Upload
others
View
3
Download
0
Embed Size (px)
Citation preview
Economy Transdisciplinarity Cognition
www.ugb.ro/etc
Vol. XIV,
Issue 1/2011
215-230
The Analysis of Profitability in the Iron and Steel Industry
WILLI PĂVĂLOAIA
George Bacovia University Bacău, Romania
Abstract
Profitability emphasizes the enterprise capacity to obtain profit by using production factors and capital.
It is also a synthetic form of expressing the enterprise economic and financial efficiency of the enterprise. There
are more ways of approaching profitability analysis: either using the profit, in absolute measures, or in relative
measures by profitability ratios.
The main profitability ratios are: the economic profitability ratio and the financial profitability ratio
using data from metallurgy. Each of them has a different information value.
Key-words: profit, profitability, economic profitability ratio, financial profitability ratio.
Introduction
Being a basic component of the financial-economic mechanism, profitability reflects, through
its level, the degree of valorisation by the economic entity of all categories of resources.
Profitability is the expression of the result obtained by the enterprise as a result of an activity of
transformation and/or change, surplus which appears in the final phase of the economic circuit.
In the economic theory and practice there are different modalities of approaching profitability.
Profitability represents a monetary surplus, the balance resulted by comparing the total
sum of receipts with the total sum of expenses. This concept is based exclusively on the financial
flows appearing at the enterprise level.
Profitability can be also approached from the point of view of accounting and
patrimonial flows. This method of profitability research aims to measure the two components: the
result by means of more indicators: added value, gross surplus of exploitation, the result of
exploitation, net profit, dividends, and the capital by means of: total assets, gross fixed assets, equity,
permanent capital, invested capital.
Profitability is approached differently by the participant at the social production
process:
a) The state aims at permanently increasing material values. This creative activity of
the enterprise is measured by added value. By summing up the added value at a national level, there
can be obtained the net domestic product. The contribution of the economic agent to the increase of
the national wealth is represented by the added value.
b) The technostructure approaches profitability by means of the gross surplus of
exploitation (EBE) as it measures the enterprise regardless of the activity financing methods. It is
considered that EBE is the significant result of the technostructure activity and of adapting the
enterprise to environment and market conditions.
c) Shareholders measure the profitability of the invested capital through the net
profit or the dividend of an invested monetary unit.
Profitability can be defined as being the enterprise capacity to obtain profit by using the
production factors and capitals, regardless of their origin. In its measure we can find under different
forms the actions of all factors: quantitative and qualitative, intensive and extensive, internal or
external, with continuous or intermittent action.
Profitability is one of the most synthetic forms of expressing the efficiency of the economic-
financial activity of the enterprise, respectively of all production factors of all stages of the economic
circuit: supply, production, sales for analysis for which two groups of indicators are used: profit
(absolute measure) and profitability rates (relative measures).
1. Profit Analysis
Without being the main purpose of the activity, profit has an important signification for the
economic agent, duet to its functions: source of self-financing, lever of material co-interest for
employees, spring of the formation of the sources for the activity development in normal conditions.
Profit is the expression of profitability in absolute measure. There are more models for the profit
analysis and calculus in the specialized literature.
The data basis necessary for the analysis of profitability is presented in table 1.
