to the outstanding shares
at the end of the year.