The Analysis of Profitability in the Iron and Steel Industry

Economy Transdisciplinarity Cognitionwww.ugb.ro/etcVol. XIV,Issue 1/2011215-230The Analysis of Profitability in the Iron and Steel IndustryWILLI PĂVĂLOAIAGeorge Bacovia UniversityBacău, Romaniawpavaloaia@gmail.comAbstractProfitability 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. Thereare more ways of approaching profitability analysis: either using the profit, in absolute measures, or in relativemeasures by profitability ratios.The main profitability ratios are: the economic profitability ratio and the financial profitability ratiousing data from metallurgy. Each of them has a different information value.Key-words: profit, profitability, economic profitability ratio, financial profitability ratio.IntroductionBeing a basic component of the financial-economic mechanism, profitability reflects, throughits 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 oftransformation 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 totalsum of receipts with the total sum of expenses. This concept is based exclusively on the financialflows appearing at the enterprise level. Profitability can be also approached from the point of view of accounting andpatrimonial flows. This method of profitability research aims to measure the two components: theresult by means of more indicators: added value, gross surplus of exploitation, the result ofexploitation, 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 productionprocess:a) The state aims at permanently increasing material values. This creative activity ofthe enterprise is measured by added value. By summing up the added value at a national level, therecan be obtained the net domestic product. The contribution of the economic agent to the increase ofthe national wealth is represented by the added value.b) The technostructure approaches profitability by means of the gross surplus ofexploitation (EBE) as it measures the enterprise regardless of the activity financing methods. It isconsidered that EBE is the significant result of the technostructure activity and of adapting theenterprise to environment and market conditions.c) Shareholders measure the profitability of the invested capital through the netprofit or the dividend of an invested monetary unit.Profitability can be defined as being the enterprise capacity to obtain profit by using theproduction factors and capitals, regardless of their origin. In its measure we can find under differentforms the actions of all factors: quantitative and qualitative, intensive and extensive, internal orexternal, with continuous or intermittent action.Profitability is one of the most synthetic forms of expressing the efficiency of the economicfinancialactivity 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 AnalysisWithout being the main purpose of the activity, profit has an important signification for theeconomic agent, duet to its functions: source of self-financing, lever of material co-interest foremployees, 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 profitanalysis 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 periodn n+1 n+21 Arcelormittal Hunedoara Total assets 268307 260756 274177Working assets 23992 23510 16157Equity 232692 216296 188065Total debts 266710 261155 231727Total income 634280 766042 655512Turnover 746541,1 766042,3 655512,0Total expenses 611755 817892 653326Gross profit 22525 - 51850 2186Net profit 18905 - 1836Tax on profit 3620 - 3502 Arcelormittal Galaţi Total assets 2933530 2691301 2567554Working assets 323014 363412 404175Equity 4978385 4616647 5279067Total debts 1103312 1566032 1139805Total income 6485004 7643573 8903051Turnover 6485005 7643573,9 8903051,8Total expenses 6277991 7225665 8145205Gross profit 207013 407908 757846Net profit 173891 324779 604871Tax on profit 33122 93129 1529753 TMK Reşiţa Total assets 402524 485769 532103Working assets 86976 100409 110578Equity 268810 297255 358127Total debts 217623 281095 280660Total income 463483,6 555208,3 570779,7Turnover 463483 555208 570779Total expensesGross profit 449405 525595 513383Net profit 14078 29613 57396Tax on profit 14078 29613 57396Total assets - - -I TOTAL METALPRODUCTIONTotal assets 3664361 3437826 3373834Working assets 433912 483331 530919Equity 5479887 5130198 5825259Total debts 1587645 2180282 1652192Total income 7582767 8964823 10129342Turnover 7695029,7 8964824,5 10129343,5Total expenses 7339171 8569152 9311914