Table 1. Data basis for the analysis of profitability in- mii lei-
No. Elements of calculus Research period
n n+1 n+2
1 Arcelormittal Hunedoara Total assets 268307 260756 274177
Working assets 23992 23510 16157
Equity 232692 216296 188065
Total debts 266710 261155 231727
Total income 634280 766042 655512
Turnover 746541,1 766042,3 655512,0
Total expenses 611755 817892 653326
Gross profit 22525 - 51850 2186
Net profit 18905 - 1836
Tax on profit 3620 - 350
2 Arcelormittal Galaţi Total assets 2933530 2691301 2567554
Working assets 323014 363412 404175
Equity 4978385 4616647 5279067
Total debts 1103312 1566032 1139805
Total income 6485004 7643573 8903051
Turnover 6485005 7643573,9 8903051,8
Total expenses 6277991 7225665 8145205
Gross profit 207013 407908 757846
Net profit 173891 324779 604871
Tax on profit 33122 93129 152975
3 TMK Reşiţa Total assets 402524 485769 532103
Working assets 86976 100409 110578
Equity 268810 297255 358127
Total debts 217623 281095 280660
Total income 463483,6 555208,3 570779,7
Turnover 463483 555208 570779
Total expenses
Gross profit 449405 525595 513383
Net profit 14078 29613 57396
Tax on profit 14078 29613 57396
Total assets - - -
I TOTAL METAL
PRODUCTION
Total assets 3664361 3437826 3373834
Working assets 433912 483331 530919
Equity 5479887 5130198 5825259
Total debts 1587645 2180282 1652192
Total income 7582767 8964823 10129342
Turnover 7695029,7 8964824,5 10129343,5
Total expenses 7339171 8569152 9311914
Gross profit 243596 395671 817428
Net profit 204621 332364 686640
Tax on profit 38975 63307 130788
4 Arcelormittal Products
Roman
Total assets 143415 392102 364977
Working assets 35144 31788 42216
Equity 57398 258582 74980
Total debts 403901 418566 674919
Total income 982175 903885 884598
Turnover 982878,8 903885,2 884598,3
Total expenses 973045 942592 1068197
Gross profit 9130 -38707 -183599
Net profit 8147 - -
Tax on profit 983 - -
5 Arcelormittal Products Iaşi Total assets 44339 132218 135321
Working assets 6561 8161 7238
Equity 31561 35542 161039
Total debts 130071 174313 44889
Total income 230354 208308 279818
Turnover 230354,7 208308,5 279818,1
Total expenses 239485 236053 281174
Gross profit -9130 -27745 -1356
Net profit - - -
Tax on profit - - -
6 Arcelormittal Products Galaţi Total assets 23388 19846 17683
Working assets 12929 2400 5212
Equity 17 5042 9267
Total debts - 48214 71068
Total income - 86620 105840
Turnover - 86620,3 105840,2
Total expenses - 91280 102066
Gross profit - -4660 3774
Net profit - -
Tax on profit - -
II TOTAL PRODUCTION OF
STEEL TUBES
Total assets 211142 544166 517981
Working assets 54634 42349 54666
Equity 88976 299166 245286
Total debts 533972 641093 790876
Total income 1212529 1198813 1270256
Turnover 1213233,5 1198814.0 1270256,6
Total expenses 1212530 1269925 1451437
Gross profit - -71112 -181181
Net profit - - -
Tax on profit - - -
GENERAL TOTAL (I +II) Total assets 3875503 3981992 3891815
Working assets 488546 525680 585585
Equity 5568863 5429364 6070545
Total debts 2121617 2821375 2443068
Total income 8795296 10163636 11399598
Turnover 8908263,2 10163638,5 11399600,1
Total expenses 8551701 9839077 10763351
Gross profit 243595 324599 636247
Net profit 204620 272663 534448
Tax on profit 38975 51936 101799
One of the most used models is based on the data offered by the profit and loss account,
component of the annual financial statements, which group incomes and revenues according to their
nature. According to it, the accounting net profit,
Pn = V – (Ch + Ip), where:
Pn – net profit;
V – total revenues;
Ch – total expenses;
Ip – tax on profit;
The factorial study of the profit is as follows:
Δ = Pn1 – Pn0 = [V1 – (Ch1 + Ip1)] – [V0 - (Ch0 + Ip0)] = ± lei
From the relation of calculus there results that there are three factors generating this situation:
Change of total revenues (Δ V)
Change of total expenses (Δ Ch)
Change of tax on profit (Δ Ip)
The calculus of the influence on the modification of each factor is realised as follows:
1. The influence of the modification of revenues (Δ V)
Δ V = [V1 – (Ch0 + Ip0)] – [V0 - (Ch0 + Ip0)] = ± lei
2. The influence of expense growth on the net profit is determined by the relation:
Δ Ch = [V1 – (Ch1 + Ip0)] – [V1 - (Ch0 + Ip0)] = ± lei
The increase of expenses in the present period as compared with the previous period, is based
on the modification of its components, therefore: working expenses, financial expenses and
extraordinary expenses.
