SCECO – Studies and Scientific Researches. Economics Edition

Financial profitableness, relevant indicator in enterprises performance appreciation and of its position on the market, depends on the commercial policy (commercial profitableness), on the engaged capital’s efficiency (economic profitableness), on the policy and financial structure of enterprise (debt degree) offering information both to investors and managers, orienting the enterprise in financing strategic decisions

Solomon, Daniela

Dragomirescu, Simona

Aspects concerning financial profitableness analysis and its purpose in substantiation of firm’s 
strategic financing decisions 
90
  
Studies and scientific researches                                            Edition: Economics, no. 13 (2008) 
 
ASPECTS CONCERNING FINANCIAL PROFITABLENESS ANALYSIS AND ITS 
PURPOSE IN SUBSTANTIATION OF FIRM’S STRATEGIC FINANCING DECISIONS 
  
Solomon Daniela-Cristina, Lecturer 
UNIVERSITY OF BACĂU  
Dragomirescu Simona-Elena, Lecturer 
UNIVERSITY OF BACĂU 
 
 
Abstract: 
Financial profitableness, relevant indicator in enterprises performance appreciation and of 
its position on the market, depends on the commercial policy (commercial profitableness), on the 
engaged capital’s efficiency (economic profitableness), on the policy and financial structure of 
enterprise (debt degree) offering information both to investors and managers, orienting the 
enterprise in financing strategic decisions 
 
 The analysis of enterprise’ 
performance by means of profitableness 
rates highlights the efficiency reports 
between a indicator of results (profit or loss) 
and an indicator that reflects an activity flux,  
(business number, consumed resources etc.) 
or a stock (own capital, total actives). The 
size of rates is influenced by accountancy 
policies and practices used by the enterprise 
that has different informational valences and 
reflects multiple sizes of economic-financial 
activity.  
The financial profitableness rate 
(Rf) expresses the efficiency degree of using 
the own capitals. In the case where financial 
profitableness rate is bigger than the 
borrowed cost capital, then a supplementary 
value will be created to “payment of the 
shareholders’ capitals (by the distributed 
dividends) and firm’s self-financing (by the 
result in the reserve)”1 . 
The information given by the firm’s 
yearly financial situations allow 
determination of financial profitableness rate. 
The relation calculation for this rate is the 
following2:  
 
 
 
                                                 
1  S. Petrescu, Analysis and financial-accountancy 
diagnostic. Theoretical-practical guide, Second revised 
edition, CECCAR’ s Publish house, Bucharest, 2008,  
p. 238. 
2 Gheorghe Vâlceanu, Vasile Robu, Nicolae 
Georgescu, Economic-financial analysis, Economic 
Publish house, Bucharest 2004, p.283. 
 
Rf = 100
capitalOwn
profitNet
 
In Anglo-Saxon terminology, the 
financial profitableness rate corresponds to 
the notion of Return on Equity (ROE) being 
calculated as below3: 
ROE= 
equityownerAverage
incomeNet
'
 
Financial profitableness reflects the 
final purpose of an enterprise’s shareholders, 
expressed by remuneration rate of capital 
investment made by them in providing 
enterprise’s stockings or in reinvesting 
total/partial profit that reverts4. 
The financial profitableness rate’s 
analysis allows the establishing of 
determining factors and the identifying of 
some significant aspects for appreciating the 
enterprise’s performance.  
In specific literature5  few patterns of 
factorial analysis are known for financial 
profitableness rate: 
1.Rf= 100
capitalOwn
assetsTotal
assetsTotal
profitNet
 
                                                 
3  Marshall D. H., McManus W., Viele D. F., 
„Accounting: what the numbers means”, Seventh 
Edition, Ed. McGraw-Hill/Irwin, 2007, p. 77. 
4 Spãtaru, L., Economic-financial enterprise’s analysis 
–Instrument of enterprise’s management, Economic 
Publish house, Bucharest, p. 393. 
5 W. Păvăloaia, D. Păvăloaia, Economic-financial 
analysis Concepts. Studies, Moldavia Publish house, 
Bacău, 2003, p. 310-311. 
 