4 Arcelormittal ProductsRomanGross profit 243596 395671 817428Net profit 204621 332364 686640Tax on profit 38975 63307 130788Total assets 143415 392102 364977Working assets 35144 31788 42216Equity 57398 258582 74980Total debts 403901 418566 674919Total income 982175 903885 884598Turnover 982878,8 903885,2 884598,3Total expenses 973045 942592 1068197Gross profit 9130 -38707 -183599Net profit 8147 - -Tax on profit 983 - -5 Arcelormittal Products Iaşi Total assets 44339 132218 135321Working assets 6561 8161 7238Equity 31561 35542 161039Total debts 130071 174313 44889Total income 230354 208308 279818Turnover 230354,7 208308,5 279818,1Total expenses 239485 236053 281174Gross profit -9130 -27745 -1356Net profit - - -Tax on profit - - -6 Arcelormittal Products Galaţi Total assets 23388 19846 17683Working assets 12929 2400 5212Equity 17 5042 9267Total debts - 48214 71068Total income - 86620 105840Turnover - 86620,3 105840,2Total expenses - 91280 102066Gross profit - -4660 3774Net profit - -Tax on profit - -IITOTAL PRODUCTION OFSTEEL TUBESTotal assets 211142 544166 517981Working assets 54634 42349 54666Equity 88976 299166 245286Total debts 533972 641093 790876Total income 1212529 1198813 1270256Turnover 1213233,5 1198814.0 1270256,6Total expenses 1212530 1269925 1451437Gross profit - -71112 -181181Net profit - - -Tax on profit - - -GENERAL TOTAL (I +II) Total assets 3875503 3981992 3891815Working assets 488546 525680 585585Equity 5568863 5429364 6070545Total debts 2121617 2821375 2443068Total income 8795296 10163636 11399598Turnover 8908263,2 10163638,5 11399600,1Total expenses 8551701 9839077 10763351Gross profit 243595 324599 636247Net profit 204620 272663 534448Tax 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 theirnature. 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 = Pn 1 – Pn 0 = [V 1 – (Ch 1 + Ip 1 )] – [V 0 - (Ch 0 + Ip 0 )] = ± leiFrom 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 = [V 1 – (Ch 0 + Ip 0 )] – [V 0 - (Ch 0 + Ip 0 )] = ± lei2. The influence of expense growth on the net profit is determined by the relation:Δ Ch = [V 1 – (Ch 1 + Ip 0 )] – [V 1 - (Ch 0 + Ip 0 )] = ± leiThe increase of expenses in the present period as compared with the previous period, is basedon the modification of its components, therefore: working expenses, financial expenses andextraordinary expenses.Therefore: Δ Ch = Δ Che + Δ Chf + Δ ChexThe 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 = [V 1 – (Ch 1 + Ip 1 )] – [V 1 - (Ch 1 + Ip 0 )] = ± leiThis model of analysis allows us to calculate the sensitivity of the net result (net profit) inrelation with the turnover (the value volume of the sales of products)Table 2. The result of the factorial analysis of the net profitNo. ExplanationsResearch periodn+1/n n+2/ n+11 Arcelormittal Hunedoara Total change, out of which: -77955 +53686- income change +131762 -110530- expense change -206137 +164566- tax on profit change -3620 -3502 Arcelormittal Galaţi Total change, out of which: +150889 +280092- income change +1158569 +1259478- expense change -947674 -919540- tax on profit change -60007 -598463 TMK Reşiţa Total change, out of which: +15535 +27783- income change +91175 +15571- expense change -76190 +12212- tax on profit change - -I TOTAL METALPRODUCTIONTotal change, out of which: +127743 +354276- income change +1382056 +1164519- expense change -1229981 -742762- tax on profit change -24332 -674814 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 - -IITOTAL PRODUCTION OFSTEEL TUBESTotal 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 -49863The data from table 2 shows that as a whole the developed activity registered profit, moreoverthe net profit is increased from one period to another. We register, on the one hand, an increase ofrevenues 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 ofexpenses, in the same period of time, has generated net profit decreases, normal effect, and hasattracted 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 surplusof profit belonging to the researched period of time is due to the fact that, at this analysis level, therehas been observed the correlation between the growth rhythm of revenues