The economic growth sustainability factor: definition, types, calculation formula with examples

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:40

Every company wants to be reckoned with. But until she has achieved worldwide fame, she needs to somehow show her success. Managers would also do well to know whether the company is making a profit or not. For this purpose, a formula was invented by which one can calculate the sustainability coefficient of economic growth and find out in which direction the company is moving.

What characterizes economic growth?

First, of course, by increasing the overall profit from production. Let's say there is a bakery. Its owner spends some money on the purchase of flour, milk and other things, on renting premises and on salaries for employees. If the amount that he receives from the sale and distribution of confectionery at the end of the month does not exceed all these costs, then the business can be called not profitable.

Investors are mostly interested in liquiditycompanies. What does it mean? The word "liquidity" comes from the Latin liquidus, meaning "fluid". In simple terms, this is "currency turnover". In fact, the level of liquidity indicates how long it takes to sell all the property of the enterprise on the market. The price should be standard, of course. The higher the score, the better.

There is also such an important factor as solvency. It shows whether the company will be able to fully fulfill its financial obligations. No delays are allowed. For creditors, solvency is an indicator of whether it is worth giving credit to this particular enterprise. Risk in the banking world must always be calculated. Another important point is the production capacity. It informs everyone who is interested in how much an enterprise can produce in a strictly limited period of time if it exerts all its strength.

Growth sustainability ratio

In the field of economy, the term "indicator of business activity" has existed for quite a long time. It reflects how effectively the company is managed. In more detail, numerous indicators of business activity show whether the employees and managers of the enterprise are trying, or they could achieve more with the assets at their disposal. From this it is deduced how the enterprise is economically stable. And also what is its potential in the market.

The economic growth sustainability ratio is one of the indicators of business activity. It characterizes how fast or how slowly the enterprise develops, whether the company uses its resources with the maximum possible efficiency, whether it can pay dividends, and the like.

How is it calculated?

The balance sheet is one of the five most important parts of the financial statements. It contains information about how many assets the company owns, as well as how much and to whom they were obliged to pay money.

According to the balance, the coefficient of sustainability of economic growth is calculated always and everywhere. This is the general rule of individual entrepreneurs. The formula for the sustainability of economic growth is equal to the ratio of the profit that was received through the activities of the company and directed to its further growth and development, to the average value of the company's assets.

But these figures still need to be calculated. Fortunately, it's not that difficult. Profit divided by common property is calculated using this formula:

all company income - (production costs + taxes + bank payments + dividends).

And property is calculated as the total capital of the company at the beginning of the year minus the total capital of the company at the end of the year. In conclusion, all this is divided into two.

What conclusions can we draw from all this?

Start with the most positive scenario:coefficient increase. It is achieved through the fact that all the acquired profit (with the exception of the part of the money from which taxes, debts and employees' salaries are paid) goes to improving the enterprise: attracting world-class specialists, modernizing production, and so on. It means victory. Also, an increase in the sustainability of economic growth means that the company is moving in the right direction. Now it can even more interest investors and ordinary people, improve the quality of production, thereby attracting new buyers.

If the economic growth stability coefficient is negative, then this leads to the opposite situation. Investors will no longer be so sure that a company whose liquidity has declined is worth their trust. The quality of the goods and services provided will also suffer. Most likely, many employees will leave the enterprise if they find out that it is on the verge of ruin. But there is another option: the maximum rate of economic growth. In this case, absolutely all the profit goes to the further development of the enterprise. The quality and speed of production reach a whole new level. But many companies can only strive for it.

Example of economic growth sustainability ratio

For the sake of clarity, it is worth assuming that there is a confectionery company whose capital at the beginning of the year under consideration is sixty rubles. At the end of the year it will reach eighty rubles. Profit - about a hundred rubles. Noseminus taxes and other payments, it is eighty rubles.

So, given all these data and knowing the formula, you can easily find out the coefficient of sustainability of economic growth. With allowable errors, it is one percent. This means that the confectionery company must continue to continue in the same spirit, because now they have just huge potential.

Conclusion

In business, it is very common to use the economic growth sustainability ratio to determine if an enterprise has any prospects, whether it is worth supporting. Of course, any organization is interested in stability and prosperity, so many entrepreneurs strive for a positive coefficient in one of the main indicators of business activity.