Therefore: Δ Ch = Δ Che + Δ Chf + Δ Chex
The contribution of each component is determined as follows:
3. The effect of modification of tax on profit is calculated according to the relation:
Δ Ip = [V1 – (Ch1 + Ip1)] – [V1 - (Ch1 + Ip0)] = ± lei
This model of analysis allows us to calculate the sensitivity of the net result (net profit) in
relation with the turnover (the value volume of the sales of products)
Table 2. The result of the factorial analysis of the net profit
No. Explanations Research period
n+1/n n+2/ n+1
1 Arcelormittal Hunedoara Total change, out of which: -77955 +53686
- income change +131762 -110530
- expense change -206137 +164566
- tax on profit change -3620 -350
2 Arcelormittal Galaţi Total change, out of which: +150889 +280092
- income change +1158569 +1259478
- expense change -947674 -919540
- tax on profit change -60007 -59846
3 TMK Reşiţa Total change, out of which: +15535 +27783
- income change +91175 +15571
- expense change -76190 +12212
- tax on profit change - -
I TOTAL METAL
PRODUCTION
Total change, out of which: +127743 +354276
- income change +1382056 +1164519
- expense change -1229981 -742762
- tax on profit change -24332 -67481
4 Arcelormittal Products Roman Total change, out of which: -47837 -144892
- income change -78290 -19287
- expense change +30453 -125605
- tax on profit change +983 -
5 Arcelormittal Products Iaşi Total change, out of which: -18614 +26389
- income change -22046 +71510
- expense change +3432 -45121
- tax on profit change - -
6 Arcelormittal Products Galaţi Total change, out of which: - +8434
- income change - +19220
- expense change - -10786
- tax on profit change - -
II TOTAL PRODUCTION OF
STEEL TUBES
Total change, out of which: -71111 -110070
- income change -13716 +71443
- expense change -57395 -181512
- tax on profit change - -
GENERAL TOTAL (I +II) Total change, out of which: +68003 +261825
- income change +1368340 +1235962
- expense change -1287376 -924274
- tax on profit change -12961 -49863
The data from table 2 shows that as a whole the developed activity registered profit, moreover
the net profit is increased from one period to another. We register, on the one hand, an increase of
revenues concretised in the supplementary profit of + 68.003 thousand lei in n+1 as compared to n,
respectively + 261.825 thousand lei in n+2 as compared to n+1. At the same time, the increase of
expenses, in the same period of time, has generated net profit decreases, normal effect, and has
attracted the diminution of the net profit with 1.287.376 thousand lei in n+1 as compared to n,
respectively – 924.274 thousand lei in n+2 as compared to n+1. Another positive aspect is the surplus
of profit belonging to the researched period of time is due to the fact that, at this analysis level, there
has been observed the correlation between the growth rhythm of revenues and that of expenses. The
surplus of net profit was due to the fact that the growth rhythm of revenues has advanced the expenses
growth rhythm.
For the two sectors of activity, the production of metal and the production of tubes, the
evolution of the net profit is different. The societies composing the production of metals develop
profitable activities (see table 1) and the net profit has increased from year to year. The activity of the
components of steel tubes production registered losses, the net loss increased in the research period.
2. The Analysis of Profitability Ratios
Profit gives a general orientation on the activity of an economic agent, meaning that revenues
are higher than expenses. Therefore, it doesn’t always show the effort made for obtaining these results,
as there can be economic agents with similar profile, with a different volume of activity and which
obtain the same profit, as measure. This is the reason profitability is also analysed in relative
measures, by means of profitability ratios.