Aspects concerning financial profitableness analysis and its purpose in substantiation of firm’s 
strategic financing decisions 
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Studies and scientific researches                                            Edition: Economics, no. 13 (2008) 
 
assetsTotal
profitNet
= global capital enterprise’s 
profitableness invested in fixe and circular 
assets.  
capitalOwn
assetsTotal
 = multiplication factor of own 
average capital or the arm of the financial 
lever that characterizes indirectly the debt 
degree of enterprise (gî). 
Because Total assets = Own capital + 
Debts , the relation becomes: 
     
capitalOwn
assetsTotal
= 

capitalOwn
DebtscapitalOwn
 
capitalOwn
assetsTotal
capitalOwn
Debts
 1  
The financial profitableness rate 
depend on the permanent capitals structure, 
meaning on the proportion existent between 
the borrowed capital, respective debts and 
own capital .  
The 
capitalOwn
Debts
 report is a quotient 
named “financial lever” that influences the 
financial profitableness rate and that 
expresses the enterprise’s debt degree, report 
that generates the appearance of financial 
efficiency increase or the financial lever 
effect. The effect of lever’s increase may be 
both in favor and unsafe, on this effect the 
financial risk being connected, the one 
flowing from capital cost that assures the 
financing.  
According to this pattern, the increase 
of financial profitableness rate can be 
realized through:  
 increase of net profit to a leu assets and  
 growth of debt degree if economical 
profitableness is higher than interest rate. 
A growth of multiplication factor can 
be appreciated as favorable, but it should be 
reminded that this indicator reflects the debt 
degree, and therefore is necessary the 
framing of the size of the multiplication 
factor under certain preordained optimal 
values.  
2.Rf 
= 100
capitalOwn
assetsTotal
assetsTotal
Turnover
Turnover
profitNet
        
The financial profitableness rate 
represents the product between the 
commercial profitableness rate (profit’s net 
average), assets rotation and global debt 
rate.  
The increase of the financial 
profitableness rate of own capital is the 
consequence of the invested capital 
efficiency increase, as a consequence of the 
increase of the assets’ speed’s rotation with 
direct implications on the volume of sells on 
invested monetary unit but also because of 
the profit increase to a leu business number 
that reflects the efficiency of exploitation 
activity.  
According to this pattern the increase 
of financial profitableness may be realized if 
the following conditions are satisfied:  
 
a). INet profit > ITurnover - the increase of 
gross profit in an superior rhythm to 
turnover, possible to be realized through:  
- reduction of exploitation expenses; 
- increase of physical volume of 
physical production  and of the delivered one;  
- manners of amortization calculation; 
- fiscal state’s policy.  
b). ITurnover > ITotal assets - the increase 
of turnover will outmatch the total assets 
growth aspect that means the increase of the 
enterprise’s speed rotation assets.  
c). Re > d economical profitableness 
(Re) will outmatch the interest rate(d).  
By its calculation pattern the financial 
profitableness rate also highlights the 
following specific conditions:  
 financial profitableness is 
influenced by the modality of providing 
capitals, reason for which is sensitive as 
against financial structure, meaning the debt 
degree of the enterprise, 
 the size of gross profit is 
influenced by tax evolution, elements 
undeductive from a fiscal point of view and 
of the fiscal deductions,  
 the financial profitableness 
rate should be higher than the average tax 
rate in order to make the enterprise’s actions 
more attractive. Under this situation, for the 
Aspects concerning financial profitableness analysis and its purpose in substantiation of firm’s 
strategic financing decisions 
  
Studies and scientific researches                                            Edition: Economics, no. 13 (2008) 
 
92
enterprise, is more advantageous to make 
appeal to medium and long term loaning for 
activity financing, this assuring in this way a 
supplementary profit. The use of the debt 
should be very carefully made in order not to 
limit the financial independence of the firm 
and to reduce the supplementary debt 
possibilities in crisis periods.  
 
 The data necessary for analyzing the 
financial profitableness rate for S.C. ALFA 
S.A. are presented in table nr. 1:  
     
 
Table nr. 1 Indicators concerning the financial profitableness rate’s analysis for S.C. ALFA 
S.A. 
 
