I.

Methods for assessing the influence of factors in absolute size

1. The method of connected substitutions

Application:
a) It is applied within the deterministic relations of product, ratio or complex;
b) In order to separate the influence of the factors, the analysis model is constructed and the
order of analysis is specified (first the quantitative factors are analyzed and then the
qualitative ones);
c) The absolute deviation of the phenomenon is decomposed into the influences of
quantitative and qualitative factors;
d) The principle underlying the separation of the influence of factors is that the substituted
factor remains substituted until the end of the analysis (until the end of the method of
separating the influence of the factors)
Steps of application of the procedure:
1. Determining the absolute deviation of the phenomenon;
2. Successive establishment of the influence of quantitative and qualitative factors;
3. Checking the truth relationship.
A. Application of the method in the case of product relations:
F= X × Y
STEPS:
1. The absolute deviation of the phenomenon
∆F= F1- F0

2. Influences of factors:
Influence of quantitative factor X:
∆F(X)= ∆X × Y0
The influence of the qualitative factor Y:
∆F(Y)= X1 × ∆Y
3. The relationship of truth:
∆F= ∆F(X) +∆F(Y)
 B. Application of the method in the case of the relationship of two factors (ratio):
X
F=
Y
S1. X- quantitative factor and Y- qualitative factor
S2. Y- quantitative factor and X qualitative factor

STEPS:
1. The absolute deviation of the phenomenon
∆F= F1- F0
2. Influences of factors:
S1. X- quantitative factor and Y- qualitative factor
THE INFLUENCE OF THE QUANTITATIVE FACTOR X
X1 X0 ∆X
∆F(X)= − =
Y0 Y0 Y0
THE INFLUENCE OF THE QUALITATIVE FACTOR Y
X 1 X 1 −X 1× ∆ Y
∆F(Y)= − =
Y 1 Y0 Y 0×Y 1
3. The relationship of truth:
∆F=∆F(X)+ ∆F(Y)

S2. Y- quantitative factor and X qualitative factor

STEPS:
1. The absolute deviation of the phenomenon
∆F= F1- F0
2. Influences of factors:
Influence of quantitative factor Y:
X 0 X 0 −X 0 ×∆ Y
∆F(Y)= − =
Y1 Y0 Y 0×Y 1
Influence of the qualitative factor x
X1 X0 ∆X
∆F(X)= − =
Y1 Y1 Y1
3. The relationship of truth
 ∆F=∆F(Y)+ ∆F(X)

Application
The multiplicative model of analysis of the return on equity is given with the data related
to the table below:
ROE= RMRNE × KAB × LF

Indicator Symbol .M.U Calculation Financial exercise Deviations

name method Previous Ended
(N0) (N1)
Return on ROE % ROE= 23,69 21,17 -2,52
equity RNE
CPR
Net profit RMRNE % RMRNE= 24,79 22,85 -1,94
margin RNE
× 100
ratio CAN
Rotation KAB - KAB = 0,8429 0,8243 -0,0186
speed of RNE
total assets CAN
Financial LF - AB 1,1337 1,124 -0,0097
LF=
leverage CPR

Steps:
1. The absolute deviation of the phenomenon
∆ROE= ROE1 –ROE0= 21,17-23,69= -2,52%
Interpretation: ROE decreased by 2.52% compared to the previous year, which reflects a
less efficient use of shareholders' capital from one year to another.
2. Influences of factors:
The order of analysis of the factors is:
I: LF is a quantitative factor (it has the least to do with the essence of the phenomenon)
II: KAB is a quantitative factor (makes the transition to the essence of the phenomenon)
III: RMRNE is a qualitative factor (it expresses the essence of that phenomenon of profitability)
So the financial profitability rate analysis model is:
ROE= LF × K AB × RMRNE
 The influence of financial leverage (LF) on the return on equity:
∆ROE(LF) = LF1 × KAB0 × RMRNE0 – LF0 × KAB0 × RMRNE0
= 1,124 × 0,8429 × 24,79- 1,1337 × 0,8429 × 24,79= -0,2026%
Interpretation:
The return on equity decreased compared to the previous year by 0.2026% due to the
decrease of the financial leverage by 0.007 (the degree of financing of assets from equity
decreases by 0.0097). So, financial leverage is a factor with a negative influence on the return
on equity.
 Influence of asset turnover rate (KAB) on the rate of financial return:
∆ROE(KAB) = LF1 × KAB1 × RMRNE0 – LF1 × KAB0 × RMRNE0
= 1,124 × 0,8243 × 24,79 – 1,124× 0,8429× 24,79= -0,5182 %
Interpretation:
The return on equity decreased compared to the previous year by 0.5182 due to the decrease
in the turnover rate of assets by 0.0186 rotations. So, the turnover rate of total assets was a
factor with a negative influence on the rate of financial return.
 The influence of the net profit margin rate (RMNE) on the financial profitability rate:

∆ROE(RMRNE) = LF1 × KAB1 × RMRNE1 – LF1 × KAB1 × RMRNE0

=1, 124 × 0,8243 × 22,85 – 1,124 × 0,8243 × 24,79= -1,7974

Interpretation:
The return on equity decreased compared to the previous year by 1.7974% due to the
decrease of the net profit margin rate by 1.94%. Thus, the net profit margin rate acts
as a factor with a negative influence on the return on equity in the analyzed period.