and that of expenses. Thesurplus of net profit was due to the fact that the growth rhythm of revenues has advanced the expensesgrowth rhythm.For the two sectors of activity, the production of metal and the production of tubes, theevolution of the net profit is different. The societies composing the production of metals developprofitable activities (see table 1) and the net profit has increased from year to year. The activity of thecomponents of steel tubes production registered losses, the net loss increased in the research period.2. The Analysis of Profitability RatiosProfit gives a general orientation on the activity of an economic agent, meaning that revenuesare 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 whichobtain the same profit, as measure. This is the reason profitability is also analysed in relativemeasures, by means of profitability ratios.Profitability ratio is defined as the proportion between an indicator of results and a measurereflecting a flow of activity or a stock measure:ResultR 100Stock or activity flow‣ The profitability ratio is a relative measure expressing the degree in which capital as a wholebrings profit.‣ In the whole of economic-financial indicators the profitability ratio is placed among the mostsynthetic efficiency indicators of the enterprise activity 1 .‣ In the level of profitability ratios there are reflected the results of the enterprise activity of allstages of the economic circuit. In comparison with costs, which reflect the results in theproduction stage, the profitability ratio synthesises those from the distribution stage.

‣ The profitability ratios, as compared with the profit, allow the realisation of comparativeanalysis 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, grosssurplus 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, fixedassets, there results a great diversity of models that can be used in order to analyse the profitabilityratios of an economic agent.According to the reference basis, the profitability ratio acquires content and different forms. Weshall present here some of the models used in profitability analysis.2.1. The Analysis of Economic Profitability RatioThe economic profitability ratio measures the performances of the enterprise total assets, of theinvested capital, respectively, without taking into consideration the modalities of obtaining thecapitals. As a result, its measure is not influenced by the enterprise financing policy.The most used model of calculus is:Pba) Re 100, where:APb – 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 investedcapital unit;▪ the performance of the enterprise assets , regardless of its way of financing (equity, foreigncapital) and of the fiscal system;▪ the efficiency of the material and financial means allotted to the main activity (exploitation andcommercial);For economical reasons, the level of economic profitability ratio has to meet the followingconditions:▪ the level of economic profitability ratio must ensure the keeping of the unit’s economicsubstance. 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 levelof the minimum rate of output in economy (the medium interest rate) and to cover at the same time theeconomic and financial risk of investors;▪ to assure the fructification of the lever effect of the enterprise gearing and it is realised onlywhen 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 theinitial model into rates structured according to different criteria.Operating a mathematical artifice, the initial relation can be written as follows:Pb CAb) Re 100, where CA – turnover, orCA ARe = Gross margin Assets rotation, that is, Re = Mb VrThis relation shows that the same result can be obtained through two different commercialpolicies:- a quality policy of products will generate a great profit margin, but with a weakrotation of sales;- Or a policy of low prices, with a low profit margin, but with a great rotation ofsales.Δ = Re 1 – Re 0 = Mb 1 Vr 1 - Mb 0 Vr 0 = ± %The total modification is explained by:1. The influence of the gross margin modification:Δ Mb = Mb 1 Vr 0 - Mb 0 Vr 0 = ± %2. The influence of assets rotation modification:

Δ Vr = Mb 1 Vr 1 - Mb 1 Vr 0 = ± %▪ 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 greaterprofitability,- - 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, presentedabove, are systematised in table 3.Table 3. The calculus of the economic profitability ratio (model b)No. ExplanationsResearch period1 TOTALMETALPRODUCTION2 TOTALPRODUCTION OFSTEEL TUBES3 GENERALTOTAL (I +II)n n+1 n+2Gross margin 0,0316 0,0441 0,0807Rotating speed 2,0999 2,6067 3,0023Economic profitability ratio 6,64 11,49 24,22Gross margin - -0,0593 -0,1429Rotating speed - 2,2030 2,4523Economic profitability ratio - -13,06 -34,96Gross margin 0,0273 0,0319 0,0558Rotating speed 2,2986 2,5524 2,9291Economic profitability ratio 6,28 8,95 16,34The data in table 3 present a differentiated evolution of the economic profitability ratio. It isnecessary to mention that the economic activity of this industrial sector, the metallurgic one, ischaracterised by: a normal level of the gross margin, between 2.73 gross profit at 100 lei turnover and8.07 gross profit at 100 lei turnover, but also through a relatively reduced rotation speed, the recoveryof assets through the turnover is realised three times per year, fact showing that the recovery is doneapproximately after 120 days, above the accepted normal measure, that of 30 days. As such, the sectormanagement needs to give attention to: the reduction of the stocks level and of the finished productsdelivery duration, the reduction of the stocks level and the duration of the manufacture cycle, thereduction 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. ExplanationsResearch periodn+1-n n+2- n+11 TOTAL METAL Total change, out of which: + 4,85 + 12,73PRODUCTION- gross margin change(ΔMb) + 2,62 + 9,552 TOTAL PRODUCTIONOF STEEL TUBESGENERAL TOTAL (I+II)- assets rotation change (Δvr) + 2,23 + 3,18Total change, out of which: - - 21,9- gross margin change(ΔMb) - - 18,35- assets rotation change (Δvr) - - 3,55Total 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 6.28percents 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 isprofitable, 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, theprofit losses are significant, therefore the economic profitability ratio has negative values andincreasing from one year to another, respectively from – 13.06 percents to – 34.96 percents. We haveremarqued the following positive aspects: the favourable influence of the gross margin growth both fortotal and for the metal production concretized in increasing the economic profitability ratio with valuesbetween 1.05 percents and 9.55 percents; the favourable influence of the rotation speed accelerationwhich concretized in increasing this profitability ratio with values between 0.82 percents and 3.18percents.c) The analysis of the economic profitability ratio in accordance with model a can beapproached by decomposing the assets in the component elements, fixed assets and circulatingassets (A=Ai+Ac). Therefore:PbPb PbRe 100 CA100where:A Ai Ac 1 1CAAiCAAcPb CA commercial profitability ratio (Rc), fixed assets output (ra),CAAiCA rotation speed of circulating assets (vr).AcThe methodology of factorial analysis according to this model (model c) supposes thecalculation of the total modification and the influences of the three factors modification:The modification (increase ⁄ decrease) of the economic profitability ratio is rendered by therelation:Rc1Rc0 % out of which:1 1 1 1CA1CA1CA0CA0Ai1Ac1Ai0Ac01. the modification of the fixed assets productiveness (ra):Rc0Rc0Δra %1 1 1 1CA1CA0CA0CA0Ai1Ac0Ai0Ac02. the modification of circulating assets (vr):Rc0Rc0 vr %1 1 1 1CA1CA1CA1CA0Ai1Ac1Ai1Ac03. the modification of commercial profitability ratio (rc):Rc1 Rc0Rc1 Rc0 rc %1 1 At1CA1CA1CA1Ai Ac11

Table 5. Elements for the factorial analysis of the profitability ratio model cNo. Elements of calculusAnalysed periodn n+1 n+21 TOTAL METAL Gross profit 243596 395671 817428PRODUCTION Turnover 7695029,7 8964824,5 10129343,5Fixed assets 3230449 2954495 2842915Working assets 433912 483331 530919Total assets 3664361 3437826 3373834Rate of commercial 0,0316 0,0441 0,0807profitabilityFixed assets return 2,382 3,0343 3,5632 TOTALPRODUCTIONOF STEELTUBESGENERALTOTAL(I +II)Rotation speed 17,734 18,548 19,079Gross profit - -71112 -181181Turnover 1213233,5 1198814.0 1270256,6Fixed assets 156508 501817 463315Working assets 54634 42349 54666Total assets 211142 544166 517981Rate of commercial - -0,0593 -0,1426profitabilityFixed