Indicator’s name MU 31.12.2005 31.12.2006 31.12.2007 
Net profit  lei 125.457 324.568 257.005 
Own capital  lei 508.077 2.059.013 2.049.572 
Financial profitableness rate (Rf) % 24,69 15,76 12,54 
The variation of financial profitableness rate  % 0 -8,93 -3,22 
Growth index Rf % 100 63,83 79,57 
Growth index net profit % 100 258,71 79,18 
Growth index own capital % 100 405,26 99,54 
Informative value % 25% 25% 25% 
Total assets lei 837.352 2.746.266 3.007.678 
Global profitableness of invested capitals 
 (Net profit/Total assets) 
% 14,98% 11,82% 8,54% 
Debt degree (Total assets/Own capital) - 1,65 1,33 1,47 
Turnover lei 224.748 234.798 197.000 
Net profit average (Net profit/Turnover) - 0,56 1,38 1,30 
The assets’ speed rotation  (Turnover/Total assets) - 0,27 0,09 0,07 
  
 The evolution of financial profitableness rate for S.C.ALFA S.A is presented in figure nr. 1. 
  
0
5
10
15
20
25
30
2005 2006 2007
Rf
  
 
 
 
 
 
 
 
 
 
 
Figure 1  The evolution of financial profitableness rate for S.C.ALFA S.A 
 
 
 The financial profitableness rate for 
the analyzed period manifested a decreased 
tendency that is equivalent to a weak net 
wining remuneration of own resources, 
respective the decrease of the own capitals 
capacity of creating net profit.  
 During 2007 the rate’s level was of 
12,54% that means that for 100 lei own 
capitals revert 12,54 lei net profit. This level 
does not assure the reconstruction of own 
capitals only for net profits.  
 The rate’s modification Rf= -
3,22% was determined by:  

  
Aspects concerning financial profitableness analysis and its purpose in substantiation of firm’s 
strategic financing decisions 
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Studies and scientific researches                                            Edition: Economics, no. 13 (2008) 
 
 decrease of global invested 
capitals profitableness with  3,28% (from 
11,82% to 8,54%) that had a negative effect 
on the indicator; 
 the increase of firm’s debt 
degree with 0,14 (from 1,33 to 1,47) with 
favorable effect upon financial profitableness 
rate that did not succeed the compensation of 
unfavorable effect that the decrease of global 
invested capitals rate in fixe and circular 
assets. Under these circumstances, for 
society, it is more advantageous to appeal to 
loaning on medium and long term for activity 
financing, assuring therefore a supplementary 
profit. The use of debt should be carefully 
made in order not to limit the financial firm’s 
independence and to reduce the 
supplementary debt possibilities in crisis 
periods.  
  
 The financial profitableness rate 
constitutes a relevant indicator in 
appreciating the enterprise’s position on the 
market. An increased remuneration of 
capitals assures a facile access to financial 
resources due to the present shareholders’ 
trust of reinvesting in enterprise and of 
potential investors – owners of financial 
resources available for investments as well as 
the development capacity. 
 
 
 
References:  
[1] Marshall, D. H., McManus, W., Viele, D. F., Accounting: what the numbers means, Seventh 
Edition, Ed. McGraw-Hill/Irwin, 2007. 
[2] Păvăloaia, W., Păvăloaia, D., Economic-financial analysis Concepts. Studies, Moldavia 
Publish house, Bacău, 2003. 
[3] Petcu M., The enterprise’s economic-financial analysis, Economic Publish house, Bucharest, 
2003. 
[4] Petrescu, S., Analysis and financial-accountancy diagnostic. Theoretical-practical guide, 
Second revised edition, CECCAR’ s Publish house, Bucharest, 2008. 
[5] Spãtaru, L., Economic-financial enterprise’s analysis –Instrument of enterprise’s 
management, Economic Publish house, Bucharest, 2004. 
[6] Vâlceanu, Gh., Robu, V., Georgescu, N., Economic-financial analysis, Economic Publish 
house, Bucharest, 2004. 
[7] *** Public Finances Minister’s Command no. 1752/2005 for the approval of Accountancy 
Settlements according to European directives, published in Official Monitor, 1st Part, no. 1080 
from  30/11/2005.   
 


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ASPECTS CONCERNING FINANCIAL PROFITABLENESS ANALYSIS AND ITS PURPOSE IN SUBSTANTIATION OF FIRM’S STRATEGIC FINANCING DECISIONS

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