Profitability ratio is defined as the proportion between an indicator of results and a measure
reflecting a flow of activity or a stock measure:
010flowactivity or Stock
ResultR
The profitability ratio is a relative measure expressing the degree in which capital as a whole
brings profit.
In the whole of economic-financial indicators the profitability ratio is placed among the most
synthetic efficiency indicators of the enterprise activity 1.
In the level of profitability ratios there are reflected the results of the enterprise activity of all
stages of the economic circuit. In comparison with costs, which reflect the results in the
production stage, the profitability ratio synthesises those from the distribution stage.
The profitability ratios, as compared with the profit, allow the realisation of comparative
analysis in space, between similar units, but with a different volume of activity.
As the registered result can be expressed by: the result of exploitation, added value, gross
surplus of exploitation, gross profit, net profit, operational profit, dividends; flow of activity by:
turnover, consumed resources, and the stock measure by: equity, permanent capital, total assets, fixed
assets, there results a great diversity of models that can be used in order to analyse the profitability
ratios of an economic agent.
According to the reference basis, the profitability ratio acquires content and different forms. We
shall present here some of the models used in profitability analysis.
2.1. The Analysis of Economic Profitability Ratio
The economic profitability ratio measures the performances of the enterprise total assets, of the
invested capital, respectively, without taking into consideration the modalities of obtaining the
capitals. As a result, its measure is not influenced by the enterprise financing policy.
The most used model of calculus is:
a) 100A
PbRe , where:
Pb – gross profit;
A – economic assets .
This calculus formula expresses the profitability of the total assets.
From the calculus ratio there results that the economic profitability ratio measures:
▪ the degree of valorisation of the invested capital, expressing gross profit in lei at an invested
capital unit;
▪ the performance of the enterprise assets , regardless of its way of financing (equity, foreign
capital) and of the fiscal system;
▪ the efficiency of the material and financial means allotted to the main activity (exploitation and
commercial);
For economical reasons, the level of economic profitability ratio has to meet the following
conditions:
▪ the level of economic profitability ratio must ensure the keeping of the unit’s economic
substance. This is realised only if the economic profitability ratio is higher than the inflation rate;
▪ the economic profitability ratio must assure the remuneration of the invested capital at the level
of the minimum rate of output in economy (the medium interest rate) and to cover at the same time the
economic and financial risk of investors;
▪ to assure the fructification of the lever effect of the enterprise gearing and it is realised only
when the economic profitability is superior to the interest rate.
In the analysis of this rate there can be used more models based on the decomposing of the
initial model into rates structured according to different criteria.
Operating a mathematical artifice, the initial relation can be written as follows:
b) A
CA
CA
PbRe 100, where CA – turnover, or
Re = Gross margin Assets rotation, that is, Re = Mb Vr
This relation shows that the same result can be obtained through two different commercial
policies:
- a quality policy of products will generate a great profit margin, but with a weak
rotation of sales;
- Or a policy of low prices, with a low profit margin, but with a great rotation of
sales.
Δ = Re1 – Re0 = Mb1 Vr1 - Mb0 Vr0 = ± %
The total modification is explained by:
1. The influence of the gross margin modification:
Δ Mb = Mb1 Vr0 - Mb0 Vr0 = ± %
2. The influence of assets rotation modification:
Δ Vr = Mb1Vr1 - Mb1Vr0 = ± %
▪ the growth of the gross margin can be realised by:
- the increase of the physical volume of manufactured and delivered production,
- the reduction of production (operating) expenses,
- the modification of the production structure in favour of the products that have a greater
profitability,
- - the increase of production prices associated only with the improvement of their quality.
▪ the acceleration of the rotation speed of economic assets supposes:
- the reduction of stocks level and of the finished products delivery rotation,
- the reduction of stocks level land of the manufacture cycle rotation,
- the optimization of the invested capital structure in fixed assets and circulating assets,
- the increase of the active fixed assets share in the total of fixed assets,
- the reduction of stocks level and of the raw materials supply duration,
- the reduction of the receivables quantity and of the average duration of cashing.
