Questions 35 to 40 are used to generate information on the return on assets and return on equity of the business for the quarter ending 30 September 2007 and 31 March 2008. The data from these questions will be used for the investigation of the third of the specific research questions. This question asks about the factors that determine profitability in the short-stay accommodation industry. Figure 5.4 shows the distribution of responses for the return on assets data from Question 35. The figure shows the percentage of respondents who selected each of the five possible choices in the Likert scale used for the questions. The distribution of responses for return on assets is bi-modal for winter and summer with the peaks focused on more than 10% and 3% to 5%. There is a marked difference in the returns for summer and winter with lower returns overall in the winter.
Figure 5.5 shows the distribution of responses for the return on equity data from Question 38. The distribution of responses for return on equity is also a bi-modal distribution although less so than the return on assets distributions. Again, there is a marked difference between the summer and winter with returns on equity being lower in the winter. It is not clear a priori why the distributions are bi-modal but the variation across the responses invites further analysis. There were many factors that are likely to affect returns and these factors are investigated in Chapter 8.
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Figure 5.4 Distribution of responses for the return on assets
Less than 3% 3% to 5% 6% to 7% 8% to 10% More than
10% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% R es p on se P er ce n tage Return on assets before interest and taxes for quarter ending 31 March 2008 (Summer)
Return on assets before interest and taxes for quarter ending 30 September 2007 (Winter)
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Figure 5.5 Distribution of responses for the return on equity
Less than 4% 5% to 7% 8% to 9% 10% to 12% More than
12% 0% 10% 20% 30% 40% 50% 60% R es p on se P er ce n tage Return on equity before interest and taxes for quarter ending 31 March 2008 (Summer)
Return on equity before interest and taxes for quarter ending 30 September 2007 (Winter)
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Since the return on equity is simply the return on assets with the borrowings removed some relationship between the two variables would be expected. Consider the stylised balance sheet for a business: Assets = Liabilities + Equity.
It must be the case that Profit Profit Profit
Equity ≡ Assets−Liabilities > Assets. If the business has no liabilities then the return on assets will be equal to the return on equity but with liabilities the return on equity must be higher than the return on assets. Allowance for borrowing in the industry was incorporated into the design of the questions used to generate in data in Figure 5.4 and Figure 5.5 with the boundaries being higher for the return on equity. For both measures of returns the business were asked to use profit before tax and interest.
The two rates of return are compared by considering the data in Figure 5.4 and Figure 5.5. Seventy percent of respondents indicate no difference between their return on assets and return on equity suggesting a situation of no liabilities, 10% indicate that their return on equity is higher than their return on assets suggesting some borrowing and 20% indicate that their return on equity is lower than their return on assets. This latter result suggests the business operator may be confused over what their liabilities are, giving erroneous values for the return on equity. In view of this the return on equity data needs to be used with caution in the econometric analysis.
To elicit further information on the factors that affect the returns for the business during the two quarters of the study, two open-ended questions were included in the survey questionnaire. In Questions 37 respondents are asked about any significant factors that affected return on assets and in Questions 40 respondents are asked about any significant factors that affected return on equity. Twenty two percent of respondents stated that there were significant factors that affected their return on assets during the two quarters. Four respondents indentified internal capital improvements such as “investment into onsite developments” and “significant refurbishment of rooms” and “renovating showers, new beds, Austar, new carpets and televisions”. Another respondent had “set up a website, listed on the last minute sites and organised a site manager”. A number of respondents identified external factors that significantly affected their return on assets such as the “ending of the Spirit of Tasmania Sydney to Devonport ferry services and the detrimental effect it had on Tasmanian tourism” and “the decrease in customer confidence of Tasmania as a destination”. “Petrol prices and low-fare flights” were also factors identified by one respondent affecting return on assets whilst another respondent “balanced capital works for the business with an extremely
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buoyant year”. Only 12% of respondents indicated that there were significant factors that affected their return on equity. There was no additional information in these responses, simply a repetition of the factors that affected return on assets. This is to be expected given the relationship between return on assets and return on equity and the likelihood that the factors that affected return on assets also affected return on equity. These anecdotal observations on other factors affecting returns are interesting, although no general themes emerge. It is possible that respondents are expensing these items in the same quarter rather than treating them as an investment and taking the quarterly depreciation into account. It is not possible to ascertain whether this is the case but since the proportion of respondents identifying significant factors is relatively small any bias in the analysis should be relatively small. There are however no major common significant factors identified by the respondents that need to be incorporated into the analysis in Chapter 8. The final step in this summary of the data from the survey is to investigate the data from the questions which assessed the competitive position of the business from the perspective of the respondents.