assets return 7,7518 2,3889 2,7416Rotation speed 22,2065 28,3079 23,2366Gross profit 243595 324599 636247Turnover 8908263,2 10163638,5 11399600,1Fixed assets 3386957 3456312 3306230Working assets 488546 525680 585585Total assets 3875503 3981992 3891815Rate of commercial 0,0273 0,0310 0,0558profitabilityFixed assets return 2,6301 2,9406 3,4479Rotation speed 18,234 19,3342 19,4670Using the above-presented methodology, the results of the factorial study, of model c, aresystematized in table 6.Table 6. The synthesis of the factorial study of the economic profitability ratio, model cNo ExplanationsResearch period1 TOTAL METALPRODUCTION2TOTALPRODUCTION OFSTEEL TUBESTOTAL GENERAL(I +II)n+1/n n+2/ n+1Total change(Δ), out of which: + 4,85 +12,73-change of assets return (Δra) + 1,54 +1,69- change of working assets rotation +0,05 +0,06(Δvr)-change of commercial profitability +3,26 +10,89(Δrc)Total change(Δ), out of which: - -21,9-change of assets return (Δra) - -1,76- change of working assets rotation - +1,58(Δvr)-change of commercial profitability - -21,72(Δrc)Total change(Δ), out of which: +2,67 +7,39-change of assets return (Δra) +0,63 +0,12- change of working assets rotation +0,05 +0,02(Δvr)-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 commercialprofitability ratio.2.2. The analysis of the financial profitability ratioThe profitability ratio is an indicator of great importance for managers and investors. Forinvestors, their investment is more profitable when this ratio is increasing. On the other hand, if thefinancial 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 aproportion between the net profit (Pn) and equity (Cpr).PnRf 100where:CprPn- net profit,Cpr- equity.This model shows that the financial profitability ratio gas the following significations: itrepresents the enterprise capacity to generate net profit by the equity used in the production capacity; itmeasures the productiveness of equity, that is of the financial placement of the shareholders’ capital; itexpresses the shareholders’ interests under a double aspect, on short term, by cashing the dividends, onlong term by reinvesting the profit that assures the growth of shares’ value and implicitly the creationof the possibility to increase dividends in the next period.By the method of calculus the financial profitability ratio emphasizes the following specificconditions:▪ Financial profitability is influenced by the modality to obtain capitals, reason why it issensitive 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 andprovisions as well as by the method of calculus of deductible and non-deductible expensesfrom the taxed mass;▪ the financial profitability ratio has to be greater than the average interest rate in order torender 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 itcan be obtainedas follows:a)where:Rf PnAtAt100or Rf pCpr At – total assets (from the balance sheet)p n – the net profit at a leu assets,gi –the enterprise degree of gearing.The measures p n and gi present, in fact, the two researches and analysis directions: a first way isthe economic one, and the latter is financial.The ratio Pn/At measures the global profitability of the enterprise capital, invested in tangibleand circulating assets. The second ratio At/Cp characterises indirectly, the enterprise degree ofgearing. This statement can be demonstrated as follows: starting from the fundamental equality of thebalance Assets=Liabilities, with reference to the financial balance, there can be written the followingequality: Total assets=Equity + Debts (D)At Cpr D Dthen 1Cpr Cpr CprThe ration D/Cpr expresses the enterprise gearing degree, ratio that can generate the appearanceof the financial efficiency surplus or the financial lever effect.n gi

