Empirical Analysis on Earning Performance in listed Real Estate Sector

Empirical Analysis on Earning Performance in listed Real Estate
Sector
ZHAO Zhi-quan SUN Jian-bo
Jiangsu Teachers University of Technology, P.R.China ,213001
Abstract: With the prices of housing climbing up, the earnings of the real estate industry are on the rise;
therefore investors show an unprecedented enthusiasm toward the listed real estate sector. In order to
have rational investment, it is urgent that studies be conducted on the earning performance of the listed
companies in the real estate industry. By employing the methods of AHP analysis and composite index
analysis, the thesis makes an empirical analysis on the 17 representative listed companies, whose result
shows that the overall earning performance of the listed companies is relatively low, but in the last three
years it has been rising. The last part of the thesis proposes some effective advices on improving the
earning performance of the listed companies from the following aspects: improving management in the
enterprises, increasing government supervision, and improving the discriminating judgment of the
investors.
Key Words: earning performance; real estate industry; empirical analysis
1. Introduction
Earnings are a basic indicator to measure of operating and profitability of corporation. It is basis for
investors of corporate to make investment decision, for creditors to make credit decision, for enterprise
managers to operate management of enterprises. What kind of Earnings can guarantee the interests of
enterprises as well as stakeholders? Whether it is safe of a relatively higher number on accounting
statements?
Most people regard earnings of per share as criterion to evaluation Earnings. In fact, this is a very
single and one-sided evaluation criterion. The evaluation of Earnings should be considered in two ways:
quantity and quality. But quality is more important than quantity. Therefore, it is important to study the
quality of listed company Earnings in real estate. In this paper, the author used composite index method
and AHP to analyze A shares listed company in real estate of Shanghai Stock Exchange. The author is
with a view to provide useful information for listed company in real estate, government regulation sector
and investors.
2. Research samples
In order to study earning performance of year 2004-2006, the author has selected 17 listed
companies as samples of A shares in real estate of Shanghai Stock Exchange Market whose data are
integrity and representative. They are shown in the table 1.
Table 1 Samples
Securities Code
Securities Code
Companies short
600064
Nanjing High-Tech
600634
Hainiao Enterprise Development
600246
Pioneer shares
600639
Pudong gole bridge
600322
Tian Housing development
600641
Billion Enterprises
600325
Huafa shares
600665
World Source
600376
Tianhong Po Yip
600675
Chinese enterprises
600383
Golden Group
600684
Pearl River Industries
324
Companies short
600463
Airport shares
600736
Suzhou New
600533
Qixia Construction
600767
ST Wan Shing
600603
ST booming business
Data sources: data center of giant tidal Information Network (www.cninfo.com.cn) "annual report
of listed company major financial indicators"
3. Research methodology
According to the characteristics of the real estate industry, the author will use composite index and
AHP analysis method to analyze the quality of listed company earnings in real estate.
The so-called composite index method is to put a series of relevant indicators together, give these
indicators different weights according to the different characteristics of them, work out a comprehensive
number to overall evaluation. The so-called AHP method is to judge relative importance of each factor
of each level, use mathematical methods and calculation of each factor weights.
Specific analysis ideas are the following: (1) establish indicators index system. (2) Calculate the
index value. (3) Determine index standards of zero and full marks. (4) Calculate the scores of every
index value. (5) Calculate total scores of corporate earning performance in method of weighted
geometric average method according to weights in earning performance of every indicator. Composite
index system is shown in figure 1.
Operating profit ratio(0.0877)
receipts resource
(0.1879)
Revenue
structure
(0.25)
（
Interest protection
multiples 0.0446
（
receivables in
profit (0.0176)
Earni
ngs
Quali
ty
(1)
）
Net operating Index 0.0877
）
Related party receipts proportion (0.0125)
net
Admission rate of main business (0.0597)
Implementation
ability (0.0682)
(1)
Cash Flow
(0.75)
Cash recovery rate of all assets (0.0085)
Liquid Ratio (0.0568)
Solvency
(0.3409)
protection Multiples of cash interest (0.2841)
Profit quality
(0.3409)
Cash ratio of operating profit (0.1704)
Cash operating index (0.1704)
Fig 1 Earning performance indicator system
4. Data selection
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4.1 Calculation index value
Table 2
Interpretation of 11 indicators
interpretation
NO.
indicators
1
ratio of Operating profit (f1)
2
Net operating Index (f2)
3
income proportion of related parties
5
Interest protection multiples (f4)
receivables content in net profit (f5)
6
recovery of all assets (f6)
7
Receive cash rate of main business
(f7)
8
9
2
3
(f3)
4
，
f =1，strong earnings sustainability , good stability
f =0，the statements of the proceeds are less likely to whitewash
f ≥1，the stronger solvency which can be leveraged
f1≥1 strong profitability, reasonable profit
4
f5 the lower the proportion about the profits of the enterprise or is
higher
f6 lower, the ability to generate cash of the company's assets is weak
，
f7≥100% sales policies or accounts receivable collection better
f8 higher showed that the short-term solvency of the enterprise is
Cash ratio (f8)
higher
Cash interest protection multiples
(f9)
f9 smaller, higher financial leverage
10
Cash margin ratio (f10)
f10 cash realization degree of net profit by accounting
11
cash Operating index (f11)
f11 1
＜ ，indicates that the part Earnings has not converted into cash
According to the formula in table 2, we select data from annual report of 17 sample companies and
calculate index value. The results are in attached schedule 1.
