The Analysis of Profitability in the Iron and Steel Industry

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

[email protected]

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

http://www.ugb.ro/etc

mailto:[email protected]

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


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


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


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


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


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


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


6 Arcelormittal Products Galaţi Total change, out of which: - +8434

- income change - +19220

- expense change - -10786


II TOTAL PRODUCTION OF

STEEL TUBES

Total change, out of which: -71111 -110070

- income change -13716 +71443

- expense change -57395 -181512


GENERAL TOTAL (I +II) Total change, out of which: +68003 +261825

- income change +1368340 +1235962

- expense change -1287376 -924274


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)


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:


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


Total assets 211142 544166 517981

Rate of commercial

profitability

- -0,0593 -0,1426


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


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


(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


(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 - - -


assets

5,7460 2,2030 2,4523


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


assets

2,2986 2,5524 2,9291


Financial profitability

ratio

3,66 5,02 8,78

Table 8. The synthesis of the factorial study of the financial profitability ratio , model b


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.

The Analysis of Profitability in the Iron and Steel Industry

Documents

Transcript of The Analysis of Profitability in the Iron and Steel Industry