SELECTED METHODOLOGICAL APPROACHES TO THE PYRAMID DECOMPOSITION OF RETURN ON ASSETS FOR THE FINANCIAL NEEDS OF CORPORATE GOVERNANCE
Rastislav Kotulic, Miroslava Rajcaniova
The most important factor often determining the prosperity or bankruptcy is the ability of the firm to make correct decisions in financial management questions. Like every decision, the decisions on the level of financial management must be based on detailed financial analysis. Pyramid systems of financial and economic indicators are therefore inevitable and extremely important tools of the financial analysis. They are able to capture the different processes and relations in the enterprise. The main goal of this paper is to describe the methodological approaches to create a hierarchy of selected financial and economic indicators and their subsequent practical use in the pyramid systems.
Keywords: Return on assets, Du Pont equation, Pyramid decomposition
An important prerequisite for pyramid decomposition is knowledge of the firm management how to interpret financial and economic links between various indicators. Most of the pyramid decompositions are based on Du Pont equations. Du Pont equations enable to progressively decompose the ratio on the top of the pyramid (primary indicator) in a logical and deductive way. Characteristic feature of the primary indicator is that it is highly integrated indicator and it can be gradually disintegrated into other analytical (less integrated or secondary) indicators. Pyramid system of financial indicators is characterized by the conditionality of individual indicators, which means that the indicator of a lower layer (less integrated indicator) presents the economic criterion for indicators of higher layers (higher integrated indicators). Integrity of the financial indicator expresses the weight of the ratio on an analyzed phenomenon. Primary indicators are being the most general indicators which peak the pyramid. Analytical (secondary) indicators are more detailed and have lower degree of integrity. These are placed at lower layers of the pyramid system (from the perspective of the pyramid, primary indicator is closer to the top and secondary indicators are further from the top). The method of decomposition of primary indicators is based on mathematical and logical links. Vertical ties among indicators are causal. Horizontal links among indicators of certain layer of the pyramid are complementary. The direction and intensity of different factors affecting the return on assets (ROA) may therefore be very different.
...more in full version
Pyramid system of financial-economic indicators allows optimizing financial processes, particularly in regard to the evaluation of financial goals of the enterprise. Therefore, creating hierarchical systems of financial and economic indicators in financial management will always play an important role in financial decision-making of enterprise.the case of a modified decomposition of firm's profitability of assets we can conclude that the increase in ROA was due to a positive impact of growth net profit (NP) in the observed period. Net Profit recorded a 8.4-fold increase in 2010 in comparison to 2009. The value of firm's profit increased from 661 EUR to 5 567 EUR, i.e. by about 4 906 EUR in absolute terms, or by 742.21% in relative terms. This growth had a positive impact on the development of ROA and caused a growth of ROA by 0.0911 in absolute terms, or by 583.01% in relative terms.in property values ??had on the contrary a negative impact on the development of ROA. Change in value of total assets by 44.76% resulted in a reduction of ROA by 0.0158 i.e. by 101.20%. It is positive to see that the growth of company profits has required only modest increase in individual items of assets, compared with profit growth and therefore the positive impact of the net profit exceeded the negative effect of the total business assets.is apparent from the preceding section, the increase in profitability of assets ROA was caused mainly by positive effects of the increase in net profit and to a lesser extent by the negative impact of growth in the value business assets. Results of the second decomposition layer provide us with answers to the question, what factors were behind the already mentioned increase in profits and business assets.Profit in 2010 increased in comparison to 2009 due to cost savings by 11129 EUR or by 10.53%. Thanks to the cost saving, the return on assets increased by 0.2066 or by 1322.54%.fact that the overall increase in profitability of assets was lower and reached 481.81% growth rate was due to the cost savings were reflected also in lower revenues. The decrease in total company revenues by 106 320 EUR in 2009 to the value of 100 097 EUR in 2010 had a negative impact on ROA and lowered its value by 0.1155 in absolute terms, or by 739.52% in relative terms.remaining effect on the growth of ROA was caused by the development of business assets. The value of total assets grew and so the profit per unit was lower (ceteris paribus) and therefore the development of growth in total assets had a negative impact on ROA. What was the real development of concrete items of firm's property and what was their impact on the profitability of assets development?value of fixed assets has increased from 10 482 EUR in 2009 to 12 050 EUR in 2010, which stood behind the reduction the profitability of assets by 0.0013 in absolute terms or by 8.38% in relative terms.more significant was the impact of the change in current assets on the development of ROA. It was caused by the growth of current assets, which was stronger and reached to 57.51%. This growth stood behind the reduction of ROA by 0.0149 in absolute terms, or by 95.35% in relative terms.items of assets have decreased by 473 EUR, from 808 EUR in 2009 to the value of 335 EUR in 2010. Therefore these are the only part of the firm's property, whose development had a positive impact on growth of ROA by 2.53%.
 Brealey, R. A. et al.: Fundamentals of Corporate Finance, McGraw-Hill, 2001, s. 145
 Higgins, R. C.: Analysis for Financial Management. Irwin, 1995, s.53
 Kotulic, R., Kiraly, P., Rajcaniova, M. Financna analyza podniku. 2. vyd. Bratislava : IURA edition, 2010. 238 s. ISBN 978-80-8078-342-6.
 Kotulic, R. - Rajcaniova, M. Pyramidovy rozklad rentability majetku a jeho vyuzitie vo financnom manazmente podniku. In: Financny manazment a controlling v praxi, c.4, 2011, Bratislava : Iura edition, s.200-206. ISSN 1337-7574.
 Kotulic, R. - Rajcaniova, M. Pyramidovy rozklad rentability majetku a jeho vyuzitie vo financnom manazmente podniku (II.). In: Financny manazment a controlling v praxi, c.5, 2011, Bratislava : Iura edition, s.264-269. ISSN 1337-7574.
 Robbins, S.P. - Coulter, M. Management. 1. vyd. Praha : Grada Publishing, a.s., 2004, 600 s. ISBN 80-247-0495-1.
Article created as part of the project solutions KEGA 013PU-4/2011 and VEGA 1/0541/11
PODEJSCIA METODOLOGICZNEGO DO ROZKLADU PYRAMID ZWROTU Z AKTYWOW DLA POTRZEBY FINANSOWE LADU KORPORACYJNEGO
Najwazniejszym czynnikiem czesto okreslenia dobrobytu lub upadlosci jest zdolnosc przedsiebiorstwa do podejmowania wlasciwych decyzji w kwestii finansowych zarzadzania. Jak kazda decyzja, decyzje na poziomie zarzadzania finansami musi opierac sie na szczegolowej analizie finansowej. Systemow Piramida wskaznikow finansowych i ekonomicznych sa wiec nieuniknione i bardzo wazne narzedzia analizy finansowej. Sa one w stanie uchwycic roznych procesow i stosunkow w przedsiebiorstwie. Glownym celem tego artykulu jest opisanie podejscia metodologicznego do tworzenia hierarchii wybrane dane finansowe i wskazniki ekonomiczne, a nastepnie ich praktyczne zastosowanie w systemach piramidy.