Financial Performance Analysis of a Resort Company Using New Comprehensive Financial Performance Measures

Abstract

Purpose - The sales growth rate has the shortcoming that it does not consider the cost, which is an important factor in value creation along with revenue. The return on assets (ROA) is not a reasonable measure of corporate financial performance because the ROA is the return (increase in shareholders equity, which corresponds to the equity capital) on assets (equity capital + others capital). The purpose of this study is to introduce new comprehensive financial performance measures and analyze the financial performance of a resort company by using those measures. Research design, data, and methodology - To distinguish clearly and analyze the effect of business activities and financial activities on financial performance we explained theoretically return on equity (ROE) could be determined by return on net operating assets (RONOA), operating spread, and financial leverage. The difference between ROE and RONOA is determined by the amount of the financial leverage and the operating spread between RONOA and the after-tax net borrowing cost. If a firm earns an RONOA greater than its after-tax net borrowing cost the RONOA is levered up to yield a higher ROE. We analyzed the financial performance of a Jeju island resort company (A Co.) by using those new comprehensive financial performance measures and new ROE breakdown approach. Results - We found that ROE of the A Co. had decreasing trend because favorable financial leverage effect was added to decreasing trend of RONOA in a small amount by degrees from year 2011 to year 2013. Big decrease of year 2014 ROE was influenced by not small favorable financial leverage but small positive operating spread between the RONOA and the after-tax net borrowing cost, and we concluded big decrease of year 2014 ROE was originated by worsening profitability in business activities. The ROE decreased largely in year 2015 because lowered RONOA was affected by unfavorable financial leverage effect. Conclusions - We concluded the key factor for enhancing the financial performance of the A Co. was the profitability from the business activities, and the key financial indicator for measuring the financial performance was the return on net operating assets (RONOA).