. The elements necessary for the economic profitability ratio according to b model, presented
above, are systematised in table 3.
Table 3. The calculus of the economic profitability ratio (model b)
No. Explanations Research period
n n+1 n+2
1 TOTAL
METAL
PRODUCTION
Gross margin 0,0316 0,0441 0,0807
Rotating speed 2,0999 2,6067 3,0023
Economic profitability ratio 6,64 11,49 24,22
2 TOTAL
PRODUCTION OF
STEEL TUBES
Gross margin - -0,0593 -0,1429
Rotating speed - 2,2030 2,4523
Economic profitability ratio - -13,06 -34,96
3 GENERAL
TOTAL (I +II)
Gross margin 0,0273 0,0319 0,0558
Rotating speed 2,2986 2,5524 2,9291
Economic profitability ratio 6,28 8,95 16,34
The data in table 3 present a differentiated evolution of the economic profitability ratio. It is
necessary to mention that the economic activity of this industrial sector, the metallurgic one, is
characterised by: a normal level of the gross margin, between 2.73 gross profit at 100 lei turnover and
8.07 gross profit at 100 lei turnover, but also through a relatively reduced rotation speed, the recovery
of assets through the turnover is realised three times per year, fact showing that the recovery is done
approximately after 120 days, above the accepted normal measure, that of 30 days. As such, the sector
management needs to give attention to: the reduction of the stocks level and of the finished products
delivery duration, the reduction of the stocks level and the duration of the manufacture cycle, the
reduction of receivables quantity and the average cashing duration.
The results of the factorial study of the economic profitability ratio are presented in table 4:
Table 4. The synthesis of the factorial analysis of the economic profitability ratio, model b:
No. Explanations Research period
n+1-n n+2- n+1
1 TOTAL METAL
PRODUCTION
Total change, out of which: + 4,85 + 12,73
- gross margin change(ΔMb) + 2,62 + 9,55
- assets rotation change (Δvr) + 2,23 + 3,18
2 TOTAL PRODUCTION
OF STEEL TUBES
Total change, out of which: - - 21,9
- gross margin change(ΔMb) - - 18,35
- assets rotation change (Δvr) - - 3,55
GENERAL TOTAL (I
+II)
Total change, out of which: + 1,87 + 8,19
- gross margin change(ΔMb) + 1,05 + 6,09
- assets rotation change (Δvr) + 0,82 + 2,10
If, in total, the economic profitability ratio increases from one period to another, from 6.28
percents in year n to 16.34 percents in year n+2, for the two components, the metal production,
respectively the tubes production, the dynamics of this indicator is different. The metal production is
profitable, in the analysed period, the measure of the researched indicator increasing almost 4 times,
from 6.64 percents to 24.22 percents. The activity of the steel tubes production is not profitable, the
profit losses are significant, therefore the economic profitability ratio has negative values and
increasing from one year to another, respectively from – 13.06 percents to – 34.96 percents. We have
remarqued the following positive aspects: the favourable influence of the gross margin growth both for
total and for the metal production concretized in increasing the economic profitability ratio with values
between 1.05 percents and 9.55 percents; the favourable influence of the rotation speed acceleration
which concretized in increasing this profitability ratio with values between 0.82 percents and 3.18
percents.
c) The analysis of the economic profitability ratio in accordance with model a can be
approached by decomposing the assets in the component elements, fixed assets and circulating
assets (A=Ai+Ac). Therefore:
100
Ac
CA
1
Ai
CA
1CA
Pb
AcAi
Pb100
A
PbRe
where:
CA
Pb commercial profitability ratio (Rc),
Ai
CA fixed assets output (ra),
Ac
CA rotation speed of circulating assets (vr).