NO.
Table 3 Standards of zero and full marks
indicators
Standards of full marks
Standards of zero marks
1
f1
1
0
2
f2
1
3
f3
0
1
4
f4
33.84
1
5
f5
10.22
0
6
f6
0
7.33
7
f7
0.62
0
8
f8
1
0
9
f9
103.38
-42.70
10
f10
7.39
-26.79
11
f11
1
4
，-2
-4
，6
4.2 Calculation scoring value of Indicator
According to the standards of zero and full marks in table 3, we can calculate the scores of index
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value in the method of interpolation. The specific calculation methods are to regard the score of listed
company index as X.
full − zero
X − zero
=
highest − lowest score − lowest
We can calculate the index value according to the above formula. The specific results are in
attached schedule 2.
5. Research results
Comprehensive scores of Earning performance of 17 listed companies of A share in Shanghai
Stock Exchange are in attached schedule 2 in 2004-2006. The average score of six indicators over the
past three years is shown in table 4 according to calculations.
Table 4 Comprehensive scores of Earning performance of listed companies in real estate (Two
decimal reservations)
Earnings
protection
receivables in Implementation solvency
profits
comprehensiv
years
resource
Multiples
of
net profit
ability
quality
e scores
interest
2004
16.16
1.58
1.55
1.03
10.99
18.03
49.34
2005
15.81
1.20
1.59
0.75
10.82
21.12
51.29
2006
15.63
1.73
1.65
0.93
10.55
20.93
51.43
Conclusion 1: It is evident from table 4 that Earning performance is upward trend overall. The
net profit of receivables is also rising. But Earnings sources and solvency are on the contrast. Other
indicators are in the small fluctuations. But in the six indicators, Earnings sources and profits quality get
higher scores which have larger contribution to the total score.
Table 5
No.
Scores of 11 indicators of listed company Earning performance in real estate
(Two decimal reservations)
indicators
2004
2005
2006
1
f1
86.58
78.92
84.60
2
f2
84.15
87.90
79.82
3
f3
94.79
94.25
97.01
4
f4
35.48
26.99
38.81
5
f5
88.14
90.32
93.98
6
f6
14.52
11.22
15.00
7
f7
18.64
9.32
3.75
8
f8
34.74
29.16
27.57
9
f9
31.73
32.25
31.63
10
f10
74.80
74.67
69.79
11
f11
31.03
49.27
53.07
327
Conclusion 2: It is clear in figure 2 receivables in net profit and cash operating index is
upward trend. Cash recovery rate of all assets, ratio of cash, cash ratio of operating profit are downward
trend. Cash recovery rate of all assets ring falls 50 percent, 59.76 percent. Cash operating index ring
rose 58.78 percent, 7.71 percent.
100.00
80.00
s
e 60.00
r
o
c 40.00
s
20.00
0.00
2004
2005
2006
years
Fig 2
Scoring trend of some indicators in 2004-2006
In order to study distribution of earning performance in samples corporate, the 17 listed companies
are divided into categories of excellent, good, medium and poor according to the following criteria. The
companies were excellent that the scores of earning performance over past 3 years were higher than the
average of industry. The companies were good that the scores of earning performance over past 2 years
were higher than the average of industry. The companies were medium that the scores of earning
performance over past 1 year were higher than the average of industry. The others were in the poor
category. Its specific distribution is shown in figure 3.
poor
12%
excellent
18%
medium
29%
good
41%
Fig 3 Proportion of four styles of companies
Conclusion3: Earning performance of listed companies in real estate is normal. We can see
from figure 3 that 3 companies are excellent which accounts of 18 percent, 7 companies are good which
accounts of 41 percent, 5 companies are medium which accounts of 29 percent, 2 companies are poor
which accounts of 12 percent.
6. Research conclusion
From the analysis of earning performance of 17 listed companies in real estate, we can draw the
following conclusions. Overall level of earning performance in real estate industries is relatively low in
2004-2006. But there has been a slow increase over the past three years, mainly due to increased internal
operating funds efficiency. But the scores of revenue source are on decline. We can infer that listed
companies in real estate whitewash statements through non-operating Earnings. Part of the earnings has
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not been converted into cash. Instead, they remain in the form of tangible assets. As a result, monetary
funds are inadequate to pay current liabilities, and the ability to pay the interest in cash is poor.
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