The above relation shows that enterprise equity profitability depends on the global profitabilityof capital an don the gearing degree.Taking into accordance this model, the increase of the financial profitability ratio can berealised by: increasing the net profit at a leu assets and the increase of the gearing degree if theeconomic profitability is greater than the interest rate(re > d).Another factorial model of analysis can be obtained by introducing in model a, the turnoverparameter, and the model becomes:b)Pn Pn CA * Mn* v, andAt CA AtPn CA AtRf * * 100CA At CprRf Mn*v*gi where:Mn- the profit net marginv- the assets rotation speedgî – the enterprise gearing degree.The ratio Pn/CA or the net margin characterises in fact the turnover productivity, that is theenterprise industrial and commercial efficacy.The second ratio CA/At, also called the rotation speed of economic assets, expresses in ageneral form the capital utilisation degree, as a whole.In accordance with this model, the increase of the financial profitability can be realised if thefollowing conditions are met:- i Pn > i CA 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.- i CA > i At The increase of turnover should advance the increase of the total assets, meaning the increaseof the enterprise assets rotation speed.- re > d(interest rate).Table 7. Elements for the factorial analysis of the financial profitability ratio model bNo Elements of calculus Analysed period1 TOTAL METALPRODUCTION2 TOTALPRODUCTIONOF STEELTUBESn n+1 n+2Net profit 204621 332364 686640Turnover 7695029,7 8964824,5 10129343,5Total assets 3664361 3437826 3373834Equity 5479887 5130198 5825259Profit net margin 0,0266 0,0371 0,0678The speed rotation of 2,0999 2,6077 3,0023assetsDegree of gearing 0,6686 0,6701 0,5791Financial profitability 3,73 6,48 11,78ratioNet profit - - -Turnover 1213233,5 1198814.0 1270256,6Total assets 211142 544166 517981Equity 88976 299166 245286Profit net margin - - -The speed rotation of 5,7460 2,2030 2,4523assetsDegree of gearing 2,3730 1,8189 2,1117Financial profitability - - -

GENERALTOTAL(I +II)ratioNet profit 204621 272664 534448Turnover 8908263,2 10163638,5 11399600,1Total assets 3875503 3981992 3891815Equity 5568863 5429364 6070545Profit net margin 0,0229 0,0268 0,0468The speed rotation of 2,2986 2,5524 2,9291assetsDegree of gearing 0,6959 0,7334 0,6410Financial profitability 3,66 5,02 8,78ratioTable 8. The synthesis of the factorial study of the financial profitability ratio , model bNo. ExplanationsResearch period2007/2006 2008/20071 TOTAL METAL Total change (Δ), out of which: +2,75 +5,30PRODUCTION - net margin change(ΔMn) +1,47 +5,36- assets rotation change (Δv) +1,26 +1,80TOTALPRODUCTIONSTEEL TUBESGENERAL TOTAL(I +II)OF- change of the gearing degree(Δgi) +0,02 -1,86Total change (Δ), out of which: - -- net margin change(ΔMn) - -- assets rotation change (Δv) - -- change of the gearing degree(Δgi) - -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 -1,27As the production of tubes registered losses in the researched period of time, the positivefinancial result is totally duet to the metal production activity. The factorial study shows that the mostimportant influence on the increase of the financial profitability ratio is held by the increase of the netmargin both for the metal production and for the total. The factorial study also emphasizes the fact thatthe increase of the net margin was based on the fact that the net profit growth rhythm advanced the oneof turnover growth, that is i Pn > i CA, a favourable aspect, generated by the increase of the physicalvolume of the physical and of the delivered production. At the same time, as a result of the advance ofgrowth, as rhythm, of the turnover towards the increase of total assets, i CA > i At, the effect concretized inthe acceleration of the assets rotation speed whose effect is the increase of the financial profitabilityratio with measures between 0.48% and 1.80% according to table 8.This research underlines the important role of the economic activity profitability analysis ofeconomic entities. Approached from the two points of view, in absolute measures and relativemeasures (percentage), profitability offers different information and opportunities.The profit shows the capacity of an economic agent to produce positive results and it is usuallyinfluenced 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 theeconomic entity to obtain profit. The profitability ratio calculated as the proportion between profit anda measure reflecting an activity flow or a stock measure shows what profit is obtained at the unit usedas 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, betweeneconomic units with the same sector of activity, but with a different volume. At the same time it offersthe 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, Bucureşti2005.