The methodology of factorial analysis according to this model (model c) supposes the
calculation of the total modification and the influences of the three factors modification:
The modification (increase ⁄ decrease) of the economic profitability ratio is rendered by the
relation:
%
Ac
CA
1
Ai
CA
1
Rc
Ac
CA
1
Ai
CA
1
Rc
0
0
0
0
0
1
1
1
1
1
out of which:
1. the modification of the fixed assets productiveness (ra):
%
Ac
CA
1
Ai
CA
1
Rc
Ac
CA
1
Ai
CA
1
RcΔra
0
0
0
0
0
0
0
1
1
0
2. the modification of circulating assets (vr):
%
Ac
CA
1
Ai
CA
1
Rc
Ac
CA
1
Ai
CA
1
Rcvr
0
0
1
1
0
1
1
1
1
0
3. the modification of commercial profitability ratio (rc):
%
CA
At
RcRc
Ac
CA
1
Ai
CA
1
RcRcrc
1
1
01
1
1
1
1
01
Table 5. Elements for the factorial analysis of the profitability ratio model c
No. Elements of calculus Analysed period
n n+1 n+2
1 TOTAL METAL
PRODUCTION
Gross profit 243596 395671 817428
Turnover 7695029,7 8964824,5 10129343,5
Fixed assets 3230449 2954495 2842915
Working assets 433912 483331 530919
Total assets 3664361 3437826 3373834
Rate of commercial
profitability
0,0316 0,0441 0,0807
Fixed assets return 2,382 3,0343 3,563
Rotation speed 17,734 18,548 19,079
2 TOTAL
PRODUCTION
OF STEEL
TUBES
Gross profit - -71112 -181181
Turnover 1213233,5 1198814.0 1270256,6
Fixed assets 156508 501817 463315
Working assets 54634 42349 54666
Total assets 211142 544166 517981
Rate of commercial
profitability
- -0,0593 -0,1426
Fixed assets return 7,7518 2,3889 2,7416
Rotation speed 22,2065 28,3079 23,2366
GENERAL
TOTAL
(I +II)
Gross profit 243595 324599 636247
Turnover 8908263,2 10163638,5 11399600,1
Fixed assets 3386957 3456312 3306230
Working assets 488546 525680 585585
Total assets 3875503 3981992 3891815
Rate of commercial
profitability
0,0273 0,0310 0,0558
Fixed assets return 2,6301 2,9406 3,4479
Rotation speed 18,234 19,3342 19,4670
Using the above-presented methodology, the results of the factorial study, of model c, are
systematized in table 6.
Table 6. The synthesis of the factorial study of the economic profitability ratio, model c
No Explanations Research period
n+1/n n+2/ n+1
1 TOTAL METAL
PRODUCTION
Total change(Δ), out of which: + 4,85 +12,73
-change of assets return (Δra) + 1,54 +1,69
- change of working assets rotation
(Δvr)
+0,05 +0,06
-change of commercial profitability
(Δrc)
+3,26 +10,89
2
TOTAL
PRODUCTION OF
STEEL TUBES
Total change(Δ), out of which: - -21,9
-change of assets return (Δra) - -1,76
- change of working assets rotation
(Δvr)
- +1,58
-change of commercial profitability
(Δrc)
- -21,72
TOTAL GENERAL
(I +II)
Total change(Δ), out of which: +2,67 +7,39
-change of assets return (Δra) +0,63 +0,12
- change of working assets rotation
(Δvr)
+0,05 +0,02
-change of commercial profitability +1,99 +7,25
(Δrc)
The above model shows that the economic profitability ratio is influenced by specific factors:
the productiveness of economic assets, the rotation speed of the circulating assets and the commercial
profitability ratio.
2.2. The analysis of the financial profitability ratio
The profitability ratio is an indicator of great importance for managers and investors. For
investors, their investment is more profitable when this ratio is increasing. On the other hand, if the
financial profitability ratio is higher, the enterprise is more searched by shareholders .
Financial profitability expresses the ability of equity to bring profit an dis calculated as a
proportion between the net profit (Pn) and equity (Cpr).
100Cpr
PnRf where:
Pn- net profit,
Cpr- equity.
