Ratios as Internal Determinants of Profitability on Real Estate Sector in Kenya: Case of Registered Real Estate Firms

The research objective of the study was to examine how higher profitability not only allows firms to survive and succeed in a risky business environment, but also how important it is for sustainable economic growth. Besides, the study’s focus was on analysis of the relationship between firm profitability and ratios as its determinants is critically crucial for both shareholders, uncountable stakeholders and investors. Given that profitable firms make a great contribution to Gross Domestic Product (GDP) and provide prosperity and employment opportunities, what determines the profitability of firms is significant. The current study, therefore, sought to investigate ratios as determinants of profitability on real estate sector firms registered by Kenya Property Developers Association in Kenya which was the main focus of the study. Because in Kenya real estate investment plays crucial role in providing employment opportunities, offering shelter to households, enhancing income distribution and alleviating poverty. Four major objectives guided the study. To analyze the effect of size of the firm on profitability of registered real estate firms, to explore how liquidity affects the profitability on registered real estate firms, to investigate the effect of capital adequacy on profitability of registered real estate firms, to investigate the effect of credit risk and profitability of registered real estate firms. The study adopted a longitudinal research survey design. The target population was 66 real estate registered firms by Kenya Property Developers Association based in Kenya. The study used Stratified random sampling techniques. For purposes of this study, only secondary data on the sampled firms was collected for the period of 9 years from 2009 to 2017. Diagnostic and model specification tests were done on the data. A panel least squares regression analysis was estimated with the aid of Eviews software to establish the relationship between the variables and profitability of real estate firms. The results showed that, the model explained 83.7% of variations in profitability among the sampled firms as represented by adjusted R2. Based on this finding, we conclude that, firms registered by Kenya Property Developers Association, are efficient enough in determining their own profitability and are significant for the real estate managers to having a positive perspective about determinants of profitability in expanding of the Kenyan Real Estate Sector. The model was also fit to explain the relationship as the F-Statistic with p=0.00000 was significant at 5% level. Empirical findings show that capital adequacy and credit risk factors had a positive effect in determining profitability of the firms. Furthermore, the study concludes that firm size and liquidity had a negative effective in determining profitability of the firms. The study recommends emphasis on optimal capital adequacy in the firms, because capital adequacy revealed a positive relationship on profitability. Besides that, real estate managers and investors should have optimal assets that will maintain liquidity in the short run, to upsurge profitability. Keywords: Profitability, Sustainable economic growth, Capital adequacy, Liquidity, Firm size, Credit risk and Real estate sector.