Kpenmxsb1c.docx | Course Paper

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Petra University

Faculty of Business

Accounting Department

The Impact of Assets Turnover on Profitability

in Service Sector

Candidate Name:

Saif Alisalm Abusrhan

Registration number:

201720178

Name of Supervisor:

Dr. Abdul Rahman Al Natour

This study is provided to complete the

requirements of graduation project in accounting.

Summer Semester

2020/2021

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Abstract

This study aims to introduce the impact of assets turnover on profitability in service

sector. Comparisons are only meaningful when they are made for different companies

within the same sector, you can also calculate your ratio in previous periods to

determine whether it is improving or declining.

The study examined a data of 9 firms from service sector from 2016 to 2019 and the

data was collected from the Amman stock exchange (ASE). A descriptive statistical

analysis approach was used and analysis to process the data statistically. The studies

find that there is a significant impact between variables, and the regression model was

valid to find that there is a relationship between the variables.

But, because of the narrow time window we recommend using more variables and

using larger samples and increase the time window of the study sample to understand

assets turnover more accurately and also to find the accurate correlation between

assets turnover and profitability. And to conduct more researches that include other

sectors such as the service and financial sectors and comparing the results of those

studies with the results of the current study in order to know the most sectors that

practice assets turnover.

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1. introduction

This research discusses the impact of assets turnover on services sector net income.

First of all I will discuss the assets turnover; assets turnover ratio measures the value

of the company sales or revenues relative to the value of assets. The asset turnover

ratio can be used as an indicator of the efficiency with which a company is using its

assets to generate revenue. The higher assets turnover the more efficient a company is

at generating revenue from its assets. Conversely, if a company has a low asset

turnover ratio, it indicates it is not efficiently using its assets to generate sales. The

asset turnover ratio is calculated on an annual basis. (Sunjoko, M. I., & Arilyn, E. J.

(2016))

Service sector is that portion of the economy that produces intangible goods.

The service sector provides a service, not an actual product that could be held in your

hand. Activities in the service sector include retail, banks, hotels, real estate,

education, health, social work, computer services, recreation, media, communications,

electricity, gas and water supply.

Problem of this study

The higher the asset turnover ratio, the better the company is performing. Since this

ratio can vary widely from one industry to the next, comparing the asset turnover

ratios of a retail company and a telecommunications company would not be very

productive. Comparisons are only meaningful when they are made for different

companies within the same sector, you can also calculate your ratio in previous

periods to determine whether it is improving or declining. (Irman, M., & Purwati, A.

A. (2020))

Importance of this study

If your asset turnover ratio is higher than others in your industry and is increasing

over time, your business likely uses its assets efficiently.(

https://www.investopedia.com/terms/a/assetturnover.asp).

This gives investors and creditors an idea of how a company is managed and uses its

assets to produce products and sales. Sometimes investors also want to see how

companies use more specific assets like fixed assets and current assets. The fixed

asset turnover ratio and the working capital ratio are turnover ratios similar to the

asset turnover ratios that are often used to calculate the efficiency of

these asset classes. The primary advantage of the total asset turnover ratio is the

same as any financial ratio; it puts company-specific asset information in a form that

is easily comparable for investors. Managers can discover assets success and failure

by examining the ratio year over year.

For example, if the asset turnover ratio suddenly drops, it could indicate that an

asset has become outdated to operations and should be sold. (Warrad, L., & Al

Omari, R. (2015))

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Study Questions

• What is the impact of Assets turnover and profitability in the service sector?

• Can you compare the assets turnover ratios between the different sectors?

Study Objectives

• Understand the impact of profitability on assets turnover.

• Provide some suggestions that would help in enhancing the profitability of the

listed firm in Amman Stock Exchange.

Chapter tow

Literature review

2.1 Previous studies

1) The Impact of Turnover Ratios on Jordanian Services Sectors’

Performance. (Warrad, L., & Al Omari, R. (2015))

“Profitability ratios are a group of financial ratios that show how much profit a

business makes in a given context, while asset utilization ratio indicates how

efficiently a business is operating assets to generate cash. The difference between

profitability margin and sales margin is more specific sales. While profitability ratios

measure overall profitability performance, asset utilization ratios focus on company–

specific metrics.

Warrad & Al Omari conducting this study to examine the impact of turnover ratio on

performance of Jordan service industries for the period from 2009 to 2012. The study

shows that there is no significant effect of turnover ratio on the profitability of the

Jordanian service industries. Service industries in Jordan and examining primary and

secondary assumptions, studies show no significant impact of revenue ratio on the

performance of Jordan service industries.

Out of assets (ROA), there was no significant impact of working capital turnover on

ROA of Jordanian service industries, had no significant effect of total asset turnover

on ROA of service industries. Jordan, and had no significant effect of fixed asset

turnover on ROA of Jordanian service industries. In addition, the study indicated that

there was no significant effect of turnover ratio on return on equity (ROE) of

Jordanian service industries, with no ‘significant round effect’ working capital

turnover to the ROE of Jordanian service industries, there is no significant effect of

the total asset turnover on the ROE of the Jordanian service industries and no

significant effect on the ROE of the service industries in Jordan. There was no

significant impact of fixed asset turnover on the ROE of Jordan’s Service Industries.

In addition, the study concludes that education service sectors have the lowest

working capital turnover ratio and the health service sector have the highest working

capital turnover ratio. Additionally, we find that the hospitality and tourism sectors

have the lowest total asset turnover, while the utilities and energy sectors have the

highest fixed asset turnover and the hotel has the lowest fixed asset turnover ratio,

while the utilities and energy sectors have the highest.