This model shows that the financial profitability ratio gas the following significations: it
represents the enterprise capacity to generate net profit by the equity used in the production capacity; it
measures the productiveness of equity, that is of the financial placement of the shareholders’ capital; it
expresses the shareholders’ interests under a double aspect, on short term, by cashing the dividends, on
long term by reinvesting the profit that assures the growth of shares’ value and implicitly the creation
of the possibility to increase dividends in the next period.
By the method of calculus the financial profitability ratio emphasizes the following specific
conditions:
▪ Financial profitability is influenced by the modality to obtain capitals, reason why it is
sensitive towards the financial structure, that is the enterprise degree of gearing,
▪ the calculus of the net profit is influenced by the calculus modalities of amortisation and
provisions as well as by the method of calculus of deductible and non-deductible expenses
from the taxed mass;
▪ the financial profitability ratio has to be greater than the average interest rate in order to
render the enterprise actions more attractive.
There are more factorial models of analysis of the financial profitability ratio.
The financial profitability ratio can be decomposed in a product of two other indicators and it
can be obtained
as follows:
a)
where:
At – total assets (from the balance sheet)
pn – the net profit at a leu assets,
gi –the enterprise degree of gearing.
The measures pn and gi present, in fact, the two researches and analysis directions: a first way is
the economic one, and the latter is financial.
The ratio Pn/At measures the global profitability of the enterprise capital, invested in tangible
and circulating assets. The second ratio At/Cp characterises indirectly, the enterprise degree of
gearing. This statement can be demonstrated as follows: starting from the fundamental equality of the
balance Assets=Liabilities, with reference to the financial balance, there can be written the following
equality: Total assets=Equity + Debts (D)
then Cpr
D1
Cpr
DCpr
Cpr
At
The ration D/Cpr expresses the enterprise gearing degree, ratio that can generate the appearance
of the financial efficiency surplus or the financial lever effect.
gipRf100or Cpr
At
At
PnRf n
The above relation shows that enterprise equity profitability depends on the global profitability
of capital an don the gearing degree.
Taking into accordance this model, the increase of the financial profitability ratio can be
realised by: increasing the net profit at a leu assets and the increase of the gearing degree if the
economic profitability is greater than the interest rate(re > d).
Another factorial model of analysis can be obtained by introducing in model a, the turnover
parameter, and the model becomes:
b)
100Cpr
At*
At
CA*
CA
PnRf
and v,*MnAt
CA*
CA
Pn
At
Pn
gi*v*MnRf where:
Mn- the profit net margin
v- the assets rotation speed
gî – the enterprise gearing degree.
The ratio Pn/CA or the net margin characterises in fact the turnover productivity, that is the
enterprise industrial and commercial efficacy.
The second ratio CA/At, also called the rotation speed of economic assets, expresses in a
general form the capital utilisation degree, as a whole.
In accordance with this model, the increase of the financial profitability can be realised if the
following conditions are met:
- iPn > iCA the increase of the net profit in a rhythm superior to the turnover growth, being realised by:
- the reduction of operating expenses,
- the increase of the physical volume of the manufactured and delivered production,
the amortization methods of calculus,
- The State’s fiscal policy.
- iCA> iAt The increase of turnover should advance the increase of the total assets, meaning the increase
of the enterprise assets rotation speed.
- re > d(interest rate).