3. The relationship of truth:

∆ROE = ∆ROE(LF) + ∆ROE(KAB) +∆ROE(RMRNE)
= 0,2026-0,5182-1,7974= -2,52 % (A)
Application 2.
RATIO RELATIONSHIPS-homework
The mathematical model for determining the earning per share (EPS) is given:
RNE
EPS =
NA
Indicator Symbol U.M. Financial exercise Deviations
name Previous Ended (N1)
(N0)
Earnings EPS Lei/share 782,39 825,37 43,98
per Share
Net income RNE Lei 239.893.084 253.071.184 13.178.100
Number of NA number 306.614 306.614 0
common
shares

SOLUTION:
STEPS:
1. The absolute deviation of the phenomenon
∆EPS = EPS1 –EPS0 =42,98 lei/share
Interpretation:
EPS increased compared to the previous year by 42.98 lei / share, which will become an
attractive aspect for potential investors.
2. Influences of factors:
Order of analysis of factors:
I: NA is a quantitative factor (expressed in physical units of measurement)
II: RNE is a qualitative factor (Expresses the essence of the phenomenon)
 The influence of the number of shares outstanding (NA) on the earnings per share:
RNE 0 RNE 0 239.893 .084 239.893.084
∆ EPS (NA)= − = − =0 lei/acțiune
NA 1 NA 0 306.614 306.614

Interpretation:
Net income per share does not change due to the number of shares outstanding, the latter
remaining unchanged from one year to the another.
 The influence of the net income (RNE) on the earnings per share:
∆ EPS (RNE)= RNE1/NA1-RNE0/NA1=∆RNE/NA1=13.178.100/306.614= 42, 98 lei/share
Interpretation:
The net result per share increased compared to the previous year by 42.97 lei / share due to
the increase of the net result of the year by 13,178,100 lei. RNE is a factor with a favorable
influence on the analyzed phenomenon (EPS).
3. The relationship of truth:
∆EPS = ∆EPS (NA) +∆EPS (RNE) = 0+42,98 =42,98 (A)

2. The balance sheet method

The balance sheet method is also a particular case of the connected substitution method,
applied on sum and / or difference ratios.
The procedure is used with good results in the financial analysis based on the Balance Sheet,
the Profit and Loss Account and the cash flow statement
application:
a) It is applied within the relations of sum and difference;
b) The absolute deviation of the phenomenon is decomposed into the influences of direct and
opposite factors;
c) The order of analysis of the factors (quantitative and qualitative) is taken into account but
in this case the order of analysis is given by their logical order from the model;
d) Both phenomena and factors are expressed in the same unit of measure;
e) The influence of a direct factor is equal to the absolute deviation of the factor from its basis
of comparison:
f) The influence of an opposite factor (with the sign “-” in the balance equation) is equal to
the opposite of the absolute deviation of the factor from its basis of comparison.
Steps:
1. Determining the absolute deviation of the phenomenon;
2. Separation of the influence of the direction and opposite factors of the phenomenon
3. Checking the truth relationship

Applying the procedure on a classical balance relation of the type:

Sf= Si +I - E
Sf- The final balance at the end of the period
Si- Initial balance at the beginning of the period
I - entries (increases) during the period
E- outflows (decreases) over the period
Steps Sf= Si +I - E

1. Deviation of the phenomenon:

∆Sf= Sf1 - Sf0
2. Influences of factors
 The influence of SI
∆Sf (Si)= (Si1+I0- E0)- (Si0-I0-E0) = ∆Si
 Influence I
∆Sf(I)= (Si1+I1-E0)- (Si1+I0-E0) = ∆I
 Influence E
∆Sf(E)= (Si1+I1-E1)- (Si1+I1-E0) =- ∆E
3. The relationship of truth
∆Sf= ∆Sf(Si)+ ∆Sf(I)+ ∆Sf(E)
Application:
We submit to the factor analysis the final balance of raw materials and material for a period
of two consecutive months. The analysis model of the final stock of raw materials and
material is:
Sf = Si + I- E
Sf- final stock of raw materials and materials at the end of the period
Si- initial stock of raw materials and materials at the beginning of the period
I - supplies of raw materials and materials over the period
E- consumption of raw materials and materials over the period
Elements January 2021 February 2021 Absolute Index
deviation
Initial stock of 30.000 40.000 10.000 133,33%
raw materials
and materials
Supply of raw 100.000 120.000 20.000 120%
materials and
 materials
40.000 20.000 -20.000 50%
Final stock of 90.000 140.000 50.000 155,55%
raw materials
and materials

Steps:
Sf = Si + I- E

1. Deviation of the phenomenon:

∆Sf= Sf1 - Sf0 =50.000 lei
Interpretation:
The stock of raw materials and materials increased in February 2021 compared to January
2021 by 50.000 lei
2. The influence of factors
 The influence of Si of raw materials and material on Sf
∆Sf (Si)= (Si1+I0-E0) - (Si0+I0-E0) = ∆Si = 10.000 lei
 The influence of I on Sf
∆Sf(I)= (Si1+I1-E0) - (Si1+I0-E0) = ∆I = 20.000 lei
 The influence of E on Sf
∆Sf (E) = (S1-I1+E1) - (Si1+I1-E0) = - ∆E= - (-20.000)=20.000 LEI
3. The relationship of truth
∆Sf= ∆Sf(Si) +∆Sf (I)+ ∆Sf(E) = 50.000 LEI (A)