Table 7. Elements for the factorial analysis of the financial profitability ratio model b
No Elements of calculus Analysed period
n n+1 n+2
1 TOTAL METAL
PRODUCTION
Net profit 204621 332364 686640
Turnover 7695029,7 8964824,5 10129343,5
Total assets 3664361 3437826 3373834
Equity 5479887 5130198 5825259
Profit net margin 0,0266 0,0371 0,0678
The speed rotation of
assets
2,0999 2,6077 3,0023
Degree of gearing 0,6686 0,6701 0,5791
Financial profitability
ratio
3,73 6,48 11,78
2 TOTAL
PRODUCTION
OF STEEL
TUBES
Net profit - - -
Turnover 1213233,5 1198814.0 1270256,6
Total assets 211142 544166 517981
Equity 88976 299166 245286
Profit net margin - - -
The speed rotation of
assets
5,7460 2,2030 2,4523
Degree of gearing 2,3730 1,8189 2,1117
Financial profitability - - -
ratio
GENERAL
TOTAL
(I +II)
Net profit 204621 272664 534448
Turnover 8908263,2 10163638,5 11399600,1
Total assets 3875503 3981992 3891815
Equity 5568863 5429364 6070545
Profit net margin 0,0229 0,0268 0,0468
The speed rotation of
assets
2,2986 2,5524 2,9291
Degree of gearing 0,6959 0,7334 0,6410
Financial profitability
ratio
3,66 5,02 8,78
Table 8. The synthesis of the factorial study of the financial profitability ratio , model b
No. Explanations Research period
2007/2006 2008/2007
1 TOTAL METAL
PRODUCTION
Total change (Δ), out of which: +2,75 +5,30
- net margin change(ΔMn) +1,47 +5,36
- assets rotation change (Δv) +1,26 +1,80
- change of the gearing degree(Δgi) +0,02 -1,86
TOTAL
PRODUCTION OF
STEEL TUBES
Total change (Δ), out of which: - -
- net margin change(ΔMn) - -
- assets rotation change (Δv) - -
- change of the gearing degree(Δgi) - -
GENERAL TOTAL
(I +II)
Total change (Δ), out of which: +1,36 +3,76
- net margin change(ΔMn) +0,62 +3,74
- assets rotation change (Δv) +0,48 +1,29
- change of the gearing degree(Δgi) +0,26 -1,27
As the production of tubes registered losses in the researched period of time, the positive
financial result is totally duet to the metal production activity. The factorial study shows that the most
important influence on the increase of the financial profitability ratio is held by the increase of the net
margin both for the metal production and for the total. The factorial study also emphasizes the fact that
the increase of the net margin was based on the fact that the net profit growth rhythm advanced the one
of turnover growth, that is iPn > iCA, a favourable aspect, generated by the increase of the physical
volume of the physical and of the delivered production. At the same time, as a result of the advance of
growth, as rhythm, of the turnover towards the increase of total assets, iCA> iAt, the effect concretized in
the acceleration of the assets rotation speed whose effect is the increase of the financial profitability
ratio with measures between 0.48% and 1.80% according to table 8.
This research underlines the important role of the economic activity profitability analysis of
economic entities. Approached from the two points of view, in absolute measures and relative
measures (percentage), profitability offers different information and opportunities.
The profit shows the capacity of an economic agent to produce positive results and it is usually
influenced by the volume of activity and, does not emphasize in most cases, the effort made for it
(volume of activity).
Profitability, in relative measures or profitability ratio emphasizes the intensive capacity of the
economic entity to obtain profit. The profitability ratio calculated as the proportion between profit and
a measure reflecting an activity flow or a stock measure shows what profit is obtained at the unit used
as calculus reference. As it is not directly affected by the activity volume, the profitability ratio offers,
in comparison with the profit, the possibility to make comparative calculi, in time and space, between
economic units with the same sector of activity, but with a different volume. At the same time it offers
the possibility to classify the researched entities according to their efficiency.
Recommended Supplementary Readings: 1. Colasse B., La rentabilité de l´entreprise, Editura Dunod, Paris,1977.
2. Marion A, Analyse financière concepts et méthodes, Dunod, Paris, 2007.
3. Păvăloaia W., Paraschivescu D.M., Olaru G.D., Analiză financiară studii de caz, Editura Tehnopress,
Iaşi 2006.
4. Păvăloaia W., Păvăloaia D., Analiză economico-financiară, Editura Tehnopress, Iaşi, 2009.
5. Păvăloaia W, Parascchivescu M.D. şa, Analiza economico-financiară concepte şistudii de caz,
Editura Economica, Bucureşti ,2010.
6. Vâlceanu Gh., Robu V., Georgescu N., Analiza economico-financiară, Editura Economica, Bucureşti
2005.